Not All Selected Hospitals Tracked How They Used Revenues from Their Supplemental Payments, but Described Uses Included Uninsured Costs and Capital Purchases

Selected hospitals that received large UPL supplemental payments under  state plans in three of four selected states did not account specifically for  the use of revenue from these payments in their financial systems, as  they were not required to do so. Officials from several hospitals described more than one purpose for  which the UPL supplemental payments and resulting Medicaid surpluses  were used. Hospital officials from seven of nine selected hospitals in these three  states said they used the revenues from the large UPL supplemental  payments they received in part to cover the costs of providing services to  uninsured patients. For example, in 2009 this  hospital had a Medicaid surplus of about $16 million. Selected Hospitals Receiving Large Medicaid Demonstration Supplemental Payments Were Required to Track Spending and Allowed to Use Payments for Purposes Such As Uninsured Costs

Under Medicaid demonstrations, states were approved to make Medicaid  supplemental payments to hospitals for costs and activities not otherwise  covered under Medicaid to promote Medicaid objectives, and hospitals  were required to track how they used these payments. Further, the Florida demonstration allowed hospitals to  include uncompensated care costs for underinsured individuals with  private insurance as well as for the cost of operating poison control  centers, costs that the state could not have covered without the  demonstration. Hospitals in Texas receiving incentive payments for health care delivery  system improvements under that state’s Medicaid demonstration were  required to develop an implementation plan and report their progress in  meeting designated milestones. Three Selected States Made Supplemental Payments Based on Ability of Hospitals or Local Governments to Finance the Payments; Federal Written Guidance On Appropriate Basis for Such Payments Is Lacking

The bulk of supplemental payments in three of four selected states we  reviewed were distributed to hospitals based on the availability of funding  from hospital or local government contributions toward the nonfederal  share of the payments, rather than the volume of services each hospital  provided. Three of Four Selected States Largely Based Their Supplemental Payments on the Availability of Local Financing Rather Than on Medicaid Services Provided

Our review of state documentation shows that in three of four selected  states—New Mexico, Texas, and Florida—the bulk of the supplemental  payments to hospitals were made contingent on these hospitals or the  relevant local governments providing funds to finance the nonfederal  share of the payments the hospitals received, rather than Medicaid  services they provided. In  2009, about $2.3 billion in supplemental payments was distributed  under these three programs. In 2012, among Texas hospitals that had uncompensated Medicaid  and uninsured costs and were eligible to receive a demonstration  supplemental payment for uncompensated care, the extent to which  the hospitals’ uncompensated care costs were covered by the  payments varied widely based on the availability of local funding, from  0 percent for the 7 hospitals that were otherwise eligible but did not  receive a payment, to more than 100 percent for 44 other hospitals,  based on data provided by the state. The absence of written guidance to states is inconsistent with federal  standards for internal control. In addition to internal  communications, management should ensure there are adequate means  of communicating with, and obtaining information from, external  stakeholders who may have a significant impact on the agency achieving  its goals. The lack of guidance may result in inconsistent application of  CMS’s policy among states with overpayments to some providers and  underpayments to others due to the unavailability of local funding. Conclusions

Under broad federal requirements, Medicaid payments are to be made for  Medicaid-covered services delivered to Medicaid beneficiaries and should  be economical and efficient and sufficient to ensure beneficiaries’ access  to care. This can be partly attributed to the fact that CMS has not  issued guidance to clearly articulate its policy for states on how they  should be distributing supplemental payments or that payments should  not be contingent on the availability of financing for the nonfederal share. As a result, CMS cannot ensure that states’ payments are based on the  provision of Medicaid services or for demonstration purposes, and not  based on the availability of provider and local government financing. Recommendations for Executive Action

To promote consistency in the distribution of supplemental payments  among states and with CMS policy, we recommend that the Administrator  of CMS take the following two actions:  (1)  issue written guidance clarifying its policy that requires a link  between the distribution of supplemental payments and the  provision of Medicaid-covered services, and  (2)  issue written guidance clarifying its policy that payments should  not be made contingent on the availability of local funding. In its comments, HHS concurred with the first  recommendation and agreed with our concerns regarding the second  recommendation. GAO-12-694.
Why GAO Did This Study

In 2012, GAO reported that 505 hospitals received Medicaid payments that resulted in Medicaid payment surpluses—that is, payments that exceeded the costs of providing services—of about $2.7 billion. These surpluses were due in part to the lump-sum supplemental payments hospitals received that were above their regular payments for individual services. States made them under broad Medicaid payment authorities that allow federal matching on payments up to an upper payment limit or under Medicaid demonstrations. These types of supplemental payments are authorized, but not required, by law.
GAO was asked to examine how hospitals used revenues from large supplemental payments and the states' basis for distributing the payments. For four selected states making large payments and 12 hospitals receiving them, GAO examined (1) how these hospitals used revenues from the payments and (2) the basis on which the states distributed the payments. GAO reviewed documents authorizing payments and interviewed hospital, state and federal officials. GAO also obtained payment data for 2009, the year hospitals were identified as having large payments, and for 2012, the most recent year available.

What GAO Found

Not all selected hospitals in the four states GAO reviewed tracked their use of revenues from the large supplemental payments they received and tracking of revenues is generally not required. Based on information obtained from hospital officials and a review of demonstration approval documents, GAO determined that the revenues were used for a broad range of purposes. For example,
Officials from nine selected hospitals that received large supplemental payments under three states' traditional state Medicaid programs reported using revenues—which resulted in average surpluses of about $39 million—to cover the costs of uninsured patients as well as funding general hospital operations, maintenance, and capital purchases, such as a helicopter.
Hospitals in two selected states that GAO reviewed that were approved to make supplemental payments under Medicaid demonstrations were subject to certain tracking requirements to ensure payment revenues were used for approved demonstration purposes. Documentation for one state showed that approved uses of revenues included hospitals' uncompensated costs of serving underinsured or uninsured individuals and operating poison control centers. In the other state, which moved during the study timeframe from making supplemental payments under a traditional Medicaid program to under a demonstration, payments were allowed for purposes such as incentivizing health care delivery system improvements and for uncompensated costs for physician and clinic services, and drugs.
Three selected states distributed Medicaid supplemental payments largely based on the availability of local government funds to finance the nonfederal share of the payments, rather than on the services the hospitals provided. Medicaid payments should be made for Medicaid services or, if under demonstrations, for demonstration purposes and be economical and efficient. GAO found that three states made supplemental payments based on the ability of hospitals, or their local governments, to finance the nonfederal share. Consequently, hospitals otherwise eligible for payments but whose local government could not finance them did not receive them. The Centers for Medicare & Medicaid Services (CMS), which oversees Medicaid, communicated in writing to one state two key principles regarding payment distribution: (1) payments should be distributed based on Medicaid or demonstration purposes, and (2) payments should not be made based on the availability of local financing. However, CMS has not provided written guidance to articulate or broadly communicate these requirements to all states. Federal internal controls standards stress the need for effective communications with external stakeholders that have a significant impact on the agency achieving its goals. The absence of written guidance may result in inconsistent application of CMS's policies among states, the distribution of supplemental payments that are counter to the agency's policies and not aligned with the program's purposes, and the potential for states to overpay or underpay providers depending on the availability of local government financing.
In commenting on a draft of this report, HHS concurred with the first recommendation and agreed with GAO's concerns regarding the second recommendation but did not explicitly concur with it.

What GAO Recommends

GAO recommends that CMS issue written guidance clarifying its policies that (1) supplemental payments should be linked to the provision of Medicaid services and (2) payments should not be contingent on the availability of local financing.