Medicaid is the third largest social program in the federal budget and one of the largest components of state budgets. States and CMS share responsibility for instituting financial practices for the Medicaid program that are in compliance with applicable rules, laws, and regulations. In general, the federal government matches state Medicaid spending for medical assistance according to a formula based on each state’s per capita income. The federal contribution ranged from 50 to 77 cents of every state dollar spent on medical assistance in fiscal year 2004. For most state Medicaid administrative costs, the federal match rate is 50 percent. For skilled professional medical personnel, 75 percent federal matching is available. States are responsible for providing the state share of Medicaid funding and submitting plans, budgets, and expenditure reports to CMS that accurately report on the administration of their Medicaid programs and how they expend Medicaid funds. CMS is responsible for reviewing the states’ plans, budgets, expenditures, and operations to ensure compliance with all applicable laws and regulations. Each state develops its own administrative structure and establishes its own eligibility standards, scope of covered services, and payment rates in accordance with Medicaid statute and within broad federal guidelines. States are required to describe the nature and scope of their programs in a comprehensive plan submitted to CMS, with federal funding depending on CMS’s approval of the plan. State Medicaid plans specify the services to be provided and how the state will establish the amount it will pay for those covered services. Amendments to states’ plans are also subject to approval by CMS. Table 1 shows the amount of state and federal expenditures for Medicaid for fiscal years 2003 and 2004, the most recent years for which data are available. CMS’s Center for Medicaid and State Operations (CMSO) shares Medicaid program administration and financial management responsibilities with the 10 CMS regional offices. Two divisions in CMSO’s Finance, Systems, and Budget Group—the Division of Financial Management (DFM) and DRSF—have primary responsibility for Medicaid financial management. Figure 1 outlines CMS’s organizational structure related to Medicaid. DFM’s mission includes effectively administering the Medicaid program budget and grants, financial management policy, and administrative cost policy processes. Among other things, DFM staff in the central office are responsible for (1) determining and issuing state grant awards based on regional decision reports resulting from reviews of budget and expenditure reports, (2) reconciling state expenditure and budget reports, (3) reviewing and approving draft focused financial review reports, and (4) preparing annual financial management workplans based on input from regional offices. DRSF’s responsibilities include, but are not limited to (1) reviewing state plan amendments that involve reimbursement, (2) providing training to and coordinating the work of the funding specialists, (3) providing technical assistance to states on institutional and noninstitutional reimbursement, and (4) identifying and addressing state financing practices that could inappropriately increase federal Medicaid costs. CMS has approximately 65 regional financial analysts who are responsible for performing activities such as (1) reviewing state quarterly budget estimates and expenditure reports, (2) preparing decision reports that document approvals for federal reimbursement or deferrals or disallowances of claims for federal reimbursement, (3) assisting in assessing issues that put federal Medicaid dollars at risk and determining which issues to review in a fiscal year, (4) performing focused financial reviews, (5) providing technical assistance to the states on financial matters, and (6) serving as liaison to the states and audit entities. CMS has about 90 funding specialists who are responsible for, among other things, (1) gaining an understanding of their assigned state’s organizational structure, program structure, and budget process related to the state’s Medicaid program; (2) assisting in reviews of state plan amendments; (3) conducting reviews of state financing practices; and (4) providing technical assistance to the states. States submit quarterly budget and expenditure reports to CMS. The financial analysts in the 10 regional offices have traditionally reviewed these reports and prepared a Regional Office Decision memorandum which they submit to DFM in the central office. In some regions, the new funding specialists now have responsibility for reviews of state budget reports. Also, in some cases, the funding specialists assist financial analysts with reviews of state expenditure reports. CMS has undertaken several steps to improve its Medicaid financial management activities including its efforts to oversee state claims for federal reimbursement and to identify payment errors. CMS hired about 90 funding specialists who are examining high-risk state funding practices and working with states to eliminate those practices that inappropriately increase federal costs. CMS also created a new unit, DRSF, which reviews state plan amendments for reimbursement to identify and work with states to eliminate payment methodologies that could result in higher federal costs. CMS has continued to use focused financial reviews and OIG audits to identify inappropriate state claims for federal reimbursement and recommend changes to states’ internal control practices. In addition, CMS recently established a new performance goal for its Medicaid financial management staff to reduce cumulative questionable federal reimbursement by 10 percent in fiscal year 2006. These and other recent efforts represent improvement in CMS’s oversight activities and address weaknesses and recommendations