Title XIX of the Social Security Act establishes Medicaid as a federal-state partnership that finances health care for certain low-income individuals, including children, families, the aged, and the disabled. Within broad federal requirements, each state operates and administers its Medicaid program in accordance with a CMS-approved state Medicaid plan. These plans detail the populations served, the services covered, and the methods used to calculate payments to providers. All states must provide certain services, such as inpatient and outpatient hospital services, nursing facility services, and physician services, and may provide additional, optional services, such as prescription drugs, dental care, and certain home- and community-based services. The federal government matches most state Medicaid expenditures for covered services according to the FMAP, which is based on a statutory formula drawing on each state’s annual per capita income. To obtain federal matching funds for Medicaid, states file quarterly financial reports with CMS and draw down funds through an existing payment management system used by HHS. The Recovery Act initially provided eligible states with an increased FMAP for 27 months from October 1, 2008, to December 31, 2010. On August 10, 2010 federal legislation was enacted amending the Recovery Act and providing for an extension of increased FMAP funding through June 30, 2011, but at a lower level. Generally, for fiscal year 2009 through the third quarter of fiscal year 2011, the increased FMAP is calculated on a quarterly basis and is comprised of three components: (1) a “hold harmless” provision, which maintains states’ regular FMAP rates at the highest rate of any fiscal year from 2008 to 2011; (2) a general across-the-board increase of 6.2 percentage points in states’ regular FMAPs through the first quarter of fiscal year 2011, which will be reduced to regular FMAP by July 1, 2011; and (3) a further increase to the regular FMAPs for those states that have a qualifying increase in unemployment rates. Because the unemployment component of the increased FMAP is based on both t level of its regular FMAP and changes in a state’s unemployment rate— versus its existing unemployment rate—it does not fully differentiate among states’ economic circumstances prior to the downturn. States with comparatively high unemployment rates and higher regular FMAPs did not For always receive the largest unemployment adjustment to their FMAPs. example, Michigan had the highest pre-recession unemployment rate in he the nation at 7.3 percent in October 2007, and in June 2010, continued to have one of the nation’s highest unemployment rates at 13.2 percent. Although the state’s unemployment rate increased by 5.9 percentage points over this time, the increased FMAP attributable to the unemployment component in the fourth quarter of FFY 2010 was 3.88 percentage points. In contrast, New Hampshire received an unemployment adjustment of 5.39 percentage points for the same period, although growth in its unemployment rate was significantly lower, and in June 2010, was less than half the unemployment rate in Michigan. Following enactment of the Recovery Act, FMAP rates substantially increased in all states over the regular 2009 FMAP rates and have continued to increase, albeit at a slower rate, since that time. On average, increased FMAP rates nationally for the first and second quarters of FFY 2009 were 8.58 percentage points higher than regular FFY 2009 FMAP rates. By the fourth quarter of FFY 2010, the increased FMAP rates nationwide had increased by an average of 10.59 percentage points over the regular FFY 2010 FMAPs, with the increase ranging from 6.94 percentage points in North Dakota to 13.87 percentage points in Louisiana. (See fig. 1.) For all states, the largest proportion of the increased FMAP was the component attributable to the across-the-board increase of 6.2 percentage points. In addition, the “hold harmless” component contributed to the increase in 17 states, and all states except North Dakota received an increase to their regular FMAP rate based on qualifying increases in unemployment rates. (See app. II for additional information on increased FMAP rates available to states under the Recovery Act.) For states to qualify for the increased FMAP, they must pay the state’s share of Medicaid costs and comply with a number of requirements, including the following: States generally may not apply eligibility standards, methodologies, or procedures that are more restrictive than those in effect under their state Medicaid programs on July 1, 2008. States must comply with prompt payment requirements. States cannot deposit or credit amounts attributable (either directly or indirectly) to certain elements of the increased FMAP in any reserve or rainy day fund of the state. States with political subdivisions—such as cities and counties—that contribute to the nonfederal share of Medicaid spending cannot require the subdivisions to pay a greater percentage of the nonfederal share than would have been required on September 30, 2008. In addition, states must separately track and report on increased FMAP funds. To help states comply with these