Five insular areas—American Samoa, Guam, CNMI in the Pacific Ocean, and the Commonwealth of Puerto Rico and the Virgin Islands in the Caribbean Sea—represent the largest insular areas of the United States. More than 4 million U.S. citizens and nationals live in these insular areas under the sovereignty of the United States. These areas vary in terms of how they came under the sovereignty of the United States and also in terms of their demographics, such as median age and education levels. However, all of these insular areas participate in three major federal health care financing programs—Medicare, Medicaid, and SCHIP—and are eligible for a variety of federal health grant programs. These five areas have come under the sovereignty of the United States in various ways. Puerto Rico and Guam were ceded to the United States by treaty at the end of the Spanish-American War in 1898, and the Virgin Islands were purchased from Denmark in 1917. Following the renunciation by Great Britain and Germany of their claims to what is now American Samoa and the cession of these islands by the Samoan chiefs to the United States, the Congress ratified the instruments ceding the islands to the United States in 1929. The United States was responsible for administering the Northern Mariana Islands after World War II under a United Nations trusteeship agreement. In 1976, a covenant between the United States and the Northern Marianas established the islands as a commonwealth under the sovereignty of the United States. Each of these areas has its own government and maintains a unique diplomatic relationship with the United States. General federal administrative responsibility for all insular areas but Puerto Rico is vested in the Department of the Interior. All departments, agencies, and officials of the executive branch treat Puerto Rico administratively “as if it were a state;” any matters concerning the fundamentals of the U.S.-Puerto Rican relationship are referred to the Office of the President. People born in Puerto Rico, Guam, CNMI, or the Virgin Islands are American citizens; those born in American Samoa are American nationals. The residents of all five of these larger insular areas enjoy many of the rights enjoyed by U.S. citizens in the 50 states. But some rights that, under the Constitution, are reserved for citizens residing in the states, have not been extended to residents of the insular areas. For example, residents of the insular areas cannot vote in national elections, nor do they have voting representation in the final approval of legislation by the full Congress. The insular areas—particularly those in the Pacific—are geographically isolated from the United States. For example, Hawaii, which is the closest state to the Pacific insular areas, lies 3,300 to 3,700 miles away, or up to 13 hours by air. In addition, when compared to the U.S. states and each other, the insular areas have unique demographic characteristics. For example, with the exception of Puerto Rico, the populations in the insular areas are small relative to the states, and with the exception of Guam, they are significantly poorer. For example, four of the insular areas have median incomes that range from about $14,000 to about $25,000, considerably lower than the two poorest states, Mississippi and West Virginia. In addition, the populations in the Pacific island areas— American Samoa, CNMI, and Guam—are younger than those of the states and Puerto Rico and the Virgin Islands. For example, nearly half of the population of American Samoa is under the age of 19 compared to about 27 percent in the United States. Similarly, while over 12 percent of the U.S. population is over 65, this age cohort represents only 1.5 to 5.3 percent of the population in the three Pacific insular areas. In terms of available health indicators, the differences are not as clear. While the insular areas have a higher mortality rate than the U.S. for certain diseases, such as diabetes, their mortality rates for cancer are lower. (See fig. 1.) Some insular areas do not have certain types of health care providers, and even when providers operate in these areas, their numbers per capita are lower, on average, than in the states. For example, most of the insular areas do not have Medicare-certified outpatient rehabilitation facilities, community mental health centers, or ambulatory surgical centers. In addition, none of the Pacific insular areas has a Medicare-certified, free- standing skilled nursing facility or a Medicare-certified hospice facility. Provider shortages in insular areas are often particularly acute for certain specialists. For example, although Guam has a cardiac catheterization lab, it is not used because there is no cardiac surgeon. Also, although its rate of diabetes death is high, American Samoa has no resident nephrologists. Instead, the nephrologist that serves the area is based at St. Francis Medical Center in Hawaii. When providers are present, the average number per capita is usually lower than in the states, although the differences between the states and Puerto Rico are less pronounced than the differences among the states and the other four insular areas. For example, the insular areas have significantly fewer skilled nursing facilities than do the states. One notable exception is that there are more end-stage renal facilities per capita in American Samoa, Guam, and the Virgin Islands when compared to the states, perhaps due to a higher prevalence of diabetes in these areas. (See table 1.) Each insular area participates in three major federal health care financing programs—Medicare, Medicaid, and SCHIP. In addition, each area receives health-related grant funds from a variety of HHS agencies and four of the five areas receive health-related grant funds from DOI. Medicare covers a variety of health care services and items for more than 41 million beneficiaries—individuals who are 65 or older, have end-stage renal disease (ESRD), or are disabled—including about 600,000 in the insular areas. Medicare includes separate components or “parts” that cover different types of services. Individuals who are eligible for Medicare automatically receive Hospital Insurance, known as Part A, which helps pay for inpatient hospital care, skilled nursing facility services following a hospital stay, certain home health services, and hospice care. Beneficiaries pay no premiums for Part A but are liable for required deductibles, coinsurance, and copayments. Medicare Part A is funded through the Medicare trust fund, which is financed by state and insular area employer and employee contributions. Medicare Part B Supplemental Medical Insurance helps pay for physician, outpatient hospital care, laboratory, and other services. Beneficiaries who opt for Part B coverage must pay a premium—about $78 per month in 2005—and are responsible for deductibles, coinsurance, and copayments. Medicare’s new prescription drug program, Part D, was authorized in December 2003, and the interim phase of the program began in June 2004. Under the interim phase, all beneficiaries in the states and the insular