States often make two general types of Medicaid supplemental  payments:
First, under federal Medicaid law, states are required to make  disproportionate share hospital (DSH) payments to certain hospitals. Second, many states also make another type of Medicaid  supplemental payment, referred to here as non-DSH supplemental  payments, to hospitals and other providers who, for example, serve  high-cost Medicaid beneficiaries. Complete and Reliable Data on Non-DSH Supplemental Payments are Lacking, Hindering Transparency and Oversight

For about two decades, we have raised concerns about supplemental  payments and the adequacy of federal oversight. For example, as reported in November 2012, we found that 39  states had made non-DSH supplemental payments to 505 hospitals that,  along with their regular Medicaid payments, exceeded those hospitals’  total costs of providing Medicaid care by $2.7 billion. As we concluded in  our 2012 and 2015 reports, although Medicaid payments are not required  to be limited to a provider’s costs of delivering Medicaid services,  payments that greatly exceed these costs raise questions, including  whether they are consistent with economy and efficiency, whether they  contribute to beneficiaries’ access to quality care, and the extent to which  they are ultimately used for Medicaid purposes. However, CMS lacks  data at the federal level on non-DSH supplemental payments, and the  payments are not subject to audit. In connection with the independent audit  requirement, standard methods were established for calculating DSH  payment amounts. For example, reporting of non-DSH payments that  states make to individual hospitals and other providers relative to the  providers’ Medicaid costs could improve the transparency of these  payments. CMS said in 2012 that legislation was necessary  for them to implement reporting and auditing requirements for DSH  payments, and that legislation would be needed for the agency to  implement similar requirements for non-DSH supplemental payments. States are Increasingly Relying on Providers and Local Governments to Finance Medicaid, and Data Needed for Oversight is Lacking

Our work has found that states are increasingly relying on providers and  local governments to finance Medicaid, and has also pointed to the need  for better data and improved oversight to ensure that Medicaid payments  are financed consistent with federal requirements, to understand  financing trends, and to ensure federal matching funds are used  efficiently. CMS is responsible for ensuring that  state Medicaid payments made under financing arrangements are  consistent with Medicaid payment principles, including that they are  economical and efficient, and that the federal government and states  share in the financing of the Medicaid program as established by law. For example, in state fiscal year  2012, funds from providers and local governments accounted for 26  percent (or over $46 billion) of the approximately $180 billion in the total  nonfederal share of Medicaid payments that year—an increase from 21  percent ($31 billion) in state fiscal year 2008. 1.) For example, in our  July 2014 report, our analysis of arrangements involving financing of the  nonfederal share of Medicaid payments with funds from provider taxes or  local governments in three selected states illustrated how Medicaid costs  can be shifted from the state to the federal government and, to a lesser  extent, to health care providers and local governments. For example, in  our 2014 report, we found that in one state a $220 million payment  increase for nursing facilities in 2012 (which was funded by a tax on  nursing facilities) resulted in an estimated $110 million increase in federal  matching funds; no increase in state general funds; and a net payment  increase to the facilities, after paying the taxes, of $105 million. 2.) Apart from data on provider taxes, CMS generally does not  require (or otherwise collect) information from states on the funds they  use to finance Medicaid, nor ensure that the data that it does collect are  accurate and complete. We recommended in July 2014 that  CMS take steps to ensure that states report accurate and complete  information on all sources of funds used to finance the nonfederal share  of Medicaid, and offered suggestions for doing so. While Congress and CMS have taken important  steps to improve the integrity of the Medicaid program through improved  oversight of some Medicaid supplemental payments and financing  arrangements, Congress and CMS need better information and more  tools to understand who receives non-DSH supplemental payments and  in what amounts, to ensure they are economical and efficient as required  by law, and to determine the extent to which they are ultimately used for  Medicaid purposes. Appendix I: GAO’s Matters for Congressional Consideration and Agency Recommendations

The following table lists matters for congressional consideration regarding  actions to improve the transparency of and accountability for the Medicaid  non-disproportionate share hospital (DSH) supplemental payments states  make to providers. Medicaid Financing: Questionnaire Data on States’ Methods for Financing  Medicaid Payments from 2008 through 2012. Medicaid Financing: States’ Increased Reliance on Funds from Health  Care Providers and Local Governments Warrants Improved CMS Data  Collection.
Why GAO Did This Study