requirements, CMS provided the increased FMAP funds to states through a separate account in the payment management system used by HHS, allowing the funds to be tracked separately from regular FMAP funds as required by the act. CMS also provided guidance in the form of state Medicaid director letters and written responses to frequently asked questions, and the agency continues to work with states individually to resolve any compliance issues that may arise. Despite these restrictions, however, states are able to make certain other adjustments to their Medicaid programs without risking their eligibility for increased FMAP funds. For example, the Recovery Act does not prohibit states from reducing optional services, or reducing provider payment rates. States also continue to have flexibility in how they finance the nonfederal share of Medicaid payments. Specifically, provided they comply with federal limits, states may rely on various financing arrangements, such as provider taxes, certified public expenditures (CPE), or intergovernmental transfers (IGT), to generate the nonfederal share of payments. (See table 1.) States have accessed most of the increased FMAP funds available to them through the Recovery Act, despite most having to make adjustments to their Medicaid programs to become eligible for the funds. Nearly every state used the funds to cover increased Medicaid enrollment, which grew by over 14 percent nationally between October 2007 and February 2010. Through the end of the third quarter of FFY 2010, states had drawn down a total of $60.8 billion in increased FMAP funds—95 percent of the funds available at that point, or 70 percent of the total estimated $87 billion in increased FMAP that was provided through the Recovery Act. If current spending patterns continue, we estimate that the states will draw down $82 billion by December 31, 2010—about 94 percent of the estimated total allocation of $87 billion. CMS distributed the increased FMAP funds to states through an existing payment system, thereby providing states with timely access to the funds. Within 3 months of enactment, all but one state had drawn down the increased FMAP funds. Most states reported making at least one adjustment to their Medicaid programs in order to be eligible for the increased FMAP funds, and 25 states reported making multiple adjustments. Twenty-nine states reported making adjustments to comply with the act’s prompt payment requirement, and 26 states reported making adjustments to the act’s maintenance of eligibility requirement. For example, several states reported that they were in the process of replacing antiquated claims payment systems or implementing programming changes to existing systems to be able to comply with the prompt payment requirement. Specifically, Hawaii and South Carolina adjusted their claims payment systems to identify claims on a daily basis and developed reporting mechanisms to monitor compliance with the act’s prompt payment requirement. In terms of adjustments states made to comply with the maintenance of eligibility requirement, Vermont reported that it eliminated premium increases that it had imposed on certain beneficiaries, and Arizona reported reversing a policy that had increased the frequency at which it determined program eligibility. In addition, 13 states reported making adjustments to the act’s requirement on contributions by political subdivisions, and 4 states reported making adjustments to comply with the act’s requirement related to rainy day funds. When asked about the difficulty of complying with the act’s requirements in order to access funds, states most frequently reported that meeting the prompt payment requirement posed a high level of difficulty. Nine states reported having not met the prompt payment requirement at some point since the Recovery Act was enacted, with the total number of days reported by a state ranging from 1 day to 48 days. Eight states have either applied for or received a waiver from meeting the prompt payment requirement from CMS. (See app. III for additional information on the increased FMAP grant awards and drawdown amounts for each state.) For FFY 2010 through the first quarter of FFY 2011, nearly all states reported using or planning to use funds freed up by the increased FMAP to cover increased Medicaid caseloads (45 states), maintain Medicaid eligibility (44 states), and to maintain Medicaid benefits and services (44 states). Additionally, the majority of states also reported using or planning to use these funds to help support general state budget needs, maintain institutional provider payment rates, and maintain practitioner payment rates. Despite the variety of purposes for which states used the increased FMAP funds, when asked about the sufficiency of the funds, fewer than half of states (18 states) reported that the 2010 funds were sufficient for the stated purposes of the act—to provide fiscal relief to states and to maintain states’ Medicaid programs. Nonetheless, 46 states reported that the increased FMAP was a major factor in their efforts to support Medicaid enrollment growth which, from October 2007 through February 2010, increased 14.2 percent nationally, which is