Medicaid—a federal-state partnership that finances health care for low- income individuals, including children, families, the aged, and the disabled—provided health coverage for over 60 million individuals in 2007. Title XIX of the Social Security Act established Medicaid as a joint federal- state program. States operate their Medicaid programs by paying qualified health care providers for a range of covered services provided to eligible beneficiaries and then seeking reimbursement for the federal share of those payments. Within broad federal requirements, each state administers and operates its Medicaid program in accordance with a state Medicaid plan, which must be approved by CMS. A state Medicaid plan details the populations a state’s program serves, the services the program covers (such as physician services, nursing facility care, and inpatient hospital care) and the methods for calculating payments to providers. The state Medicaid plan also describes the supplemental payment programs administered by the state. Medicaid is an open-ended entitlement program, under which the federal government is obligated to pay its share of expenditures for covered services provided to eligible individuals under a state’s federally approved Medicaid plan. A state may collect up to 60 percent of its Medicaid share from local governments as long as the state government itself contributes at least 40 percent. Local governments and local government providers can contribute to the state share of Medicaid payments in certain ways, for example, through intergovernmental fund transfers. DSH payments supplement standard Medicaid payment rates to help offset certain hospitals’ unreimbursed costs. Under federal Medicaid law, each state receives an annual DSH allotment. DSH allotments are the maximum amounts of federal matching funds each state is permitted to claim for DSH payments. States’ DSH allotments were first established in 1991 based on each state’s historical DSH spending. States are required to make DSH payments to hospitals that treat a disproportionate share of low-income and Medicaid patients. Federal Medicaid law caps the amount of DSH funding a state may pay to an individual hospital each fiscal year: DSH payments cannot exceed the unreimbursed cost of furnishing hospital services to Medicaid beneficiaries and the uninsured. In determining a hospital’s unreimbursed costs, states must offset costs with all Medicaid payments received by the hospital, including any UPL payments. In other words, UPL payments count against a hospital’s DSH cap. A state may establish one or more DSH programs to make DSH payments, subject to these limits, and each program must be documented by the state and approved by CMS in the state’s Medicaid plan. As with other Medicaid program changes, to change or initiate a new DSH program, a state must submit a state plan amendment to CMS for review and approval prior to implementation. In contrast to DSH payments, states are not required to establish non-DSH supplemental payments for providers. Federal Medicaid regulations establish the UPL as an upper limit on federal reimbursement for Medicaid payments. UPL payments are a product of the gap between standard Medicaid payment rates and the UPL: in practice, states’ standard Medicaid payments are often less than the UPL, so states have established supplemental payment programs to make supplemental payments above standard Medicaid rates but within the UPL. UPL payments are approved by CMS in states’ Medicaid plans. For example, a state might establish a UPL program to provide additional payments to certain nursing facilities that serve low-income populations to fill the gap between what standard Medicaid rates pay toward the cost of services and higher payments permitted through the UPL. Some states, including California and Massachusetts, have also in recent years been allowed to make supplemental payments under Medicaid demonstrations. To obtain the federal matching funds for Medicaid payments made to providers, each state files a quarterly expenditure report to CMS. This expenditure report, known as Form CMS-64, compiles state payments in over 20 categories of medical services, such as inpatient hospital services, outpatient hospital services, mental health services, nursing facility services, and physician services. The CMS-64 expenditure report captures some information on supplemental payments. For example, states are required to report their total DSH payments to hospitals and mental health facilities separately from other Medicaid payments in order to receive federal reimbursement for them. States are not, however, required to report disaggregated information on DSH payments made to individual providers in order to obtain federal matching funds. Instead, states are required to maintain supporting documentation for DSH programs, including the amount of DSH payments made to each hospital, and to make this information available to CMS upon request. UPL payments are not reported separately from other payments for the purpose of obtaining federal matching funds. Reporting of supplemental payments under Medicaid demonstrations can vary by demonstration. Much attention has been focused on Medicaid supplemental payments, in part because of concerns that we and others have raised about inappropriate Medicaid supplemental payment arrangements between states and certain providers. From 1994 through 2007, we issued reports on various arrangements whereby states received federal matching funds by making