Title XIX of the Social Security Act authorizes federal funding to states for Medicaid, which finances health care for certain low-income children, families, and individuals who are aged or disabled. Although states have considerable flexibility in designing and operating their Medicaid programs, they must comply with federal requirements specified in Medicaid statute and regulation. For example, states must provide methods to ensure that payments for services are consistent with economy, efficiency, and quality of care. Medicaid is an entitlement program: states are generally obligated to pay for covered services provided to eligible individuals, and the federal government is obligated to pay its share of a state’s expenditures under a CMS-approved state Medicaid plan. Our prior and current work addresses five categories of Medicaid claims where we are aware that states have reimbursement-maximizing strategies. Our current work in particular concentrated on these five categories because—on the basis of factors such as nationwide growth in dollars claimed, the results of our past reviews, and work by HHS’s Office of Inspector General (OIG) to assess the appropriateness of claims in these categories—we judged them to be of particularly high risk. Over the past few years, states’ claims in some of these categories have grown significantly in dollar amounts. The five categories of claims we examined, and recent trends in claimed expenditures, are described in table 1. For many years, states have used varied financing schemes, sometimes involving IGTs, to inappropriately increase federal Medicaid reimbursements. Some states, for example, have made large Medicaid payments to certain providers, such as nursing homes operated by local governments, which have greatly exceeded the established Medicaid payment rate. These transactions create the illusion of valid expenditures for services delivered by local-government providers to Medicaid-eligible individuals and enable states to claim large federal reimbursements. In reality, the spending is often only temporary because states require the local governments to return all or most of the money to the states through IGTs. Once states receive the returned funds, they can use them to supplant the states’ own share of future Medicaid spending or even for non-Medicaid purposes. As various schemes involving IGTs have come to light, Congress and CMS have taken actions to curtail them, but as one approach has been restricted, others have often emerged. Table 2 describes some of the states’ financing schemes over the years and how Congress and CMS have responded to them. A leading variant of these illusory financing arrangements today involves states’ taking advantage of Medicaid’s upper payment limit (UPL) provisions. Although states are allowed, under law and CMS policy, to claim federal reimbursements for supplemental payments they make to providers up to the UPL ceilings, we have reported earlier that payments in excess of the provider’s costs that are not retained by the provider as reimbursement for services actually provided are inconsistent with Medicaid’s federal-state partnership and fiscal integrity. For example, we have reported that by paying nursing homes and hospitals owned by local governments much more than the established Medicaid payment rate and requiring the providers to return, through IGTs, the excess state and federal payments to the state, states obtain excessive federal Medicaid reimbursements while their own state expenditures remain unchanged or even decrease. Such round-trip payment arrangements can be accomplished via electronic wire transfer in less than an hour. States have then used the returned funds to pay their own share of future Medicaid spending or to fund non-Medicaid programs. Problems with excessive supplemental payment arrangements remain, despite congressional and CMS action to curtail financing schemes. For example, in our current review of states’ use of contingency-fee consultants, we found an example in Georgia that illustrates how current law and policy continue to allow states to generate excessive federal reimbursements beyond established Medicaid provider payments for covered services. Georgia and its consultant developed five UPL arrangements using IGTs—one each for local-government-operated inpatient hospitals, outpatient hospitals, nursing homes and for state- owned hospitals and nursing homes. Over the 3-year period of state fiscal years 2001 through 2003, the state made supplemental payments totaling $2.0 billion to nursing homes and hospitals operated by local governments (see fig. 1). A sizable share of the $2.0 billion payments was illusory, however. In reality, the nursing homes and hospitals netted only $357 million because they had initially transferred $1.7 billion to the state Medicaid agency, through IGTs, under an agreement with that agency. The state combined this $1.7 billion with $1.2 billion in federal funds, which represented the estimated federal share of its supplemental payments to local-government facilities of $2.0 billion. The state thus had a funding pool of $2.9 billion at its disposal. From this pool, the state made the $2.0 billion in supplemental payments to local-government providers and retained $844 million to offset its other Medicaid expenditures. In our view, the inappropriate use of IGTs in schemes such as UPL financing arrangements violates the fiscal integrity of Medicaid’s federal- state