Established under title XIX of the Social Security Act as a joint federal- state health financing program, Medicaid is one of the largest programs in the federal and state budgets. States, in administering their Medicaid programs, must comply with federal requirements. States pay qualified health providers for a broad range of covered services provided to eligible beneficiaries. The federal government then reimburses states for a share of their expenditures. The federal share of each state’s program expenditures is calculated according to a formula specified in the Medicaid statute, which allows the federal share to range from 50 to 83 percent. With Medicaid as payer of last resort, states are responsible for having plans in place to identify Medicaid beneficiaries’ other sources of health coverage, determine the extent of the liability of such third parties, avoid payment of third-party claims, and recover reimbursement from third parties after Medicaid payment if the state can reasonably expect to recover more than it spends in seeking reimbursement. Individuals eligible for Medicaid assign their right to third-party payments to the state’s Medicaid agency, which allows the state to claim payments for medical care directly from third parties. In general, state Medicaid agencies are required whenever possible to avoid paying for services for which the state agency has reason to believe another party is legally liable. Whenever states are reimbursed by third parties, they must ensure that the federal government is given its share of the reimbursement. Third parties that may be liable for payment of services furnished to Medicaid beneficiaries can include private insurers and health plans of employers who self-insure. Private health coverage can be delivered through managed care plans—plans in which enrollees, or their employers, pay a monthly payment in exchange for health care services through affiliated physicians, hospitals, and other providers. In addition, private insurers and health plans often contract with other entities, such as plan administrators or pharmacy benefit managers, to administer part or all of their health care plans. Plan administrators process claims and manage the day-to-day operations of the associated health plan. Pharmacy benefit managers negotiate drug prices with pharmacies and drug manufacturers on behalf of health plans and, in addition to other administrative, clinical, and cost-containment services, process prescription drug claims for the health plans. When a Medicaid beneficiary has pharmacy coverage administered through a pharmacy benefit manager, the state generally bills the pharmacy benefit manager directly for reimbursement instead of billing the insurer or the employer. For states to avoid paying costs for which a third party may be liable, or to recover from a liable third party payments the state may already have made, states need to verify when Medicaid beneficiaries have other health coverage, as well as the services that are covered and the period of eligibility. States obtain information on other health coverage in two common ways: When initially applying for enrollment in a state’s Medicaid program, applicants are asked to report to the state any other sources of health coverage they may have. States then verify the applicant’s coverage with the source of the health coverage, including coverage dates, type, benefits, and limits. State Medicaid programs often have staff who, on receiving information suggesting that a Medicaid applicant has other health coverage, contact the sources of such coverage by phone, mail, or other means to obtain specific coverage information. States also often independently identify and verify health coverage of Medicaid beneficiaries by electronically matching the states’ coverage files with those of the other coverage sources. This type of verification is important because information provided by Medicaid applicants may be incomplete. Applicants may not report other sources of health coverage, or they may not know if they have such coverage; for example, a custodial parent may not realize that his or her child has health coverage through the noncustodial parent’s employment-based health plan. Additionally, Medicaid beneficiaries who do not have other coverage when they first enroll in Medicaid may obtain it later. States may have agreements, called data-matching agreements, through which insurers, health plans, and other potential third parties periodically provide states with an electronic copy of their coverage files or with access to company databases. Third parties that are willing to work with states to electronically share their coverage files facilitate appropriate billings and reduce the administrative burden, on states and on third parties, associated with verifying coverage on a case-by-case basis. Once verification of any available private health coverage occurs, the state can redirect health care providers’ claims to a responsible third party (a process known as cost avoidance), and it can seek reimbursement from the third party for payments it has already made (a process known as “pay and chase”). Identifying and verifying coverage early is important, because it is administratively more costly and time-consuming for states to seek reimbursement for payments that have already been made. If third parties do not readily pay claims for which the state Medicaid agency is seeking payment, it is often not cost-effective for states to spend resources pursuing payment on a claim-by-claim basis, even though substantial total dollars could be involved. For example, the states might not