large supplemental payments to certain government providers, such as county-owned nursing facilities, in amounts that greatly exceeded standard Medicaid rates. The payments were often temporary, since some states required government providers to return all or most of the money to the state government. States used the federal matching funds received for these payments at their own discretion, in some cases to finance or pay for the state’s share of the Medicaid program. Since the late 1980s, a variety of regulatory or legislative actions have been taken at the federal level to curb inappropriate Medicaid financing arrangements involving excessive supplemental payments. (See table 1.) In addition to the regulatory and legislative actions referenced in table 1, CMS has taken additional steps to improve Medicaid’s financial management and its oversight of states’ supplemental payment programs. These include making internal organizational changes that centralize the review of state plan amendments, hiring additional staff to analyze each state’s Medicaid program, and increasing the scrutiny of states’ Medicaid supplemental payment programs and the programs’ financing methods. In August 2003, CMS launched an oversight initiative to review and evaluate the appropriateness of states’ Medicaid payments as part of its efforts to strengthen financial oversight and the fiscal integrity of the Medicaid program. Under the initiative, a state’s submission of a proposal to change provider payments in its state plan triggers CMS scrutiny of the appropriateness of any related payment arrangement. Through this initiative CMS had identified, as of August 2006, 55 supplemental payment programs in 29 states using financing arrangements in which government providers did not retain all the supplemental payments made to them and had taken actions to end these arrangements. In May 2007, CMS published a final rule in part to address concerns related to states’ inappropriate financing arrangements involving supplemental payments. Among other things, the rule, if implemented, would limit Medicaid reimbursement to certain providers operated by units of government to an amount that does not exceed the provider’s costs of providing Medicaid-covered services. Concerns were raised that the rule would harm certain providers. Congress placed a moratorium on this rule until May 25, 2008. CMS expenditure reports show that states and the federal government spent at least $23.48 billion on DSH and non-DSH supplemental payments in fiscal year 2006, with the federal share of these payments totaling at least $13.37 billion, but states did not provide complete information on non-DSH payments. States reported more than $17 billion in DSH payments and $6 billion in non-DSH supplemental payments in fiscal year 2006, but the non-DSH payment information was not complete as states did not report all of their payments. Since 2001, CMS has required states to report certain supplemental payments on a separate informational section of their expenditure reports, but states do not receive federal reimbursement based on this section of the expenditure reports. CMS officials said that they were updating reporting requirements to obtain better information on states’ supplemental payments. As of April 2008, specific implementation dates for these actions had not been established. CMS’s planned changes did not include requiring states to report facility- specific UPL payments, a gap we had identified in 2004 and recommended that CMS address. CMS expenditure reports show that states made $17.15 billion in DSH payments in fiscal year 2006, with the federal government reimbursing states $9.65 billion for its share of these payments. As illustrated in figure 1, 48 states and the District of Columbia reported making DSH payments, with total payments ranging from less than $1 million in Wyoming to over $3 billion in New York. The 10 states with the largest total DSH payments in fiscal year 2006 accounted for over 72 percent of the $17.15 billion nationwide total, and the five states with the largest total DSH payments—California, New Jersey, New York, Pennsylvania, and Texas—accounted for more than half of the nationwide total. CMS expenditure reports also showed that DSH payments as a percentage of states’ Medicaid payments varied. As illustrated in figure 2, DSH payments ranged from less than 1 percent to over 16 percent of state Medicaid payments. Appendix II lists each state’s total DSH payments in fiscal year 2006 and each state’s total as a proportion of the state’s Medicaid payments and of total nationwide DSH payments. CMS expenditure reports divide DSH payments into two categories of service: traditional inpatient and outpatient services, and inpatient and outpatient mental health services. The 2006 CMS expenditure reports indicate that states made about 80 percent of the total nationwide DSH payments ($13.48 billion) to hospitals for traditional inpatient and outpatient services, and about 20 percent of the payments ($3.66 billion) to hospitals for mental health services. (See fig. 3.) On 2006 CMS expenditure reports, states reported making $6.33 billion in non-DSH payments, mainly to hospitals and nursing facilities. The federal share of these payments was $3.73 billion. States are required to separately report expenditure data on non-DSH payments made under the UPL to CMS on an informational section of the CMS-64 expenditure report called the CMS 64.9I form, but not as a condition of receiving federal matching funds.