Medicaid is an over $500 billion dollar jointly financed program for which the federal government matches state Medicaid expenditures. Within certain limits, states can make supplemental payments to providers in addition to their regular claims-based payments and receive federal matching funds. These payments have grown in the past decade. To finance the nonfederal share of Medicaid payments, states can use funds from local governments and providers, within federal parameters. CMS is responsible for overseeing state programs and ensuring that state payments are consistent with Medicaid payment principles—including that they are economical and efficient, and appropriately financed.
States may have incentives to make excessive supplemental payments to certain providers who finance the nonfederal share of the payment. GAO has a body of work from 2004 to 2015 raising concerns with Medicaid supplemental payments and financing methods. Congress and CMS have taken actions to improve accountability for these payments, and GAO has made further suggestions for Congress and CMS.
This statement highlights key issues and opportunities for improving transparency and oversight from GAO's work related to (1) certain supplemental payments states make to providers, and (2) states' financing of the non-federal share of Medicaid. This testimony is based on GAO reports from 2004 to 2015 on state Medicaid financing and supplemental payments, and selected updates from CMS on the status of prior recommendations.

What GAO Found

GAO has found that complete and reliable data are lacking on the tens of billions in Medicaid supplemental payments states often make, hindering transparency and oversight. In a November 2012 report, GAO found that Congress and the Centers for Medicare & Medicaid Services (CMS) have acted to improve transparency and accountability for one type of Medicaid supplemental payment known as disproportionate share hospital (DSH) payments, made for uncompensated care costs experienced by hospitals serving low-income and Medicaid patients. Since 2010, DSH payments are required to be reported to CMS and are subject to independent audits that assess their appropriateness. States also make other supplemental payments—referred to here as non-DSH payments—to hospitals and other providers that, for example, serve high-cost Medicaid beneficiaries. Gaps in oversight remained for non-DSH supplemental payments, which as of 2011 exceeded DSH in amounts paid. For example, GAO reported that 39 states made non-DSH supplemental payments to 505 hospitals that, along with regular Medicaid payments, exceeded those hospitals' total costs of providing Medicaid care by about $2.7 billion. Medicaid payments are not limited to a provider's costs for services, but GAO concluded in an April 2015 report that payments that greatly exceed costs raise questions about whether they are economical and efficient as required by law, and the extent to which they are ultimately used for Medicaid services. CMS lacks data on supplemental payments made to individual providers. Per federal internal control standards, agencies should have reliable information for decision making and reporting, and reasonable assurance that agency objectives, such as compliance with laws, are being met. In 2012, CMS officials said legislation was needed to implement non-DSH reporting and auditing requirements, and GAO suggested that Congress consider requiring CMS to provide guidance on permissible methods for calculating non-DSH payments and require state reports and audits.
GAO found in a July 2014 report that states are increasingly relying on providers and local governments to finance Medicaid and data needed for oversight are lacking. About $46 billion or 26 percent of the nonfederal share was financed with funds from providers and local governments in 2012—an increase from 21 percent in 2008. GAO found that states' financing arrangements can effectively shift costs from states to the federal government. In one state, a $220 million payment increase for nursing facilities funded by a $115 million tax on nursing facilities yielded a net payment increase to the facilities of $105 million. The state obtained $110 million in federal matching funds for the payments. GAO found that CMS generally does not require or otherwise collect data from states on sources of funds to finance Medicaid, nor ensure that the data it does collect are accurate and complete. GAO identified, for example, incomplete reporting of provider taxes. As a result, CMS cannot fully assess the appropriateness of states' financing or the extent to which the increased reliance on providers and local governments serves to provide fiscal relief to states or improve access. Per federal internal control standards, agencies should collect accurate and complete data for monitoring. GAO recommended in 2014 that CMS improve the data states report on Medicaid financing. The agency disagreed, stating its efforts were adequate. GAO maintains its recommendation is valid.