For example, STCs indicate for what  populations and services funds can be spent. Demonstration Spending Limits

CMS policy requires that section 1115 demonstrations be budget neutral  to the federal government—that is, the federal government should spend  no more under a state’s demonstration than it would have spent without  the demonstration. 1.) 2.) 3.) CMS’s Monitoring of Demonstration Spending Lacked Consistency

We found that CMS took a number of steps to monitor demonstration  spending in our selected states. CMS did not consistently assess compliance with the spending limit in  all our selected states. These inconsistencies may have resulted, in part, from CMS’s lack of  written, standard operating procedures for monitoring spending under  demonstrations. For example, CMS does not have internal guidance on  the elements that must be included in reporting requirements for states. CMS officials told us that they are  developing protocols for monitoring state demonstration programs and  state compliance with demonstration spending limits. As such, it was unclear, for example, whether the  procedures and new system would include mechanisms to ensure that  STCs consistently require states to report the information needed for  CMS to assess compliance with the spending limits. Without standard procedures for monitoring demonstration spending and  documenting those efforts, CMS faces the risk of continued  inconsistencies in monitoring and the risk that it may not identify cases  where states may be inappropriately using federal funds or exceeding  spending limits. CMS Is Implementing a Revised Policy for Applying Spending Limits, but the Extent to Which It Will Effectively Control Costs Is Unclear

CMS’s policy for applying demonstration spending limits has allowed our  selected states to accrue unused spending authority under the  demonstration spending limit (referred to in this report as unspent funds)  and use it to expand demonstrations to include new costs. CMS  allowed New York to use $8 billion in accrued unspent federal funds from  previous demonstration periods to expand its demonstration by including  a new supplemental payment pool for incentive payments to Medicaid  providers, costs that would not have been eligible for federal matching  funds outside of the demonstration. In May 2016, CMS communicated to states that the budget neutrality  policy had been revised to, among other things, restrict the accrual of  unspent funds to better control demonstration costs. CMS released a slide presentation on the  revised policy during a teleconference with all states but has not  issued formal guidance. Inconsistent tracking of unspent funds. It is too soon to  determine if these procedures will ensure consistent tracking of  unspent funds because, as we noted earlier, there was no  documentation of the agency’s plans for these procedures as of  December 2016. Federal internal control standards require that federal agencies should  design control activities to achieve objectives. Control activities like  formal guidance and standard procedures that clarify the application of  agency policies help ensure that those policies—such as the revised  budget neutrality policy—are consistently carried out in achieving cost  control objectives. Recommendations for Executive Action

To improve consistency in CMS oversight of federal spending under  section 1115 demonstrations, we recommend that the Secretary of Health  and Human Services require the Administrator of CMS to take the  following two actions:  1. Develop and document standard operating procedures for monitoring  a. 2. HHS did not explicitly agree or  disagree with the second recommendation that the agency should issue  formal guidance on the revised budget neutrality policy and how it will be  applied.
Why GAO Did This Study

As of November 2016, 37 states had demonstrations under section 1115 of the Social Security Act, under which the Secretary of HHS may allow costs that Medicaid would not otherwise cover for state projects that are likely to promote Medicaid objectives. By policy, demonstrations must be budget neutral; that is, the federal government should spend no more for a state's Medicaid program than it would have spent without the demonstration. CMS is responsible for monitoring spending and assessing compliance with demonstration terms and conditions for how funds can be spent and applying spending limits to maintain budget neutrality.
GAO was asked to examine federal spending for demonstrations and CMS's oversight of spending. This report examines (1) federal spending over time, (2) CMS's monitoring process, and (3) CMS's application of spending limits. GAO reviewed federal expenditure data for fiscal years 2005-2015, relevant documentation for 4 states, selected based on variation among their demonstrations, and federal internal control standards, and also interviewed CMS and state Medicaid officials.

What GAO Found

Over the last decade, federal spending under Medicaid section 1115 demonstrations, which allow states flexibility to test new approaches for delivering Medicaid services, has increased significantly.
The Centers for Medicare & Medicaid Services (CMS), within the Department of Health and Human Services (HHS), took a number of steps to monitor demonstration spending in GAO's 4 selected states. However, GAO also found inconsistencies in CMS's monitoring process. For example, CMS did not consistently require selected states to report the information needed to assess compliance with demonstration spending limits. The inconsistencies may have resulted from a lack of written standard procedures. CMS officials told GAO that CMS was developing procedures to better standardize monitoring, but did not have detailed plans for doing so. Thus, it is too soon to determine whether these efforts will address the inconsistencies GAO found. Federal standards require that federal agencies design control activities to achieve objectives. Without standard, documented procedures, CMS may not identify cases where states are inappropriately using federal funds or exceeding spending limits.
In applying demonstration spending limits, CMS allowed states to accrue unspent funds (more specifically, unused spending authority) when state spending is below the limit and use them to finance expansions of the original demonstration. For example, CMS allowed New York to use $8 billion in unspent federal funds to expand its demonstration to include an incentive payment pool for Medicaid providers. In May 2016, CMS released a slide presentation outlining new restrictions on the accrual of unspent funds. Per federal standards, formal guidance helps ensure that policies are consistently carried out. However, CMS has not issued formal guidance on the policy and does not consistently track unspent funds under the spending limit, raising questions as to whether the revised policy will be effective in better controlling costs.

What GAO Recommends

GAO recommends that CMS (1) develop and document standard operating procedures for sufficient reporting requirements and to require consistent monitoring and (2) issue formal guidance on its revised policy for restricting accrual of unspent funds. HHS agreed with GAO's first recommendation and neither agreed nor disagreed with GAO's second recommendation.