have the resources to further pursue payment through legal action. Conversely, success in verifying coverage, avoiding Medicaid payments for those beneficiaries with private health coverage, and collecting on previously paid claims from third parties can result in substantial Medicaid savings. Of the $5.5 billion that states reported in third-party-related savings in fiscal year 2004, states reported more than $4.9 billion in Medicaid payments avoided and more than $524 million in third-party recoveries. On the basis of self-reported health coverage information from the Census Bureau’s annual CPS covering the 2002 through 2004 time period, an average of 13 percent of respondents who reported having Medicaid coverage for the entire year also reported having private health coverage at some time during the same year. Individual state estimates ranged from 9 percent in Alabama, Arizona, and California to 22 percent in Iowa and South Dakota and 23 percent in Wyoming (see table 1). Most often, the source of private health coverage was an employer or union. Nationwide, an estimated 11 percent of Medicaid beneficiaries reported having employment-based health coverage (ranging from about 7 percent in Arizona and Alabama to about 17 percent in Colorado, Michigan, New Hampshire, and Wyoming), whereas about 2 percent reported having individual health coverage (ranging from about 1 percent in 11 states to about 8 percent in Iowa). States also identify and collect information on private health coverage as part of administering their own Medicaid programs, but this information cannot be used to assess Medicaid beneficiaries’ private health coverage on a nationwide basis. State Medicaid agencies capture from their automated systems information on private health coverage they have identified for their Medicaid beneficiaries. According to CMS, however, this information is not reliable for measuring the extent of beneficiaries’ private health coverage nationwide, for comparing among states, or for comparing states’ identified coverage with that identified by CPS. Certain states may, for example, capture information only for those beneficiaries whose coverage has been verified, while other states may capture coverage even though the state has not yet verified the services that are covered or the period of eligibility. Problems states face in ensuring that Medicaid is the payer of last resort fall into two broad categories: problems verifying whether beneficiaries have private health coverage and problems collecting payments (or “paying and chasing”) when such coverage exists. Third-party liability provisions in the Deficit Reduction Act could help address some of these problems, although two issues require resolution in order to aid states as they implement the act. In particular, federal guidance is needed to clarify the time by which states must comply with the relevant provisions and also to clarify the entities covered by requirements to provide states with information regarding third-party coverage. Verification of available private health coverage for Medicaid beneficiaries is key to ensuring that states are able to appropriately avoid paying claims or to collect from those that are liable. Nevertheless, state officials often told us, one of the top three problems they faced in ensuring that Medicaid was the payer of last resort was related to verifying beneficiaries’ other coverage. Some state officials reported their problem broadly, stating, for example, that third parties would not cooperate in providing eligibility or coverage information. Others cited specific problems related to the verification process, stating, for example, that third parties would not assist with the state’s verification process by sharing coverage files electronically. Officials from 27 of the 39 responding states reported one or more different types of problems with verifying the services that were covered and the period of eligibility, which we summarized in two categories (see table 2): (1) verifying coverage information and (2) accessing electronic coverage files. Although most states’ officials were not able to estimate the losses to the Medicaid program due to these verification problems, officials in 10 states did provide an estimate. The estimated loss for these 10 states totaled $54 million–$60 million (the loss is stated as a range because some states estimated their losses as a range rather than as a single dollar estimate). Problems verifying coverage information. Officials in 23 states reported problems verifying coverage information; of these, officials in 8 states were able to estimate their annual losses due to third parties’ failure to provide coverage information, for a total of $47 million–$52 million. State officials reported a range of problems they experienced in verifying coverage information. For example, officials in 12 states indicated that certain third parties or their contractors, such as self-insured plans, pharmacy benefit managers, or plan administrators, ignored the state’s requests for verification information about Medicaid beneficiaries or declined to verify coverage. Four states reported that third parties cited privacy provisions in the Health Insurance Portability and Accountability Act of 1996 as one reason they could not share coverage information with state Medicaid offices. Additionally, an official in 1 state reported that some third parties would not verify coverage for seasonal workers and that some insurance companies limited the number of verifications they were willing to provide during a single phone call. Problems accessing electronic coverage files.