significantly higher than in previous years. The rate of growth peaked between January 2009 and July 2009, increasing by 5 percent during this 7-month period. (See fig. 2.) Enrollment growth across the states varied considerably—ranging from about 1 percent in Tennessee and Texas to almost 38 percent in Nevada. Twenty-three states experienced a 10 to less than 20 percent enrollment increase, with 16 states experiencing an enrollment increase of 20 percent or greater. (See fig. 3.) While the magnitude of the enrollment increase across states was largely due to the economic downturn, program expansions and enrollment outreach initiatives implemented in some states prior to the economic downturn also contributed to enrollment growth. Despite states’ declining revenues, however, the act’s maintenance of eligibility requirement made the increased FMAP contingent on states not adopting more restrictive Medicaid eligibility standards, methodologies, or procedures than those that were in place on July 1, 2008. When examining regional variation in enrollment growth, states in the western region of the country most commonly had enrollment increases above the national increase of just over 14 percent (11 of 13 states), while states in the northeast region were least likely to have enrollment increases over the national increase (4 of 9 states). Various factors likely contributed to these regional variations. For example, when compared to national averages, most states in the western region experienced higher than average growth in unemployment (8 of 13 states) and poverty rates (7 of 13 states) during the recession, and higher rates of uninsurance prior to the recession (11 of 13 states). Low enrollment growth in the northeast region may be due, in part, to the fact that many of these states have historically had higher Medicaid income-eligibility levels when compared to states in other regions. For example, in 2009, the majority of states in the northeast extended Medicaid coverage to parents with incomes over 150 percent of the federal poverty level (FPL). In contrast, the majority of states in the southern and western regions generally limited program eligibility to parents under 75 percent of the FPL. Across the states, most enrollment growth was attributable to children, a population that comprises over half of total Medicaid enrollment, and is sensitive to economic downturns. However, the highest rate of increase during this period occurred among the nondisabled, nonaged adult population. Specifically, from October 2007 through February 2010, enrollment among the nondisabled, nonaged adult population increased by nearly 30 percent, compared to an increase of nearly 15 percent for children. (See fig. 4.) Of the 29 states with readily available information on the geographic distribution of Medicaid enrollment increases, 21 states reported that the increase was generally distributed evenly across the state, and 8 states reported that the increase was concentrated in certain urban or rural counties. For example, Arizona Medicaid officials reported that the largest enrollment increase occurred in Maricopa County—the state’s largest county that includes Phoenix and Scottsdale. Pennsylvania officials reported that the concentration of enrollment growth was mixed between one rural county and two urban counties—Montgomery and Cumberland. (See app. IV for more information on adjustments made by states to comply with Recovery Act requirements and states’ uses of funds freed-up by the increased FMAP. See app. V for additional information on enrollment changes in the states and the largest U.S. insular areas.) Most states are concerned about their ability to sustain their Medicaid programs once the increased FMAP funds are no longer available, and have taken actions or proposed actions to address program sustainability. However, states’ efforts to make future program adjustments will be influenced by recent legislation, including PPACA, and the subsequent extension of the increased FMAP through June 2011. Forty-eight states reported concerns regarding the sustainability of their Medicaid programs after Recovery Act funding is no longer available, with most states reporting that the factors driving their concerns included the increased share of the state’s Medicaid payments in 2011, and the projection of the state’s economy, tax revenues, and Medicaid enrollment growth for 2011. To address program sustainability, 46 states have taken actions—such as introducing new Medicaid financing arrangements and reducing or freezing practitioner payment rates—and 44 states reported implementing multiple actions. Most commonly, states implemented new financing arrangements or altered existing ones—such as provider taxes, IGTs, and CPEs—to generate additional revenues to help finance the nonfederal share of their Medicaid programs. In addition, most states also reported that they proposed making additional changes to their Medicaid programs for the remainder of fiscal year 2010 or for fiscal year 2011. (See fig. 5.) Twenty-eight states reported that they reduced or froze Medicaid payment rates to certain Medicaid providers in response to concerns about program sustainability. For