Title XIX of the Social Security Act authorizes federal funding to states for Medicaid. States have considerable flexibility in designing and operating their Medicaid programs, but they must comply with federal requirements specified in Medicaid statute and regulations. Each state operates its program under a plan that CMS must approve for compliance with current law and regulations. CMS must also approve any amendments to a state’s plan. Consultants can provide a wide range of services to states, including serving state Medicaid programs. States that lack sufficient in-house resources can turn to consultants to add staff or needed expertise. Contingency-fee consultants are particularly attractive to budget- constrained states because the states do not need to pay them up front, agreeing to pay instead a percentage of any additional amounts saved or collected (the contingency fee). Consultants may also cost states less than developing in-house expertise, as states can hire them for short-term or specific projects rather than commit full-time state personnel. Consultants can also be attractive because they do not generally count against agency staffing ceilings. Regarding Medicaid, consultants can help states by performing services such as: analyzing federal and state statutory and regulatory provisions, developing or revising state Medicaid policies and procedures for consistency with federal requirements, assisting states in developing state plan amendments for federal approval, assisting states in determining payment rates for providers, developing cost allocation plans to support claims for administrative expenditures, training state and local staff in procedures and documentation for submitting claims for federal Medicaid reimbursement, preparing state claims for federal Medicaid reimbursement, and identifying new methods or projects to maximize federal Medicaid reimbursements. The typical Medicaid payment process is illustrated in figure 1. When a Medicaid beneficiary receives care from a health care provider such as a hospital, physician, or nursing home, the provider bills the state Medicaid program for its services. The state in turn pays the provider from a combination of state funds and federal funds, which have been advanced by CMS each quarter. The state then files an expenditure report, in which it claims the federal share of the Medicaid expenditure as reimbursement for its payment to providers and reconciles its total expenditures with the federal advance. In addition to reimbursement for medical services, the state may claim federal reimbursement for functions it performs to administer its Medicaid program, such as enrolling new beneficiaries; reviewing the appropriateness of providers’ claims; and collecting payments from third parties, that is, payers other than Medicaid, such as Medicare, that may be liable for some or all of a particular health claim. Transaction 1: A Medicaid beneficiary receives care from a health care provider, such as a physician; the provider bills the state Medicaid program; and the state pays the provider by drawing on a pool of state funds combined with a quarterly advance on federal matching funds. Transaction 2: The state files an expenditure report, in which it claims the federal Medicaid matching share as reimbursement for its payments to providers and reconciles total quarterly expenditures with the federal advance. States may file claims for medical services and for administrative functions. States’ claims for federal Medicaid reimbursement—including claims prepared by or under arrangements developed by consultants—must comply with a number of federal statutes and regulations. For example, the Social Security Act requires that states provide methods to ensure that Medicaid payments are consistent with efficiency, economy, and quality of care. CMS policy further clarifies and delineates requirements with which each state must comply in administering its Medicaid program. CMS policy, for example, generally prohibits states from claiming federal matching funds on contingency-fee payments, including contingency-fee payments among state agencies. Each state must also comply with cost principles and procedures, such as preparing a cost allocation plan to justify its administrative claims, as established in Office of Management and Budget (OMB) Circular A-87. CMS has an important role in ensuring that state claims comply with Medicaid requirements. Within CMS, the Center for Medicaid and State Operations is responsible for approving state Medicaid plans and plan amendments, working with the states on program integrity and other program administration functions and overseeing state financial management and internal control processes. The Center for Medicaid and State Operations shares Medicaid program administration and financial management responsibilities with the 10 CMS regional offices. Traditional financial management analysts in each regional office, numbering about 65 nationwide in fiscal year 2005 according to CMS officials, are responsible for reviewing states’ Medicaid claims to determine if expenditures are complete, properly supported by the state’s accounting records, claimed at the appropriate federal matching rates, and allowable in accordance with Medicaid law and policy. In addition to CMS, external organizations such as HHS OIG and state auditors routinely conduct program and financial audits of state Medicaid programs. In examining the appropriateness of state Medicaid agency claims for health services provided by local school districts, we have reported concerns about the role of consultants who were paid on a contingency- fee basis to maximize federal Medicaid reimbursements. In particular, in June 1999, we testified on the need for federal and state oversight of growing Medicaid reimbursements to states for Medicaid outreach and other administrative activities provided in schools. We found that