areas who choose to enroll pay a fee to receive a discount drug card, with an expected discount of 10 to 15 percent on covered drugs. In addition, certain low-income beneficiaries in the states are also entitled to assistance to subsidize drug costs in 2004 and 2005, and the amount of assistance available to each individual is generally $600 per year. Under the permanent program, to be implemented in January 2006, beneficiaries in the states and the insular areas can choose to enroll in an optional prescription drug coverage program subject to an estimated average monthly premium of about $32. Like the interim program, certain low- income participants in the states will also receive subsidies to lower their monthly premiums, deductibles, and copayments. To help offset the costs of providing coverage to individuals eligible for both Medicare and Medicaid, states must pay the federal government an amount that is roughly equal to the amount they would have paid to provide outpatient prescription drug coverage to elderly and disabled individuals previously eligible for prescription drug benefits under their Medicaid programs. Part D is otherwise financed through beneficiary premiums and general revenues. Medicaid operates as a joint federal-state program to finance health care coverage for certain categories of low-income individuals, including children, pregnant women, and individuals who are elderly or disabled. Although state and insular area participation in Medicaid is voluntary, all states and insular areas currently participate in the program. To obtain federal matching funds, states and insular areas generally must comply with certain minimum federal requirements related to services and eligibility, including income and resource requirements. Within these broad federal guidelines and under federally approved plans, states and insular areas have great discretion in setting eligibility standards and provider payment rates; determining the amount, scope, and duration of covered benefits; and developing their own administrative structures. For example, while federal law requires Medicaid programs to offer coverage to children age 5 and under if their family incomes are at or below 133 percent of the federal poverty level and to children ages 6 to 18 if their family incomes are at or below the federal poverty level, a state may decide to increase the thresholds in order to offer coverage to more people. As a result, Medicaid essentially operates as 56 separate programs: 1 in each of the 50 states, the District of Columbia, and each of the 5 largest insular areas. The federal share of states’ Medicaid programs, the Federal Medical Assistance Percentage (FMAP), is determined based on state per capita income in relation to the national per capita income, with poorer states receiving higher federal matching rates than wealthier states. In 2005, the FMAP ranged from 50 percent in wealthier states, such as New York and Connecticut, to about 77 percent in Mississippi. In 1997, the Congress enacted SCHIP to provide health care coverage to uninsured, low-income children living in families whose incomes exceed the eligibility limits for Medicaid. States and insular areas have three options in designing SCHIP: expand their Medicaid programs, develop separate child health programs that function independently of the Medicaid programs, or do a combination of both. States that implement SCHIP by expanding Medicaid must use their Medicaid enrollment and benefit structure. Although SCHIP is generally targeted to families with incomes at or below 200 percent of the federal poverty level, each state or insular area may set its own income eligibility limits within certain guidelines. The FMAP for SCHIP ranges from 65 percent for the wealthiest states to about 84 percent for the poorest states. Various HHS agencies also distribute health care grants to the insular areas. These grant funds—awarded by agencies such as the Centers for Disease Control and Prevention (CDC), the Health Resources and Services Administration (HRSA), and the Substance Abuse and Mental Health Services Administration (SAMHSA)—may be used to support health care services and outreach programs and are generally awarded to public health agencies. Similarly, DOI’s Office of Insular Affairs (DOI-OIA) funds health infrastructure and provides technical assistance to all insular areas but Puerto Rico. DOI also provides the Pacific insular areas with funds to offset the cost of providing services to residents of the freely associated states. Each of the five insular areas receives funding for health care services from multiple federal sources. Federal health care financing programs— Medicare, Medicaid, and SCHIP—comprised 88 percent of aggregate federal health care funding in the insular areas in fiscal year 2003, with Medicare representing the single largest funding source (76 percent). The areas also received a significant amount of health care grant funding from certain HHS agencies and DOI. However, significant variation exists among the insular areas in terms of the distribution of funds by source, largely due to the number of Medicare beneficiaries residing in each area. For example, the Pacific insular areas have relatively young populations, and therefore receive less Medicare funding compared to other sources. From fiscal years 1999 through 2003, total federal health care funding in the insular areas increased by 37 percent, although funding increases varied considerably among the insular areas. Federal health care financing programs—primarily Medicare—comprised the vast majority of the $2.2 billion in total federal health care spending in the five insular areas in fiscal year 2003. Medicare funds alone, which are generally paid directly to health care providers for services to beneficiaries rather than directly to the insular area government, represented 76 percent—about $1.68 billion—of the aggregate funding to the insular areas. (See fig. 2.) The Medicaid program represented 10 percent of the total funding in the insular areas, about $226 million, and funding for the SCHIP program totaled about $33 million, 2 percent of total health care funding in these areas. Unlike Medicare, Medicaid and SCHIP funds are provided directly to the insular area governments. In addition to the federal health care financing programs, three HHS agencies—CDC, HRSA, and SAMHSA—provided health-related grants to public and private entities in the insular areas. These grants represented approximately 11 percent, more than $250 million, of total federal health care funding in the insular areas. In 2003, these agencies awarded grants from 87 different programs to the insular areas, with individual awards ranging from over $9,000 to nearly $39 million. The funds may be used to support health care services and outreach programs. For example, HRSA provided grant funding to the insular areas for programs related to health care resources and services, including community health centers, human immunodeficiency virus (HIV) care and treatment, maternal and child health care, and bioterrorism