example, in December 2009, Iowa implemented across-the-board rate reductions for most providers ranging from 2.5 to 5 percent, which will remain in effect until June 30, 2011. Similarly, Maryland reduced or froze payments for physicians and hospitals, and for long-term care services and home- and community-based services. States also reported reducing benefits and services, changing prescription drug formularies, or increasing beneficiary copayments or premiums. Four states—Florida, Illinois, Mississippi, and Texas—and the District of Columbia reported that they did not implement any changes in response to their concerns about program sustainability; however, Medicaid officials in most of those states and the District told us that they were considering future changes. In addition to these program changes, over half the states reported making administrative changes that could affect Medicaid application processing time, such as decreasing the number of staff or staff hours available for processing Medicaid applications, increasing furlough days, and decreasing the number of Medicaid intake facilities. Despite these actions, most states kept pace with the increasing number of applications they received. Specifically, of the 33 states reporting data, 25 processed on average at least 95 percent of applications they received each month. (See app. IV for additional information on state actions to address program sustainability. App. VI provides more information on changes to states’ share of Medicaid payments when increased FMAP is no longer available.) States indicated that legislation to extend the increased FMAP funding would help address their concerns about program sustainability. At the time of our survey, legislation extending the increased FMAP had been proposed, but not enacted. Despite uncertainties about the availability of the increased FMAP beyond December 2010, however, 30 states had assumed a 6-month extension of the increased FMAP in their fiscal year 2011 budgets without any changes to the way it is calculated as provided for under the Recovery Act, and only 9 of these states had contingency plans in place if such legislation was not enacted. On August 10, 2010, Congress passed legislation amending § 5001 of the Recovery Act to extend the increased FMAP through June 30, 2011, but at a lower level. Specifically, under the amendments to the Recovery Act, states’ increased FMAP rates will decrease by at least 3 percentage points beginning on January 1, 2011, and continue to be phased down to their regular FMAP rates by July 1, 2011. For states that had assumed an unmodified extension of the increased FMAP, the available federal funds will be less than anticipated. However, without the extension, we estimate that states, on average, would have faced a nearly 11 percentage point decrease in their FMAP rates on January 1, 2011. The additional 6 months of increased FMAP funding will allow states more time to adjust as they return to their regular FMAP rates. How states will fare as they return to their regular FMAP rates will vary depending on each state’s unique economic circumstances and the size of their Medicaid population. Officials from several states indicated that the loss of increased FMAP funds would distress their state’s budget, requiring the state to make additional program reductions, as the following examples illustrate. Wisconsin Medicaid officials reported that the state would need to reduce Medicaid expenses by $1 billion annually, or about 20 percent of the state’s Medicaid budget, and are considering several options, including eliminating the state’s prescription drug program for seniors and several rate reform initiatives. Colorado Medicaid officials reported that the state would need to reduce Medicaid expenditures by an estimated $250 million, in addition to approximately $320 million the state has already cut. The state reported that the additional expenditure reduction would require drastic cuts to optional programs, benefits, and provider rates. In addition, the recently enacted PPACA includes several provisions that affect states’ Medicaid programs, and states will need to take into account these provisions when considering additional adjustments to their programs. Specifically, the maintenance of eligibility requirement under PPACA precludes states from receiving federal Medicaid funding if they apply eligibility standards, methods, or procedures, under their plan or a waiver, that are more restrictive for adults than those in effect on the date of PPACA’s enactment until the date the Secretary of HHS determines that a health insurance exchange established by the state is fully operational, which must be no later than January 1, 2014. PPACA also provides states with an opportunity to obtain additional Medicaid funds, either immediately or in the future. For example, PPACA requires states to cover all persons under 65 who are not already eligible under mandatory eligibility groups up to 133 percent of the FPL by 2014, but states have the option to expand eligibility immediately and to receive federal funds for these individuals. As of August 12, 2010, Connecticut and the District have obtained CMS