	Background

Five insular areas—American Samoa, Guam, CNMI in the Pacific Ocean,  and the Commonwealth of Puerto Rico and the Virgin Islands in the  Caribbean Sea—represent the largest insular areas of the United States. However, significant variation exists  among the insular areas in terms of the distribution of funds by source,  largely due to the number of Medicare beneficiaries residing in each area. Medicare Represents the Majority of Federal Health Care Spending in Insular Areas

Federal health care financing programs—primarily Medicare—comprised  the vast majority of the $2.2 billion in total federal health care spending in  the five insular areas in fiscal year 2003. Notable Differences Exist in Methods Used to Allocate Federal Health Care Funds in the Insular Areas Compared to the States

The methods used to allocate federal health care funds in the insular areas  differ, in some cases, from those used in the states. Similarly, differences exist in how  the Medicaid and SCHIP programs are funded in the insular areas. In addition, allocation methods used for certain HHS  grants establish separate rules for the insular areas. Hospitals in American Samoa  and CNMI are also paid based on their costs; however, they are not subject  to target amounts or a national cap. Multiple Factors Explain Differences in Individual Spending Levels in Insular Areas Compared to the States

Although most of the key sources of health care funding available in the  insular areas are also available in the states, individual spending levels are  often lower in the insular areas. In addition, statutory limits on  Medicaid funding in the insular areas contribute to lower per capita  spending. In light of these statutory limits, CMS does not hold insular areas  accountable for providing all the mandatory Medicaid services, including  nursing home care, which makes up nearly a third of Medicaid  expenditures in the states. In contrast, HHS grant funding per capita is  higher in the insular areas than in the states, due, in part, to allocation  formulas that result in higher payments to them as well as to states with  smaller populations. Lower Medicare Spending Per Beneficiary Explained by Payment Policy Differences and Lower Utilization

As in the insular areas, Medicare comprised the majority—over 60  percent—of federal health care funding in the states in fiscal year 2003  and, with limited exceptions, the program operates largely the same in the  insular areas as in the states. The insular areas expressed concern that the report did not sufficiently  address certain issues, such as implications of statutory limits on federal  Medicaid spending and a more comprehensive analysis of local  circumstances that affect the availability and costs of health care services. Specifically, CNMI and Puerto Rico commented that the statutory limits on  federal Medicaid spending—the Medicaid cap and minimum FMAP—result  in insufficient federal Medicaid payments to the insular areas and explain  the significant differences in federal Medicaid payments between them  and the states. For example, Puerto Rico commented that as a  result of the limits on federal Medicaid payments, it and other insular  areas shoulder a larger share of financial responsibility for the Medicaid  program than the states, and that the federal contribution to the program  is far less than the minimum FMAP suggests.
Why GAO Did This Study

Five insular areas of the United States--American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto Rico, and the U.S. Virgin Islands--benefit from federal health care financing and grant programs that help fund health care services to their over 4 million residents. However, notable differences exist in how the programs are funded or operate in the insular areas, such as statutory limits on federal Medicaid funding to the insular areas that do not apply in the states. To help understand these differences, GAO was asked to identify (1) the key sources of federal health care funding in the insular areas, (2) differences between insular areas and the states in the methods used to allocate these funds, and (3) differences in spending levels per individual between insular areas and the states. In commenting on a draft of this report, American Samoa, CNMI, and Puerto Rico suggested the need for additional information on certain issues, such as implications of statutory limits on federal Medicaid spending and a more comprehensive analysis of local circumstances that affect the availability and costs of health care services.

What GAO Found

Multiple federal programs fund health care services in the insular areas. Federal health care financing programs--Medicare, Medicaid, and the State Children's Health Insurance Program (SCHIP)--represented nearly 90 percent of the $2.2 billion in health care funding to these areas in fiscal year 2003, with Medicare alone representing over three-quarters of total funding. The Departments of Health and Human Services (HHS) and the Interior (DOI) also provide grants to the insular areas. Significant variation exists among the insular areas in terms of the distribution of funds by these sources, largely due to the number of Medicare beneficiaries in each area. The methods used to allocate these federal funds to insular areas often differ from methods used in the states. For example, Medicare pays hospitals in most insular areas based on their costs rather than the prospective payment system used for most hospitals in the states. Similarly, federal funding for Medicaid and SCHIP is subject to statutory limits that do not apply to states, including minimum federal contributions and a cap on federal Medicaid payments. In addition, certain HHS grants use different rules to determine insular areas' funding. Differences in allocation methods as well as other factors contribute to lower spending levels per individual in the insular areas compared to the states. For example, Medicare spending per beneficiary in the insular areas was less than half the amount it was in the states, due in part to differences in payment policies and to beneficiaries' lower utilization of services. In addition, the statutory limits on federal Medicaid funding in these areas contributed to lower federal Medicaid per capita payments in the five insular areas compared to the national average. However, in light of limits on federal funding, the insular areas are not held accountable for covering all Medicaid benefit requirements, such as nursing facility services that represent nearly one-third of Medicaid expenditures in the states. Insular areas benefit from certain HHS grant allocation formulas that result in higher per capita payments to them than the states, on average.