we identified in our 2002 report. However, it is too soon to assess the impact they will have on improving overall financial management and addressing emerging issues that put federal Medicaid dollars at risk because some have just recently been initiated, and results are not known yet. Further, there are other previously identified weaknesses that the agency has not addressed. CMS has not instituted mechanisms to measure how the risk of inappropriate federal reimbursement has changed as a result of corrective actions taken. CMS also has not incorporated the use of the MSIS in its oversight of state claims or other systems projects intended to help improve its analysis capabilities. Further, CMS has not developed profiles to document information on state fraud and abuse controls to use in its oversight of state claims. Finally, CMS has not developed a strategic plan to guide its financial management activities. Because these issues are important to further improving and sustaining CMS’s oversight activities, we reiterate our prior recommendations in these areas. In late 2004, CMS began hiring for 100 new funding specialist positions. These new staff have enabled CMS to perform more in-depth reviews of high-risk issues. The funding specialists’ positions were established to help CMS gain a better understanding of how states budget for and finance their portion of Medicaid expenditures and help CMS proactively identify state payment and funding practices that could result in inappropriate claims for federal reimbursement or increased federal costs. These new funding specialists augment the activities of approximately 65 financial analysts in 10 regional offices who had previously performed many of the state financial oversight activities, including assisting the financial analysts with reviews of state budget and expenditure reports. In addition, the funding specialists performed activities that have enabled CMS to collect and summarize more information on states’ Medicaid programs to help CMS target its oversight efforts to high-risk issues such as certain payment arrangements that have been problematic in the past. A major activity of the funding specialists during their first year was the completion of state funding profiles. These profiles document the states’ Medicaid programs’ organizational structure, programmatic structure, and budget process. For many years, states only needed to provide general information on their payment methodologies, so these newly created profiles provide more detail to help CMS in its review and oversight of states’ financial issues. For example, the profiles describe the sources of each state’s nonfederal share of Medicaid funds and state payment methodologies; and include a “watch list” section where the funding specialists can highlight significant funding-related concerns that may need to be addressed in the future. For example, one state profile identifies a concern about the state’s lack of oversight of the certified public expenditures certification process for hospitals. This type of information can be helpful in ensuring proper review of future state plan amendments, among other things. CMS officials told us the state funding profiles have been made available to all CMS staff through CMS’s intranet, and said the profiles will be updated annually to account for changes in state programs, thus allowing CMS to have current information. In addition to completing state funding profiles and reviewing state budgets and expenditures, the funding specialists carry out other oversight activities, including the following: meeting with state Medicaid officials and monitoring state legislative activity, including hearings, budget sessions, and committee meetings related to states’ Medicaid programs and proposed bills to proactively identify issues that need CMS attention; reviewing state payment arrangements that CMS previously deemed problematic and that the states agreed to end to determine if the arrangements have in fact ended; assisting in the resolution of OIG audit findings; providing technical assistance to the states concerning funding and attending training and workshops to learn about and stay abreast of CMS policy and operations. Directing the activities of the new funding specialists is one of the efforts of the central office’s DRSF, which was created in early 2005. CMS established DRSF to consolidate responsibility for all state Medicaid payment policy and funding issues. A role of DRSF is to ensure that state plan amendments for reimbursement of noninstitutional and institutional services are consistently reviewed and that CMS policy is consistently applied across the nation. The activities of DRSF have improved CMS’s ability to effectively deploy its resources to carry out more targeted oversight activities. DRSF’s National Institutional Reimbursement Team and the Non-Institutional Payment Team are part of CMS’s effort to collect information on states’ funding methodologies before approving state plan amendments, including high-risk payment methodologies that have been troublesome in the past. DRSF reviews all institutional reimbursement state plan amendments before they are approved by the Director of CMSO, thus eliminating the decentralized approval process that had been in place at all 10 regional offices. This has helped to clarify the lines of authority and responsibility for the state plan amendment process—states still submit amendments to their respective region for review but they are approved by CMS’s central office. DRSF also helped clarify responsibilities between central and regional office staff by using the 10 central office funding specialists as liaisons to each of the 10 regional offices. The DRSF funding specialists help to ensure that regional funding specialists are informed and kept up to date on funding policies and matters.