approval to shift eligible low-income adults from existing state health care programs into Medicaid. The act also includes provisions to facilitate states’ use of home- and community- based long-term care services. In commenting on a draft of this report, HHS provided technical comments, which we incorporated as appropriate. HHS did not comment on our findings. We are sending copies of this report to the Secretary of HHS, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions, please contact me at (202) 512-7114 or yocomc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix VII. To examine the extent to which states have accessed increased Federal Medical Assistance Percentage (FMAP) funds, we reviewed data provided by two divisions within the Department of Health and Human Services (HHS)—the Centers for Medicare & Medicaid Services (CMS) and the Office of the Assistant Secretary for Planning and Evaluation—on increased FMAP rates and Medicaid grant awards under the Recovery Act for federal fiscal years (FFY) 2009 and 2010. We analyzed data on increased FMAP rates to determine the proportion of each state’s increase attributable to the three components prescribed in the act: the across-the- board component, the hold harmless component, and the unemployment component. We compared preliminary fourth quarter FFY 2010 increased FMAP rates to the 2011 regular FMAP rates to estimate the percentage increase in states’ share of Medicaid payments once the increased FMAP is no longer available. We also analyzed CMS data on increased FMAP funds to determine each state’s total available grant award for FFYs 2009 and 2010 and the percentage each state had drawn from their available grants as of June 30, 2010. Based on these drawdown rates, we projected the total amount of increased FMAP funds that states would draw down by December 31, 2010. We interviewed CMS officials to understand how they compiled data on increased FMAP funds and to clarify anomalies we identified in the data. We also discussed CMS officials’ oversight of the Medicaid funds provided under the Recovery Act and specifically addressed their oversight of states’ actions to comply with the act’s eligibility requirements for increased FMAP. We also reviewed relevant CMS guidance, including a sample of increased FMAP grant award letters, a fact sheet, frequently asked questions documents, and state Medicaid director letters related to the act. To examine how states used the increased FMAP funds and how states planned to sustain their Medicaid program once the increased FMAP funds are no longer available, we administered a Web-based survey to the Medicaid directors or their designated contacts in all states in August 2009 and in March 2010, and obtained a response rate of 98 and 100 percent, respectively. The surveys asked states to provide information on a variety of topics, including their uses of increased FMAP funds, monthly Medicaid enrollment from October 2007 through February 2010, adjustments made in response to the act’s requirements, and any concerns they had about the longer-term sustainability of their Medicaid programs. We pretested the surveys with Medicaid officials from four states. We reviewed all survey responses, and where appropriate, included these responses in the report. As needed, we followed up with Medicaid officials in selected states to clarify responses, to request corrected enrollment data, or to obtain additional information on their compliance with certain Recovery Act requirements. We analyzed the Medicaid enrollment data obtained from the surveys to determine total enrollment growth and percentage change in enrollment for each state between October 2007 and February 2010. We also analyzed the enrollment data to determine the extent to which each Medicaid subpopulation—children, aged individuals, disabled individuals, and adults (nonaged, nondisabled)—contributed to overall enrollment growth during this period. We analyzed the survey data on Medicaid applications to determine any changes in states’ processing volumes and rates over this period. We did not independently verify these data; however, we reviewed all survey responses and federal Medicaid data for internal consistency, validity, and reliability. Based on these activities, we determined these data were sufficiently reliable for the purpose of our report. In addition, we analyzed other state economic and fiscal data—such as poverty rates, unemployment rates, and Medicaid eligibility levels—to examine their relationship to overall Medicaid enrollment growth within states and regions. We also reviewed data prepared by Federal Funds Information for States, an organization that tracks and reports on the fiscal impact of federal budget and policy decisions on state budgets and programs. Finally, we reviewed relevant provisions of the Patient Protection and Affordable Care Act, and other legislation that affect states’ Medicaid programs. We conducted a performance audit for this review from December 2009 to August 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Preliminary increased FMAP, fiscal year 2010, North Dakota is the only state that did not receive an increase to its preliminary FMAP rate