partnership in at least three ways. The schemes effectively increase the federal matching rate established under federal law by increasing federal expenditures while state contributions remain unchanged or even decrease. We previously estimated that one state effectively increased the federal share of its total Medicaid expenditures from 59 percent to 68 percent in state fiscal year 2001, by obtaining excessive federal funds and using these as the state’s share of other Medicaid expenditures. There is no assurance that these increased federal reimbursements are used for Medicaid services, since states use funds returned to them via these schemes at their own discretion. In examining how six states with large schemes used the federal funds they generated, we previously found that one state used the funds to help finance its education programs, and others deposited the funds into state general funds or other special state accounts that could be used for non-Medicaid purposes or to supplant the states’ share of other Medicaid expenditures. The schemes enable states to pay a few public providers amounts that well exceed the costs of services provided, which is inconsistent with the statutory requirement that states provide for methods that ensure that Medicaid payments are consistent with economy and efficiency. We previously reported that, in one state, the state’s proposed scheme increased the daily federal payment per Medicaid resident from $53 to $670 in six local-government-operated nursing homes. Another category of claims where states have used questionable practices to maximize federal reimbursements is services provided to children in schools and associated administrative costs. Medicaid is authorized to cover services to, for example, Medicaid-eligible children with disabilities who may need diagnostic, preventive, and rehabilitative services; speech, physical and occupational therapies; and transportation. School districts may also receive Medicaid reimbursement for the administrative costs of providing school-based Medicaid services. Our work in this area has addressed claims for Medicaid school-based health services and administration. In 1999, we found a need for federal oversight of growing Medicaid reimbursements to states for Medicaid school-based administrative services, including outreach activities to enroll children in Medicaid. In April 2000, we reported that Medicaid expenditures for school-based health services totaled about $1.6 billion for services provided by schools in 45 states and the District of Columbia, while Medicaid administrative expenditures were about $712 million for costs billed by schools in 17 states. We found that some of the methods used by school districts and states to claim reimbursement for school-based health services did not ensure that the services paid for were provided: some claims, for example, were made solely on the basis of at least one day’s attendance in school, rather than on documentation of any actual service delivery. Methods used by school districts to claim Medicaid reimbursement failed in some cases to take into account variations in service needs among children. With regard to Medicaid school-based administrative costs, we found that some methods used by school districts and states did not ensure that administrative activities were properly identified and reimbursed. Poor controls resulted in improper payments in at least two states, and there were indications that improprieties could have been occurring in several other states. We further found that, in some states, funding arrangements among schools, states, and private consulting firms created adverse incentives for program oversight and caused schools to receive a small portion—as little as $7.50 for every $100 in Medicaid claims—of Medicaid reimbursement for school-based administrative and service claims. We reported that 18 states retained a total of $324 million, or 34 percent, of federal funds intended to reimburse schools for their Medicaid administrative and service claims; for 7 of the states, this amounted to 50 to 85 percent of federal Medicaid reimbursement for school-based health services claims. In addition, contingency fees, which some school districts paid to private consultants for their assistance in preparing and submitting Medicaid claims, ranged from 3 to 25 percent of the federal reimbursement, further reducing the net amount that schools received. In response to recommendations we made to the Administrator of CMS, CMS has clarified guidance for states on submitting claims for school- based administrative activities. Subsequent to our work, HHS OIG conducted reviews of school-based claims in 18 states from November 2001 through June 2005, several of which have identified issues with the appropriateness of claims related to consultants’ projects. In our own most recent work, we determined that Georgia was retaining a share of the additional federal reimbursements gained from its claims for Medicaid school-based services. Georgia’s contingency-fee consultant assisted the state with its Medicaid claims for school-based services in a project that generated about $54 million in federal Medicaid reimbursements over the 3 years the consultant was paid and that, on the basis of state data, we estimate continues to generate about $25 million annually. As before, we found that the school districts were not receiving all of the federal Medicaid reimbursements that were generated on their behalf.