preparedness. DOI also provided a number of health-related grants to the four insular areas that were eligible for these funds. In fiscal year 2003, DOI grants to the insular areas totaled about $13.6 million, 1 percent of federal health care funding in the insular areas. The grants had multiple purposes, including offsetting the costs of providing care to individuals from the freely associated states and supporting health-care-related activities, such as facility construction and information technology. From 1999 through 2003, total federal health care funding in the insular areas increased 37 percent—from over $1.6 billion to over $2.2 billion. During this time, funding from all sources but SCHIP increased. For example, total Medicare funding increased by 41 percent, Medicaid by 21 percent, HHS grants by 73 percent, and DOI by 11 percent. Although funds from HHS had the largest percentage increase over this time, the biggest increase in dollars was seen in Medicare, with an increase of over $485 million. Since Puerto Rico represents about 91 percent of total insular area population, the aggregate spending numbers obscure the often significant variation that exists in the sources of funding among the insular areas. For example, similar to aggregate numbers, Medicare spending represented 78 percent of spending in Puerto Rico in fiscal year 2003, whereas the Medicare share in the other areas was smaller, ranging from 29 percent in American Samoa to 63 percent in the Virgin Islands. (See fig. 3.) This variation is influenced by differences in the share of Medicare beneficiaries residing in each area relative to its overall population. For example, Medicare as a share of total spending was largest in both Puerto Rico and the Virgin Islands, whose populations of individuals 65 or older are comparatively larger than that of the Pacific insular areas and are more closely aligned with the U.S. average. Differences in the other federal health financing programs also varied, but to a lesser extent, with Medicaid and SCHIP funding combined representing between 12 and 21 percent of health care funding in each of the areas. In terms of health care grants from both HHS and DOI, significant variation existed in the share of health care funding they represented among the insular areas. For example, in fiscal year 2003, these grants represented 11 percent of total health care funding in Puerto Rico; however, they represented 25 to 56 percent of total funding in the other insular areas. Variation among the insular areas in terms of DOI health grants as a share of total federal funding was more pronounced than that of HHS grants during this time. While HHS grants represented roughly the same share of total health care funding in each insular area except Puerto Rico, DOI grants represented 2 percent of total health care funding in CNMI, 7 percent in Guam, and 37 percent in American Samoa. The Virgin Islands, although eligible for these funds, received none in fiscal year 2003. The availability of grant funds, and therefore the share they represented of health care funding, has fluctuated considerably in recent years. For example, DOI grants to CNMI, which represented 2 percent of total health care funds in 1999, increased to 26 percent of total funding in 2001 and fell back to 2 percent in 2003. Similarly, HHS grants to the Virgin Islands represented 13 percent of total federal health funding in 1999, but grew to nearly one-third of total spending in 2002. (See app. II for a detailed description of trends in federal funding sources over time for each insular area.) Such year-to-year variability can make it difficult to establish long- range budgets and to develop, manage, and staff programs funded by grant awards. In addition, according to insular area officials, capturing and retaining HHS grant funds can be labor intensive. For example, for most of the grants we reviewed, agencies require insular areas and states to complete comprehensive applications with detailed budgets and program plans. Agencies may also require periodic data reporting or local cost sharing. When considered individually, each of the five insular areas experienced an overall increase in total federal health care funding from 1999 through 2003. Increases, however, varied considerably among the areas, ranging from 36 percent in Puerto Rico to 81 percent in CNMI. The variation was largely due to differences in the annual increases specific to Medicare and HHS grant awards. For example, Medicare funding increased in all areas, but most dramatically in CNMI, largely due to changes in the way its hospital reported costs to CMS. Similarly, total HHS grant funding increased in each area, although increases were more pronounced in certain areas, such as American Samoa and Guam, due in part to the introduction of new grants related to bioterrorism. The methods used to allocate federal health care funds in the insular areas differ, in some cases, from those used in the states. Although Medicare payment policy does not differ for certain providers, such as physicians, notable differences exist in the policies used to pay hospitals and for the new Part D prescription drug benefit. Similarly, differences exist in how the Medicaid and SCHIP programs are funded in the insular areas. Unlike in the states, the federal share of Medicaid and SCHIP expenditures in the insular areas—the FMAP—is limited by statute, and federal Medicaid funding is capped. In addition, allocation methods used for certain HHS grants establish separate rules for the insular areas. The Medicare program operates similarly in the insular areas and the states in terms of eligibility for the program and beneficiaries’ entitlement to benefits. For example, like their counterparts in the states, insular area residents who are eligible for Medicare are automatically enrolled in Part A and do not pay premiums for this coverage. Likewise, the policies used to determine payment for physicians under Part B are essentially the same. However, significant differences exist between the insular areas and the states regarding the methods used to determine payments to hospitals and the funding of the Medicare Part D benefit. Unlike the states and Puerto Rico, where hospitals are paid under Medicare’s PPS, hospitals in the other insular areas are paid based on their costs. There are differences in the cost-based payment methods used in these areas. The hospitals in Guam and the Virgin Islands are paid using the methodology established under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) for classes of hospitals not included in the PPS. Payments to these hospitals are the lesser of their average cost per discharge or a specific target amount. Hospitals in American Samoa and CNMI are also paid based on their costs; however, they are not subject to target amounts or a national cap. We did not evaluate how payments under these cost-based methods compare to PPS payments to hospitals in the states. Although hospitals in Puerto Rico are paid under the PPS system, the formula that CMS uses to reimburse hospitals in Puerto Rico is