due to qualifying increases in the state’s unemployment rate during the period. Appendix III: Increased FMAP Grant Awards and Funds Drawn Down (Dollars in thousands) Increased FMAP grant award for FFY 2009 and first three quarters of FFY 2010 97 (Dollars in thousands) Maintain Medicaid payment rates for (CHIP) ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● State also reported using funds to expand Medicaid eligibility levels. State reported using funds to finance local or state public health insurance programs other than Medicaid or CHIP. State did not provide responses to this survey. State reported using funds to increase Medicaid payment rates for practitioners. State reported using funds to increase Medicaid payment rates for institutional providers. Finance local public health programs or (programs other than Medicaid) Finance local public health programs or (programs other than Medicaid) ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● State reported using or planning to use funds to increase Medicaid payment rates for practitioners. State also reported using or planning to use funds to increase Medicaid payment rates for institutional providers. State also reported using funds to expand Medicaid eligibility levels. Due to limitations in enrollment data reported by certain insular areas, we were unable to conduct complete analyses. Percentage increase in state share of Medicaid For the portion of federal fiscal year 2011 not in the Recovery Act recession adjustment period (i.e., after December 31, 2010), the Patient Protection and Affordable Care Act (PPACA) will provide Louisiana with an FMAP of 68.04 (rather than the current FMAP of 63.61). In addition to the contact name above, the following team members made key contributions to this report: Susan Anthony, Assistant Director; Emily Beller; Laura Brogan; Ted Burik; Julianne Flowers; Zachary Levinson; Drew Long; and Kevin Milne.

Summary: In February 2009, the American Recovery and Reinvestment Act of 2009 (Recovery Act) initially provided states and the District of Columbia (the District) with an estimated $87 billion in increased Medicaid funds through December 2010, provided they met certain requirements. Funds were made available to states and the District through an increase in the Federal Medical Assistance Percentage (FMAP), the rate at which the federal government matches state expenditures for most Medicaid services. In March 2010, Congress passed the Patient Protection and Affordable Care Act (PPACA), which prohibits states from adopting certain changes to program eligibility in order to receive federal reimbursement, and in August 2010, extended increased FMAP rates through June 2011. GAO was asked to examine issues related to Medicaid funds under the Recovery Act. GAO examined (1) states' and the District's access to and use of increased FMAP funds, and (2) states' and the District's plans to sustain their Medicaid programs once these funds are no longer available. To do this work, GAO surveyed state Medicaid officials in the 50 states and the District in August 2009 and March 2010 about their program enrollment, uses of funds, program adjustments, and program sustainability. GAO obtained responses from all states and the District. GAO also reviewed CMS data and guidance and interviewed CMS and state officials. States and the District are on pace to draw down about 94 percent--$82 billion of the estimated $87 billion--in increased FMAP funds provided by the Recovery Act. Most states adjusted their Medicaid programs to comply with the act's requirements, and nearly all states and the District reported using the increased FMAP to cover increased enrollment, which grew by 14.2 percent nationally between October 2007 and February 2010. Enrollment growth across the states and the District ranged from about 1 percent to 38 percent, with 22 states and the District experiencing a 10 to less than 20 percent increase. Although most enrollment growth was attributable to children, the highest growth rate was among the non-disabled, non-aged adult population. Forty-seven states and the District reported concern regarding the sustainability of their Medicaid programs without the increased FMAP, and 46 states took steps to address sustainability, including introducing financing arrangements, such as taxes on health care providers, or reducing provider payments. Most states and the District also reported proposed changes for the future. Congress passed legislation in August 2010 to extend the increased FMAP through June 2011, although at lower rates than provided by the Recovery Act. How the subsequent return to regular FMAP rates will affect states and the District will vary depending on their unique economic circumstances. GAO estimates that regular FMAP rates will be, on average, nearly 11 percentage points lower than increased FMAP rates available in December 2010. For future adjustments, states and the District will need to consider PPACA, which prohibits more restrictive eligibility standards, methods, or procedures until 2014, in order to receive federal Medicaid reimbursement. HHS provided technical comments to this report, which GAO incorporated as appropriate.