In August 2010, Congress extended the increased  FMAP provided by the Recovery Act by providing states with an  additional $16.1 billion in assistance from January through June 2011. The prototype formula we outlined in our March 2011 report provides a  more targeted approach than the increased FMAP formula used in the  Recovery Act. Prototype FMAP Formula Offers Automatic, Timely, and Targeted Assistance

In response to the mandate, our prototype formula offers an automatic,  timely, and targeted option for providing states temporary assistance  during national economic downturns. Once a threshold number of states  show a sustained decrease in their employment-to-population (EPOP)  ratio, temporary increases to states’ FMAPs would be triggered  automatically and targeted to each state’s Medicaid program. The prototype formula would end  the temporary assistance once fewer than the threshold number of states  shows a decline in their EPOP ratio over 2 consecutive months. Prototype Formula Automatically Triggers Targeted Assistance to States

Our prototype formula uses the monthly EPOP ratio and a threshold  number of states to identify the start of a national economic downturn,  and to automatically trigger the start of the increased FMAP assistance. Once the increased FMAP is  triggered, targeted state assistance would be calculated based on   (1) increases in state unemployment, as a proxy for increased Medicaid  enrollment; and (2) reductions in total wages and salaries, as a proxy for  decreased revenues for maintaining state Medicaid programs. Because our prototype formula  relies on readily available labor market data to automatically trigger the  beginning and end of the increased FMAP, assistance would have begun  earlier and extended longer than that provided by the Recovery Act  during the most recent national recession. Similarly,  targeting assistance based on each state’s level of need ensures that  federal assistance is aligned with the magnitude of the economic  downturn’s effects on individual states. Matter for Congressional Consideration

To ensure that federal funding efficiently and effectively responds to the  countercyclical nature of the Medicaid program, Congress could consider  enacting an FMAP formula that is targeted for variable state Medicaid  needs and provides automatic, timely, and temporary increased FMAP  assistance in response to national economic downturns. Agency Comments and Our Evaluation

We provided a draft of this report for review to the Department of Health  and Human Services (HHS). HHS on behalf of the Centers for Medicare  & Medicaid Services (CMS) and the Office of the Assistant Secretary for  Planning and Evaluation (ASPE) provided written comments on the draft,  which are reprinted in appendix V.
CMS officials stated that they agreed with the analysis and goals of the  report, and they emphasized the importance of aligning changes to the  FMAP formula as closely as possible to individual state circumstances in  order to avoid unintended consequences for beneficiaries and to provide  budget planning stability for states. In their comments, ASPE officials also offered several considerations to  guide policy choices regarding appropriate thresholds for timing and  targeting of funds. Our prototype formula relies on changes in the employment-to-population  (EPOP) ratio to identify the start of a national economic downturn, and to  provide a trigger for a targeted temporary increase in states’ Federal  Medical Assistance Percentage (FMAP). Appendix III: The Recovery Act’s Across-the- board and Hold-harmless Provisions Were Not Targeted for States’ Medicaid Needs

The across-the-board and hold-harmless provisions of the American  Recovery and Reinvestment Act of 2009 (Recovery Act) did not provide a  needs-based method for targeting Medicaid assistance to states during  an economic downturn.
Why GAO Did This Study

In response to the recession of 2007, Congress passed the American Recovery and Reinvestment Act of 2009 (Recovery Act). Recovery Act funds provided states with fiscal relief and helped to maintain state Medicaid programs through a temporary increase to the federal share of Medicaid funding-the Federal Medical Assistance Percentage (FMAP)-from October 2008 through December 2010. In March 2011, GAO reported that states' ability to fund Medicaid was hampered due to increased Medicaid enrollment and declines in states' revenues that typically occur during a national downturn. The Recovery Act mandated that GAO provide recommendations for modifying the increased FMAP formula to make it more responsive to state Medicaid program needs during future economic downturns. In this report, GAO presents a prototype formula for a temporary increased FMAP and evaluates its effects on the allocation of assistance to states. To evaluate the three components of the prototype formula--starting assistance, targeting assistance, and ending assistance-- GAO uses the 2007 recession.

What GAO Found

GAO's prototype formula offers a timely and targeted option for providing states temporary Medicaid assistance during a national economic downturn. Once a threshold number of states--26 in GAO's prototype formula--show a sustained decrease in their employment-to-population (EPOP) ratio, temporary increases to states' FMAPs would be triggered automatically. The EPOP ratio compares the number of employed persons in a state to the working age population aged 16 and older. This assistance would end when fewer than the threshold number of states shows a decline in their EPOP ratio. Because the prototype formula relies on labor market data as an automatic trigger rather than legislative action, assistance would have begun earlier and extended longer than the assistance provided by the Recovery Act. The prototype formula would have triggered assistance to begin in January 2008 and end in September 2011, compared with the Recovery Act which provided an increased FMAP from October 2008 through June 2011. Once the increased FMAP is triggered, targeted state assistance would be calculated based on two components: (1) increases in unemployment, as a proxy for changes in Medicaid enrollment; and (2) reductions in total wages and salaries, as a proxy for changes in states' revenues. GAO's prototype formula provides a baseline of funding for state Medicaid needs during an economic downturn by offering automatic, timely, and targeted assistance to states. Such assistance would facilitate state budget planning, provide states with greater fiscal stability, and better align federal assistance with the magnitude of the economic downturn's effects on individual states. In commenting on a draft of this report, the Department of Health and Human Services (HHS) agreed with the analysis and goals of the report and emphasized the importance of aligning changes to the FMAP formula with individual state circumstances. HHS noted the complexity of the prototype formula and offered several considerations to guide policy choices regarding appropriate thresholds for timing and targeting of increased FMAP funds. To ensure that federal funding efficiently and effectively responds to the countercyclical nature of the Medicaid program, Congress could consider enacting an increased FMAP formula that targets variable state Medicaid needs and provides automatic, timely, and temporary assistance in response to national economic downturns.