The upper limits are based on what Medicare (the federal health care program for elderly and some disabled individuals) would pay for comparable services. Previous State Financing Schemes—and Efforts to Curtail Them—Go Back More Than a Decade

Despite limits on federal payments, the flexibility that states have to set Medicaid’s payment rates has provided the opportunity for some to develop various financing schemes in the past that inappropriately increased federal Medicaid payments. Over more than a decade, states have used a variety of schemes to boost federal Medicaid funding without contributing their specified share. Latest Financing Scheme Involved Local Government Providers

The financing scheme we identified last year was the latest variant being used by some states. Such funding arrangements violate the integrity of the Medicaid program for several reasons. In effect, this provision gave the states a period of time during which they could continue to receive excessive federal payments. The length of a state’s transition period depended on how long it had been using the scheme. On September 5, 2001, CMS issued a rule shortening the transition period from September 30, 2002, for those upper payment limit financing schemes in plan amendments that were pending when the January regulation was issued, that were subsequently approved, and that did not comply with the January regulation. September Rule Will Reduce Magnitude of Expected Excessive Payments

By shortening the allowed transition period to comply with the new upper payment limits, the September rule will reduce the magnitude of excessive federal payments for these two states by about $483 million—from over $1.2 billion to about $722 million (see table 4). Virginia did not propose its excessive payment scheme until after HCFA publicly released the draft of its regulation to curb such schemes. Experience tells us that even as the Congress and HCFA have in the past identified and acted to close down various state financing schemes that exploit the federal share of the Medicaid program, other schemes invariably emerge. They disagreed with our conclusion that HCFA’s decision to approve additional state financing schemes was unjustified.
What GAO Found

Some states have taken advantage of the flexibility that Congress built into the Medicaid program by devising schemes that inappropriately boost the federal share of program expenditures. These schemes were adding billions of dollars a year to federal Medicaid costs without the states paying their statutorily specified share of program costs. Moreover, some of the federal funds were being spent for non-Medicaid purposes. After hearing about these financing schemes, Congress passed the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). In response, the Health Care Financing Administration (HCFA) issued regulations in January 2001 to curtail financing schemes involving excessive payments to local government providers for which a separate upper payment limit did not exist. However, less than a month after the revised upper payment limit regulation became effective, HCFA decided to amend the regulation to shorten the time some states were allowed to comply with it. This reversal resulted in the approval of new financing schemes for several states that had pending proposals mimicking the schemes identified last year. The transition periods were of varying lengths, depending on how long a state had been receiving excessive federal payments from one of these schemes. Believing that states just starting to receive excessive federal payments did not need the two-year transition period established in the January regulation, HCFA decided to shorten the transition period to limit federal liability. Although the September regulation--which limited the length of time states can operate their newly approved excessive funding schemes--will reduce the drain on federal Medicaid funds, GAO questions HCFA's decision to approve additional financing schemes, given the explicit effort to curtail them.