distinct from that used for hospitals in the states. Each of the Puerto Rico PPS payment rates is a “blended rate,” which is comprised of 75 percent of a national rate used for hospitals in the states and 25 percent of a local rate, which is lower than the national rate. The rates are further adjusted for each hospital using national and local cost factors. These adjustments account for the lower costs of providing hospital services in Puerto Rico compared to the states and for differing costs among hospitals within Puerto Rico. Differences also exist between the insular areas and the states regarding the methods used to fund Medicare’s new Part D prescription drug benefit for low-income beneficiaries. For example, during the interim phase of the Part D program, certain low-income beneficiaries in the states who participate in the program are entitled to assistance to subsidize drug costs in 2004 and 2005, and the amount of assistance available to each individual is generally $600 per year. In contrast, low-income Medicare beneficiaries in the insular areas do not receive this direct subsidy. Instead, CMS provided each insular area with an allotment, which the insular areas typically used to subsidize prescription drug coverage to certain low-income Medicare beneficiaries. Similarly, although the permanent Part D program, scheduled to begin in January 2006, allows for identical coverage for most beneficiaries in the insular areas and states, however, low-income beneficiaries in the insular areas will not receive direct benefits to help subsidize their premiums, deductibles, and copayments available to Medicare and Medicaid dual eligible beneficiaries in the states. Instead, CMS will again provide each of the insular areas an allotment, which they will use to administer the program to low-income beneficiaries based on a locally-developed plan. The extent to which the benefits in the insular areas will mirror the federal program is not clear as none of the insular areas has finalized its plan for the administration of this program. Like the states, each of the insular areas receives federal funding from the Medicaid and SCHIP programs. However, how federal funds for these programs are allocated to the insular areas differs, often significantly, from the states, and these differences are statutory in nature. For example, recognizing that states vary in their capacity to pay for Medicaid expenses, the statutory formula used to calculate the federal share of each state’s expenditures—the FMAP—is based on a state’s per capita income in relation to the national average per capita income. The FMAP ranges from 50 to no more than 83 percent of Medicaid expenditures, with poorer states receiving a higher federal matching rate than wealthier states. In contrast, the FMAP for the insular areas does not recognize their capacity to pay for Medicaid expenses; instead, the FMAP is set at the lowest rate— 50 percent—although all of the insular areas, except Guam, had a lower median household income than the poorest U.S. state. In addition, federal Medicaid funding in states is not limited, provided the states contribute their share of program expenditures for services provided. In contrast, federal Medicaid funding in each insular area is subject to a statutory cap, which is increased annually by the percentage increase in the medical care component of the Consumer Price Index for all urban consumers, which averaged about 4 percent per year from 1999 through 2003. All five of the insular areas typically exhaust the Medicaid cap prior to the end of the fiscal year, and once the cap is exhausted, the insular areas assume the full costs of Medicaid. Due to insufficient local funds, once the Medicaid cap is met, some insular areas may suspend services or cease payments to providers until the next fiscal year. Federal statute and the Medicaid cap also affect the ability of insular areas to access certain sources of Medicaid funding. For example, insular areas are not included in the federal legislation that established the Medicaid disproportionate share hospital (DSH) program, which provides supplementary payments to hospitals that serve a large number of Medicaid and low-income uninsured patients. DSH is a key source of Medicaid funding for “safety net” hospitals in the states and totaled about 5 percent of all federal Medicaid funding to the states in fiscal year 2003. In addition, although states and the insular areas are eligible for other sources of Medicaid federal matching funds, CMS officials said the federal cap prevents the insular areas from accessing these funds. For example, none of the insular areas accessed available funding for the development of immunization registries or for the update of data systems to comply with provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) because funds spent on these programs would count against the cap and thereby divert funds from the direct provision of care. For this same reason, none of the insular areas participates in the optional Breast and Cervical Cancer Prevention and Treatment program, which allows for expanded eligibility and an enhanced Medicaid match rate for treatment provided to women diagnosed with these cancers. All 50 states and the District of Columbia have opted to cover women under this program. Whereas fundamental differences exist between insular areas and the states in terms of the allocation of federal Medicaid funds, the differences that exist in the funding of their SCHIP programs are less pronounced. For example, unlike Medicaid, where federal funding to the states is open- ended, annual SCHIP allotments to both the states and the insular areas are set in statute and function like a cap. The statute specified a total annual allotment for the states and insular areas for fiscal years 1998 through 2007, with the insular areas receiving 0.25 percent of the annual nationwide SCHIP allotment, which is divided among them based on statutorily set proportions. The remainder of the allotment is allocated to states based on the population of low-income uninsured children. The Congress awarded additional funds to insular areas for fiscal years 1999 through 2007 which, when combined with the original allotment, increased their portion of total SCHIP funding. Although SCHIP funding is limited for both states and insular areas, the FMAP for SCHIP, similar to Medicaid, does not consider the capacity of insular areas to pay for services. The statute provides for an “enhanced” FMAP, which is equal to each state and insular area’s Medicaid matching rate plus 30 percent of the difference between the Medicaid match and 100 percent, not to exceed a federal share of 85 percent. Thus, like states that receive the minimum 50 percent Medicaid match, the insular areas receive the minimum 65 percent match available under SCHIP. Each HHS grant has a distinct funding allocation method, and although certain grants use identical allocation methods for the states and the insular areas, others treat some or all of the insular areas differently. For example, the method used to calculate HRSA’s