school districts had often contracted with consulting firms to perform claims development and reporting activities and that they paid these firms fees ranging from 3 to 25 percent of the total amount of the federal Medicaid reimbursement for the schools’ administrative costs. We found that poor guidance and insufficient CMS oversight permitted questionable billing practices by states and created an environment of opportunism in which inappropriate claims could generate excessive federal Medicaid outlays. Our subsequent report in April 2000 on school-based health services discussed similar concerns with growing outlays and insufficient CMS guidance and oversight to prevent improper reimbursements. Since our 2000 report, CMS has clarified guidance on submitting claims for school- based administrative activities, applying stricter standards and heightening review of the methods states use to identify administrative claims for school-based services. CMS also disallowed more than $278 million in inappropriate claims from one state. An increasing number of states are using consultants on a contingency-fee basis to maximize their federal Medicaid reimbursements through a variety of projects, according to CMS. Contingency-fee consultants in the two states we reviewed—Georgia and Massachusetts—have developed reimbursement-maximizing projects in each of the five categories of claims that we reviewed, generating more than $2 billion during state fiscal years 2000 through 2004 in additional federal Medicaid reimbursements, mainly in Georgia. CMS surveyed its regional offices in fiscal years 2002 and 2004 and found that an increasing number of states were using consultants on a contingency-fee basis for projects to maximize federal reimbursements. In late 2001, CMS discovered that, contrary to CMS policy prohibiting federal reimbursement for contingency fees in most instances, at least two states (New Jersey and Virginia) had inappropriately claimed federal reimbursements for such fees. Subsequently, CMS surveyed its regional offices to identify which states were using contingency-fee consultants and for which services. This first survey (spring 2002) showed that 10 states were known by regional staff to be using contingency-fee consultants for reimbursement-maximizing projects. In response, CMS issued two letters, in May 2002 and in November 2002, reminding regional offices and states that although states were allowed to employ contingency-fee consultants, the contingency fees themselves were not eligible for federal reimbursement except in certain cases. In June 2004, CMS again surveyed its regional offices to determine how many states had entered into contingency-fee contracts with private consulting firms to maximize federal reimbursements over the period from January 1999 through June 2004. This survey identified 34 states involved in contingency-fee contracts to help them maximize federal Medicaid reimbursements in a variety of categories. Most frequent were claims for services provided to Medicaid-eligible children in schools, a category in which contingency-fee consultants have assisted states for years. CMS regional offices also reported that 11 states had contracts using contingency-fee consultants in multiple areas, some having projects in as many as four different categories (see table 2). Our review focused on five categories of claims that we considered at high risk of improper payments: TCM services, services for mental or physical rehabilitation, supplemental payment arrangements, school-based services, and administrative costs (see table 3). For most of these categories, CMS expenditure data show that federal reimbursement of states’ claims in recent years has grown nationwide, sometimes substantially. Although CMS’s 2004 survey gathered information on states’ use of contingency-fee consultants, it would not have captured states’ arrangements established outside the survey period. We identified one consultant, for example, who helped two states develop upper payment limit (UPL) arrangements, although CMS’s 2004 survey did not capture these particular states’ contracts. CMS does not identify the extent to which states’ Medicaid claims stem from projects using contingency-fee consultants to maximize federal reimbursements. From state fiscal years 2000 through 2004, Georgia used a private consulting firm on a contingency-fee basis for multiple reimbursement- maximizing projects, including projects in the five Medicaid claims categories that we reviewed. The consultant provided numerous services on more than 20 projects, such as creating new methodologies for developing claims for federal reimbursement, obtaining legal advice to support reimbursement-maximizing claims, and pursuing retroactive reimbursement for claims that were not previously reimbursed. The consultant also helped the state to write state plan amendments and cost allocation plans. For example, for five UPL projects, the consultant developed the formulas for calculating the state’s UPL, drafted the state plan amendment to submit to CMS, and drafted provider agreements to implement the project. For a project in rehabilitation services, the consultant developed a new methodology for developing claims for federal reimbursement of payments the state made to providers. For TCM projects involving two state agencies, the consultant developed revisions to the state’s payment rate; drafted the state plan amendment to implement the revised rates; drafted revisions to state policy manuals; and conducted training sessions with case managers, including identifying services that could be considered as TCM and explaining how to format their case notes to support Medicaid claims. Georgia paid the consultant mainly from additional federal Medicaid reimbursements generated from the contingency-fee projects, although CMS determined that the state did not claim federal reimbursement for the contingency fees themselves.