Federal and tribal CHS programs in each of IHS’s 12 areas pay for services from external providers if services are not available directly through IHS-funded facilities, if patients meet certain requirements, and if funds are available. IHS uses three primary methods—base funding, annual adjustments, and program increases—to allocate CHS funds to the area offices. IHS administers contract health services through 12 IHS area offices, which include all or part of 35 states where many American Indian and Alaska Natives reside. (See fig. 1.) IHS uses CHS funds to pay for services from a variety of health care providers, including hospital- and office-based providers. IHS, among other things, sets program policy for and allocates CHS program funds to the area offices. The area offices distribute funds to individual federally operated and tribally operated CHS programs that purchase contract care services from outside providers. There can be multiple individual CHS programs within an area. Tribes currently administer 177 of the 243 (73 percent) individual CHS programs and receive about 54 percent of IHS’s funding for CHS. In addition to receiving federal funding through IHS, the tribes may provide supplemental funds to the CHS programs they administer. Patients must meet certain eligibility, administrative, and medical priority requirements to have their services paid for by the CHS program. Generally, to be eligible to receive services through the CHS program, patients must reside on a reservation or within a reservation’s federally established CHS Delivery Areas and be members of a tribe or tribes located on that reservation or maintain close economic and social ties with that tribe or tribes. In addition, if there are alternate health care resources available to a patient, such as Medicaid and Medicare, these resources must pay for services first because the CHS program is generally the payer of last resort. If a patient has met these requirements, a program committee (often including medical staff), which is part of the local CHS program, evaluates the medical necessity of the service. IHS has established four broad medical priority levels of health and each area office is required to care services eligible for payment,establish priorities that are consistent with these medical priority levels. Because IHS typically does not have enough funds to pay for all CHS services requested, federal CHS programs pay first for emergency and acutely urgent medical care to the extent funds are available. They may then pay for all or only some of the lower-priority services they fund, funds permitting. Tribal CHS programs must use medical priorities when making funding decisions, but unlike federal CHS programs, they may develop a system that differs from the set of priorities established by IHS. There are two primary paths through which patients may have their care paid for by the federal CHS program. First, a patient may obtain a referral from a provider at an IHS-funded health care facility to receive services from an external provider. That referral is submitted to the CHS program for review. If the patient meets the requirements and the CHS program has funding available, the services in the referral are approved by the CHS program and a purchase order is issued to the external provider and sent to IHS’s fiscal intermediary. Once the patient receives the services from the external provider, that provider obtains payment for the services in the approved referral by sending a claim to IHS’s fiscal intermediary. Second, in the case of an emergency, the patient may seek care from an external provider without first obtaining a referral. Once that care is provided, the external provider must send the patient’s medical records and a claim for payment to the CHS program. At that time, the CHS program will determine if the patient met the necessary program requirements and if CHS funding is available for a purchase order to be issued and sent to the fiscal intermediary. As in the earlier instance, the provider obtains payment by submitting a claim to IHS’s fiscal intermediary. In addition to funds appropriated annually for CHS, IHS also distributes funds to individual CHS programs from the Indian Health Care Improvement Fund, designed to reduce disparities and resource deficiencies at the local level as measured by IHS’s Federal Disparity However, because these funds may be used to pay for either Index. contract care or direct care services, it is possible that they may not finance contract care services in some programs. Further, this fund is small compared to both CHS and direct care funding. For example, in fiscal year 2010, funds distributed from the Indian Health Care Improvement Fund equaled about 6 percent of the CHS funding level, or about 2 percent of the funding level for direct care services. IHS has reported on a number of data limitations related to the current formula used to distribute funds from the Indian Health Care Improvement Fund. IHS uses three primary methods—base funding, annual adjustments, and program increases—to determine the allocation of CHS funds to the IHS area offices, which then distribute the funds to individual CHS programs. (See fig. 2.) IHS uses these methods sequentially. Base funding is the amount of CHS funds that equal the total amount of all CHS funds that each area received in the prior fiscal year. When appropriations for CHS are higher than the amount needed for base funding, IHS uses national measurements of population growth and inflation to determine annual funding adjustments. Each IHS area office receives the same percentage increase for the annual adjustments. Since 2001, when IHS has also received additional funding for what it refers to as “program increases,” IHS has used the CHS Allocation Formula to determine how to allocate those program increases to the 12 area offices. According to IHS officials, IHS established the CHS Allocation Formula in part to ensure that American Indians and Alaska Natives had equitable access to contract health funds. The Allocation Formula is based on a combination of factors, including variations in the number of people using health care services, geographic differences in the costs of purchasing health care services, and access to IHS or tribally operated hospitals. Most CHS funding, which IHS refers to as “base funding,” is allocated based on past funding history. Each year, each of the 12 IHS area offices receives an allocation of base funding equal to the total amount of all CHS funds they received the previous fiscal year. According to IHS, base funding is intended to maintain existing levels of patient care services in all areas. Because of adjustments or funding increases that are received in most years, a new level of base funding is created in those years. IHS officials have told us they do not know the exact origins of the base funding policy, but that it dates back to the 1930s, when the health programs were under the Bureau of Indian Affairs. In 1954, Congress transferred responsibility for the maintenance and operation of hospitals and health facilities for Indians from the Bureau of Indian Affairs in the Department of the Interior to what is now IHS in HHS. When appropriations for CHS are above the previous fiscal year’s level, IHS allocates each area office an additional amount to adjust for overall population growth and inflation. The population growth funding adjustment is based on national population increases determined by the U.S. Census Bureau with annual adjustments made for changes based on state birth and death data provided by the National Center for Health Statistics. The inflation adjustment is based on the prevailing Bureau of Labor Statistics’ Consumer Price Index for medical costs. IHS gives each area the same percentage increase to its base funding regardless of any population growth or cost-of-living differences among areas. IHS receives increases in CHS funding that are large enough that the agency can allocate at least some for annual adjustments, even if not the full amount. The funding adjustments for population growth and inflation provided to the area offices are incorporated into the next year’s base funding. In fiscal year 2009, each individual CHS program received a 1.5 percent adjustment for population growth and a 3.8 percent adjustment for inflation. In fiscal year 2010, those adjustments were 1.5 percent and 3.3 percent, respectively. 3 years. This active user population is then used as a multiplier for the cost adjustment and access to care factors. The cost adjustment factor provides an adjustment to account for geographic differences in the costs of purchasing health care services. It is based on a price index derived from the American Chamber of Commerce Researchers Association Regional Cost of Living index, which provides regional comparative costs for inpatient and outpatient services. The price index for each CHS program is multiplied by the active user population for each program to determine the value of the cost adjustment factor. The access to care factor provides an additional increase only for those individual CHS programs that do not have access to an IHS or tribally operated hospital. IHS area officials determine if individual CHS programs meet two qualifying criteria for this factor: (1) the individual CHS program has no IHS or tribally operated hospital with an average daily patient load of five or more, and (2) the individual CHS program does not have an established referral pattern to an IHS or tribally operated hospital within the area. These additional funds are allocated to each program where there is no access to an IHS or tribally operated hospital in an amount proportional to the cost adjustment factor. To allocate the program increase funding, IHS first designates 75 percent of the funds for increases based on the cost adjustment factor at each individual CHS program and 25 percent of the funds for the increases based on the access to care factor at each individual CHS program. IHS then totals the program increases for the individual CHS programs and allocates that total amount to the IHS area offices. Program increases allocated using the CHS Allocation Formula become part of the area offices’ base funding for the next fiscal year. IHS used the CHS Allocation Formula to allocate program increases in fiscal years 2001, 2002, and 2008 through 2010.