Consolidated Health Center grants, which are competitive awards made to individual qualifying health centers based upon proposed budgets and their capacity to compete for funds, is the same in the states as in the insular areas. In contrast, different allocation rates are used to determine funding levels for some insular areas under HRSA’s Ryan White Title II HIV Care Formula grants to States and CDC’s Public Health Preparedness and Response for Bioterrorism grant. The allocation formulas for these grants have two components—a base component, which is a set dollar amount, and a variable component, which is based on population or other factors. For example, funding levels for the Ryan White Title II grant are based largely on the prevalence of AIDS in individual states as well as in Puerto Rico and the Virgin Islands. In contrast, funding of this grant for the Pacific insular areas does not consider the prevalence of AIDS; instead, these insular areas receive a lower, standard base rate. Similarly, when compared to the states, the base and variable components for the CDC’s Public Health Preparedness and Response to Bioterrorism grant is smaller for each of the insular areas except Puerto Rico. (See table 2.) CDC’s Immunization and Vaccines for Children grant provides another example of where the method used to allocate funds differs in the insular areas compared to the states. In this case, grant amounts to the states are based on certain rules that consider characteristics of the population as well as funding history. In contrast, these rules are not used to determine the grant amounts for insular areas. Instead, the award amounts to insular areas are determined at the discretion of the agency’s project officer. Although most of the key sources of health care funding available in the insular areas are also available in the states, individual spending levels are often lower in the insular areas. For example, Medicare spending per beneficiary is significantly lower in the insular areas, due in part to differences in methods used to pay for certain services and in beneficiaries’ utilization of services. In addition, statutory limits on Medicaid funding in the insular areas contribute to lower per capita spending. In light of these statutory limits, CMS does not hold insular areas accountable for providing all the mandatory Medicaid services, including nursing home care, which makes up nearly a third of Medicaid expenditures in the states. In contrast, HHS grant funding per capita is higher in the insular areas than in the states, due, in part, to allocation formulas that result in higher payments to them as well as to states with smaller populations. As in the insular areas, Medicare comprised the majority—over 60 percent—of federal health care funding in the states in fiscal year 2003 and, with limited exceptions, the program operates largely the same in the insular areas as in the states. However, Medicare spending per beneficiary in the insular areas in fiscal year 2003 was less than half of Medicare spending in the states—about $2,800 on average in the insular areas compared to $6,800 in the states. (See fig. 4.) Differences in payment policy help explain some of the disparity in Medicare per beneficiary spending in the insular areas compared to the states. For example, the PPS methodology used to determine payments to hospitals in Puerto Rico, which includes a lower local component, contributes to lower payments. Similarly, the method used to determine supplemental PPS payments for Medicare’s DSH program results in lower payments to hospitals in Puerto Rico compared to the states. To qualify for Medicare DSH payments, at least 15 percent of a hospital’s patient days must be attributable to certain patients receiving either Supplemental Security Income (SSI) or Medicaid benefits (which combined serve as a measure of the number of low-income patients treated by any single hospital). Further, the actual DSH payment is based on the number of patient days attributable to these low-income patients. Because residents of Puerto Rico are statutorily ineligible for SSI payments regardless of whether or not they meet the income thresholds required for SSI eligibility, only SSI patients visiting from the states are included in the counts for DSH. We were informed that, as a result, it is more difficult for hospitals in Puerto Rico to meet the 15 percent threshold, and those hospitals meeting the threshold receive limited DSH payments because the low-income counts do not include some poor patients. Whether cost-based methods used to pay hospitals in the other insular areas similarly contribute to lower per beneficiary payments relative to the states is less clear. However, some of the variation in spending per beneficiary among the insular areas is likely due to the fact that statutory limits on Medicare payments apply to hospitals in some, but not all, insular areas. For example, hospital payments in CNMI are based on what the hospital claims as its actual costs. These costs are not limited, are not audited, and have increased dramatically in recent years. In contrast, under TEFRA, payments to hospitals in the Virgin Islands are limited, and according to officials with the Medicare fiscal intermediary serving the Virgin Islands, these payments may not be covering costs. The different methods used to pay these hospitals likely explain, in part, why Medicare payments per beneficiary in CNMI are significantly higher than in the Virgin Islands. Another factor that helps explain lower Medicare per beneficiary spending in the insular areas is the extent to which Medicare beneficiaries in the insular areas use certain covered services. For example, an analysis of Medicare utilization rates for major medical procedures shows that, on average, beneficiaries in the insular areas received far fewer of these services than beneficiaries in the states—rates in the insular areas ranged from 144 to 203 per thousand beneficiaries compared to 297 per thousand in the states. Rates were similarly low in Hawaii (172 per thousand), but not in other remote or poor states studied. (See fig. 5). Several factors likely contribute to lower Medicare utilization, and therefore per beneficiary spending, in the insular areas. For example, limited access to certain specialty services, a lack of Medicare-certified physicians, and local cultural differences may contribute to lower Medicare utilization rates. A CMS official serving the Pacific insular areas reported that certain specialty services, such as chemotherapy, are not available in these areas, and it is often too expensive for beneficiaries to travel to receive such services off island. Lower utilization rates of physician services in American Samoa could also be attributable, in part, to a lack of Medicare-certified providers. According to a CMS official, many medical professionals in American Samoa who provide services to residents are not certified to receive payments under Medicare. Cultural differences may also contribute to lower utilization of Medicare services in the insular areas. For