The federal share of each state’s  Medicaid expenditures is based on a statutory formula linked to a state’s  per capita income in relation to national per capita income. In 2002, the  specified federal share of each state’s expenditures ranged from 50  percent to 76 percent; in the aggregate, the federal share of total Medicaid  expenditures was 57 percent. Some State Financing Schemes Have Used IGTs to Create the Illusion of Valid Medicaid Expenditures

For more than a decade, some states have used various financing schemes,  some involving IGTs, to create the illusion of a valid state Medicaid  expenditure to a health care provider. Many of these schemes involve payment arrangements between the state  and government-owned or government-operated providers, such as local- government-operated nursing homes. These  schemes share certain characteristics, including IGTs, with other financing  schemes from prior years (see table 1). In reality, the large payment is  temporary, since the funds essentially make a round-trip from the state to  the Medicaid providers and back to the state. In cases  like this, local-government facilities can use IGTs to easily return the  excessive Medicaid payments to the state via electronic wire transfers. The counties wire the funds to the states, which then  send most or all of the funds back to the counties as Medicaid payments. Financing Schemes Undermine Medicaid’s Federal-State Partnership

States’ use of these creative financing mechanisms undermines the  federal-state Medicaid partnership as well as the program’s fiscal integrity  in at least three ways. First, state financing schemes effectively increase the federal matching  rate established under federal law by increasing federal expenditures  while state contributions remain unchanged or even decrease. For  example, for one state we analyzed (Wisconsin), we estimated that by  obtaining excessive federal matching payments and using these funds as  the state share of other Medicaid expenditures, the state effectively  increased the federal matching share of its total Medicaid expenditures  from 59 percent to 68 percent in state fiscal year 2001. Second, CMS has no assurance that these increased federal matching  payments are used for Medicaid services. Under state financing  schemes, however, states can use funds returned to them at their own  discretion. We recently examined how six states with large UPL financing  schemes involving nursing homes used the federal funds they generated. In our view, this practice is  inconsistent with the statutory requirement that states ensure that  Medicaid payments are economical and efficient. Under UPL financing  arrangements, some states pay a few public providers excessive amounts,  well beyond the cost of services provided. We found, for example, that  Virginia’s proposed arrangement would allow the state to pay six local- government nursing homes, on average, $670 in federal funds per Medicaid  nursing home resident per day—more than 12 times the $53 daily federal  payment these nursing homes normally received, on average, per Medicaid  resident. The information includes  sources of state matching funds for supplemental payments to Medicaid  providers, the extent to which total payments would exceed providers’  costs, how a state would use the additional funds, and whether a state  required providers to return payments (and, if so, how the state planned to  spend such funds). Although  Congress and CMS have taken significant steps to help curb inappropriate  UPL arrangements and other financing schemes, states can still claim  federal matching funds for more than a public provider’s actual costs of  providing Medicaid-covered services. We previously recommended that Congress consider  prohibiting Medicaid payments that exceed actual costs for any  government-owned facility.
Why GAO Did This Study

Medicaid, the federal-state health financing program for many of the nation's most vulnerable populations, finances health care for an estimated 53 million lowincome Americans, at a cost of $244 billion in 2002. Congress structured Medicaid as a shared fiduciary responsibility of the federal government and the states, with the federal share of each state's Medicaid payments determined by a formula specified by law. In 2002, the federal share of each state's expenditures ranged from 50 to 76 percent under this formula; in the aggregate, the federal share of total Medicaid expenditures was 57 percent. Some states have used a number of creative financing schemes that take advantage of statutory and regulatory loopholes to claim excessive federal matching payments. GAO was asked to summarize prior work on how some of these schemes operated, including the role of intergovernmental transfers (IGT), which enable government entities--such as the state and local-government facilities like county nursing homes--to transfer funds among themselves. GAO was also asked to discuss these schemes' effects on the federalstate Medicaid partnership and to discuss what can be done to curtail them.

What GAO Found

For many years states have used varied financing schemes, sometimes involving IGTs, to inappropriately increase federal Medicaid matching payments. Some states, for example, receive federal matching funds on the basis of large Medicaid payments to certain providers, such as nursing homes operated by local governments, which greatly exceed established Medicaid rates. In reality, the large payments are often temporary, since states can require the local-government providers to return all or most of the money to the states. States can use these funds--which essentially make a round-trip from the states to providers and back to the states--at their own discretion. States' financing schemes undermine the federal-state Medicaid partnership, as well as the program's fiscal integrity, in at least three ways. The schemes effectively increase the federal matching rate established under federal law by increasing federal expenditures while state contributions remain unchanged or even decrease. GAO estimated that one state effectively increased the federal matching share of its total Medicaid expenditures from 59 percent to 68 percent in state fiscal year 2001, by obtaining excessive federal funds and using these as the state's share of other Medicaid expenditures. There is no assurance that these increased federal matching payments are used for Medicaid services, since states use funds returned to them via these schemes at their own discretion. In examining how six states with large schemes used the federal funds they generated, GAO found that one state used the funds to help finance its education programs, and others deposited the funds into state general funds or other special state accounts that could be used for non-Medicaid purposes or to supplant the states' share of other Medicaid expenditures. The schemes enable states to pay a few public providers amounts that well exceed the costs of services provided, which is inconsistent with the statutory requirement that states ensure economical and efficient Medicaid payments. In one state, GAO found that the state's proposed scheme increased the daily federal payment per Medicaid resident from $53 to $670 in six local-government-operated nursing homes. Although Congress and the Centers for Medicare & Medicaid Services have acted to curtail financing schemes when detected, problems persist. States can still claim excessive federal matching funds for payments exceeding public facilities' actual costs. GAO suggests that Congress consider a recommendation open from prior work, that is, to prohibit Medicaid payments that exceed actual costs for any government-owned facility.