example, a CMS official said that some American Samoans are less likely to seek care in Medicare-certified facilities. Similarly, reliance on nursing facilities may be less prevalent in certain insular areas, as families assume primary care responsibility for individuals who might commonly receive care in these facilities in the states. Another factor contributing to lower per beneficiary spending is that the percentage of Medicare beneficiaries enrolled in Part B is significantly lower in most of the insular areas than in the states. On average, in 2003 about 77 percent of Medicare beneficiaries in the insular areas opted for Part B, compared to 95 percent in the states. Insular area officials provided a number of reasons to explain the enrollment differences. For example, Medicare beneficiaries in the states and all insular areas but Puerto Rico are automatically enrolled in Part B, typically around their 65th birthday. However, some insular area officials told us that their residents opt out of Part B coverage because they cannot afford its monthly premium, which was about $78 in 2005.40, 41 Also, beneficiaries in Puerto Rico must go to a local Social Security office to enroll in Part B, and according to CMS officials, this policy leads to lower enrollment. Similarly, American Samoa officials said that some of their Medicare beneficiaries may lack the incentive to purchase Part B coverage as they have access to free health coverage through the local hospital. Federal Medicaid spending per capita was also lower in the insular areas compared to the states. In fiscal year 2003, federal Medicaid per capita spending in the states averaged $565 compared to between $33 and $65 for the insular areas. Poorer states with higher federal matching rates received as much as $813 in federal Medicaid per capita spending—more than 12 times the amount received by any insular area. (See fig. 6.) Individuals who do not enroll in Part B when they are first eligible may sign up for coverage during specified open enrollment periods. However, in most cases, the Part B premium increases 10 percent for each 12-month period that an individual could have had Part B but did not select it. State Medicaid agencies provide cost-sharing assistance to certain low-income Medicare beneficiaries. However, because of the statutory cap on federal Medicaid funding, most of the insular areas do not participate in these assistance programs, although some insular areas pay for the Part B premiums for select Medicare beneficiaries. Key: ● = service covered; ◐ = service covered with limitations; ○ = service not covered The Kaiser Commission on Medicaid and the Uninsured. Medicaid Benefits: Online Database (The Henry J. Kaiser Family Foundation). http://www.kff.org/medicaid/benefits/index.jsp (downloaded Aug. 22, 2005). Mandatory services may not be provided in an insular area because qualified providers or facilities do not exist. For example, none of the Pacific insular areas have a Medicaid-certified, free-standing skilled nursing facility. In other cases, insular areas may not cover certain services although qualified providers are available. For example, Medicaid- qualified providers are available in Puerto Rico for nursing facility, home health, nurse midwife, and certified nurse practitioner services; however, because of the limitations of the Medicaid cap, the Medicaid program does not include them in its benefit package, according to a Puerto Rico Medicaid official. Similarly, an official associated with the Virgin Islands’ Medicaid program said that although qualified providers are available, nurse midwife and nurse practitioner services are not covered due to their costs. However, the Medicaid programs of some insular areas incur additional costs that states may not. For example, several insular areas pay the costs associated with transporting enrollees off-island to receive services not available locally. The costs associated with transportation are typically high, particularly for the Pacific insular areas, and count against the Medicaid cap. In addition, each insular area has chosen to add benefits, such as coverage for outpatient prescription drugs, which are optional under the statute. (See app. III for a summary of these optional benefits.) Federal SCHIP individual spending levels were also lower in the insular areas compared to the states. In fiscal year 2003, federal SCHIP spending per child under age 19 averaged $24 in the insular areas (ranging from $14 in American Samoa to about $25 in Puerto Rico) compared to an average of $41 in the states. When compared to the states, the insular areas are poorer and have a higher proportion of children under 19 years of age. Therefore, the statutory SCHIP allotment, which distributes funds to the insular areas based on their proportion of total insular population versus number of uninsured children, contributes to this disparity. However, as is the case with the Medicaid program, the operation of the SCHIP program in most of the insular areas is fundamentally different than the states. For example, while nearly 6 million children were served through SCHIP state programs in fiscal year 2003, most of the insular areas do not have a unique SCHIP program that extends health insurance coverage to additional children. Instead, the insular areas primarily use SCHIP funds to continue to pay for services provided to children enrolled in the Medicaid program once the Medicaid cap is met. One exception is Puerto Rico, which uses SCHIP funding to extend Medicaid coverage to children with family incomes between 100 and 200 percent of its local poverty level. In fiscal year 2003, total HHS per capita spending on health-related grants from three agencies—CDC, HRSA, and SAMHSA—was higher in the insular areas compared to the states. On average, these three agencies awarded about $60 per capita in the insular areas compared to about $48 per capita in the states. Differences in per capita spending are due in part to the methods used to allocate grant funds. For example, the base rate formula used to calculate the CDC bioterrorism grant results in higher payments to all insular areas except Puerto Rico and to states with smaller populations. In the four smaller insular areas, awards per capita for this grant range from $5.20 in Guam to $11.37 in American Samoa, and in states with small populations, such as Alaska and Wyoming, awards were $10.62 and $12.06 respectively compared to $3.61 in the states on average. (See fig 7.) We provided a draft of this report for comment to HHS, DOI, and key health officials in each of the five insular areas. We received written comments from DOI, American Samoa, CNMI, and Puerto Rico, which are included in appendixes IV, V, VI and VII, respectively. Although HHS provided no general comments, it did provide technical comments, as did Puerto Rico, which we incorporated as appropriate. DOI noted that improving health care in the insular areas is a priority for both the agency and the insular areas and commented that the report will help identify areas of disparity which may be reviewed for improvement. The insular areas expressed concern that the report did not sufficiently address certain issues, such as implications of statutory limits on federal Medicaid spending and a more comprehensive analysis of local circumstances that affect the availability and costs of health care services. The insular areas also provided a number of specific comments and suggestions. Specifically, CNMI and Puerto Rico commented that the statutory limits on federal Medicaid spending—the Medicaid cap and minimum FMAP—result in insufficient federal Medicaid payments to the insular areas and explain the significant differences in federal Medicaid payments between them and the states. For example, CNMI noted that one patient with an expensive medical condition, such as a baby with congenital heart disease or a child with leukemia, can consume a large portion of the available federal Medicaid contribution in a given year. CNMI also commented that the federal funding limits prevent its Medicaid program from providing all Medicaid mandatory services and suggested that the report implied that this was a “satisfactory state of affairs” because the federal government does not penalize insular areas for not providing these services. We did not intend to imply that this is a satisfactory condition; rather, our purpose was to describe mandatory Medicaid services that are not provided by insular areas and to explain that, in light of the limits on federal funding, CMS does not hold these areas accountable for providing these services. We revised the report to clarify this point. The three insular areas commented that the report did not adequately explore other implications of the statutory federal funding limits, including the impact on the local contribution to total health care costs and the local health care infrastructure. For example, Puerto Rico commented that as a result of the limits on federal Medicaid payments, it and other insular areas shoulder a larger share of financial responsibility for the Medicaid program than the states, and that the federal contribution to the program is far less than the minimum FMAP suggests. Similarly, CNMI commented that the report failed to discuss the effect of limited federal funding on health outcomes, physician recruitment and retention, and other necessary government services. American Samoa commented that the report minimized or omitted local circumstances that affect the costs of health care services and are major factors in the analysis of federal funding. For example, a local statute requires the American Samoan government to provide medical services to qualified citizens at no cost, and its only hospital, which the government owns and operates, is the sole provider of primary, secondary, and tertiary care. In combination, these factors have deterred the development of privately-owned health care facilities and providers, which can not compete with government-level charges, and this has limited the availability of services. Where appropriate, we revised the report to include information about these local circumstances and their effect on American Samoa’s ability to provide health care services. A more comprehensive analysis of insular areas’ local contribution to total health care funding or their health care infrastructures, however, was beyond the scope of this report. The insular areas also provided a number of specific comments or suggestions. For example, CNMI commented that the report implied that the availability of certain grant funds, including those provided to offset the cost of providing services to residents of the freely associated states, ameliorated the adverse effects of disparities in federal funding for the Medicare and Medicaid programs and added that grant funds are not enough to replace inadequate Medicaid funding. It was not our intent to imply that these grants are a substitute for other sources of federal health care funding. Rather, the report identifies major sources of federal health care funding in insular areas, of which grants are a significant portion. Puerto Rico also suggested that the report include a more thorough and substantive review of several issues it considers to be programmatic barriers to a balanced partnership between insular areas and the federal government, including the Medicaid cap, SCHIP allotment methods, and the level of the Medicare Part D low-income subsidy for insular areas. Such an analysis was beyond the scope of this report. Finally, CNMI commented the report should include recommendations to address what it characterizes as “the outright discrimination in federal health care funding” for the insular areas and suggested that specific recommendations could include eliminating the Medicaid cap, calculating the FMAP based on actual poverty rates, and providing additional Medicare Part D pharmacy benefits. We acknowledge CNMI’s views on the adequacy of current levels of federal health care funding. However, we did not include recommendations in this report because it is the Congress’s prerogative to set the overall design of the Medicaid program. Puerto Rico commented that this report describes many of the challenges and the imbalance affecting the federal and insular area health care partnership, such as the Medicaid cap, and provides the foundation for the Congress to address these issues. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days after its issuance date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the Secretary of the Interior, and insular area governments. In addition, the report is available at no charge on GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7118 or allenk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VIII. To compare characteristics of the five largest insular areas—American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto Rico, and the Virgin Islands—we used demographic data from the Census Bureau and disease mortality data from the Centers for Disease Control and Prevention (CDC). Except for Puerto Rico, interim and supplemental censuses to the decennial census are not performed for the insular areas. Therefore, 2000 census data for all insular areas and states were used for consistency. Reliable data for the incidence of disease are not collected for all insular areas. CDC’s 2002 natality and mortality report provided health indicator data except where the number of cases was too few to provide reliable estimates. To identify key federal sources of health care funding to the insular areas we reviewed the Census Bureau’s Consolidated Federal Funds Report and conducted interviews with representatives from insular areas, six agencies of the Department of Health and Human Services (HHS), the Department of the Interior’s Office of Insular Affairs (DOI-OIA), and the White House Office of Intergovernmental Affairs. We defined health care funding as federal funds provided to support directly delivered health care, health data collection, disease prevention, and other health-related activities. On the basis of the discussions, we focused our work on the following key sources of funding: Medicare, Medicaid, and SCHIP, in addition to grants from three HHS agencies—CDC, the Health Resources and Services Administration (HRSA), and the Substance Abuse and Mental Health Services Administration (SAMHSA)—and DOI. We collected federal health expenditure data for the states and the insular areas. We selected five states for comparison to insular areas—Alaska, Hawaii, Mississippi, West Virginia, and Wyoming. States were selected on the basis of one or more criteria: geographic remoteness, low Medicare spending, and high federal Medicaid matching rate. We analyzed data provided by each agency and by the insular areas to identify the composition of federal health care funding to insular areas and growth in the awards from fiscal year 1999 through 2003. We compared insular area data with funding to the states as a whole, and to select individual states. We also analyzed expenditures per capita or by beneficiaries of respective programs, where available and consistent. For the key sources identified, we obtained comprehensive health expenditure data for federal fiscal years 1999 through 2003 from the respective agencies. To assess the reliability of the program expenditure data, we reviewed relevant documentation, interviewed knowledgeable agency officials about the data, and conducted electronic data testing. To assess the reliability of HHS and DOI-OIA data, we talked with officials about data quality control procedures and reviewed relevant documentation. We determined the data were sufficiently reliable for the purposes of this report. We conducted our work from October 2004 through September 2005 in accordance with generally accepted government auditing standards. When considered in the aggregate, health care funding in the five largest insular areas varied little in terms of the proportion of funding attributable to various sources for fiscal years 1999 through 2003. For each of the years, Medicare represented about three-quarters of total funding, followed by Medicaid and HHS grants, which each represented about one- tenth of the total. Funding from SCHIP and DOI grants together represented 5 percent or less of total funding. However, Puerto Rico’s comparatively large population masks much of the variation in funding sources that exists in the other insular areas. These areas, particularly those in the Pacific, are considerably more reliant upon grant funding, which can fluctuate from year to year. (See fig. 8 through 13 and tables 4 through 9.) To obtain Medicaid federal matching funds, state and insular area programs are to meet broad criteria related to eligibility, including categorical, income, and resource requirements. However, the insular areas vary in the extent to which their eligibility standards comply with the federal standards. For example, Guam, Puerto Rico, and the Virgin Islands use the same broad federal categories established in statute; however, the levels two of these areas use to determine income eligibility are based on locally established poverty levels rather than the federal poverty level (FPL). Table 10 compares the federal categorical and income eligibility standards to those in the insular areas. In addition to eligibility requirements, Medicaid mandates coverage for certain services. However, as shown in table 3, none of the insular areas provides coverage for all the mandatory services. Nonetheless, each insular area, like the states, has chosen to add optional benefits under the statute, with most providing coverage for outpatient prescription drugs, clinic services, dental and eye care, and physical therapy. (See table 11.) In addition to the contact named above, Susan T. Anthony, Assistant Director, Gerardine Brennan, Richard Lipinski, Michaela M. Monaghan, Mary Reich, and Margaret J. Weber made key contributions to this report.

Summary: Five insular areas of the United States--American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto Rico, and the U.S. Virgin Islands--benefit from federal health care financing and grant programs that help fund health care services to their over 4 million residents. However, notable differences exist in how the programs are funded or operate in the insular areas, such as statutory limits on federal Medicaid funding to the insular areas that do not apply in the states. To help understand these differences, GAO was asked to identify (1) the key sources of federal health care funding in the insular areas, (2) differences between insular areas and the states in the methods used to allocate these funds, and (3) differences in spending levels per individual between insular areas and the states. In commenting on a draft of this report, American Samoa, CNMI, and Puerto Rico suggested the need for additional information on certain issues, such as implications of statutory limits on federal Medicaid spending and a more comprehensive analysis of local circumstances that affect the availability and costs of health care services. Multiple federal programs fund health care services in the insular areas. Federal health care financing programs--Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP)--represented nearly 90 percent of the $2.2 billion in health care funding to these areas in fiscal year 2003, with Medicare alone representing over three-quarters of total funding. The Departments of Health and Human Services (HHS) and the Interior (DOI) also provide grants to the insular areas. Significant variation exists among the insular areas in terms of the distribution of funds by these sources, largely due to the number of Medicare beneficiaries in each area. The methods used to allocate these federal funds to insular areas often differ from methods used in the states. For example, Medicare pays hospitals in most insular areas based on their costs rather than the prospective payment system used for most hospitals in the states. Similarly, federal funding for Medicaid and SCHIP is subject to statutory limits that do not apply to states, including minimum federal contributions and a cap on federal Medicaid payments. In addition, certain HHS grants use different rules to determine insular areas' funding. Differences in allocation methods as well as other factors contribute to lower spending levels per individual in the insular areas compared to the states. For example, Medicare spending per beneficiary in the insular areas was less than half the amount it was in the states, due in part to differences in payment policies and to beneficiaries' lower utilization of services. In addition, the statutory limits on federal Medicaid funding in these areas contributed to lower federal Medicaid per capita payments in the five insular areas compared to the national average. However, in light of limits on federal funding, the insular areas are not held accountable for covering all Medicaid benefit requirements, such as nursing facility services that represent nearly one-third of Medicaid expenditures in the states. Insular areas benefit from certain HHS grant allocation formulas that result in higher per capita payments to them than the states, on average.