Section 1115 of the Social Security Act  authorizes the Secretary of Health and Human Services to waive certain  federal Medicaid requirements and to allow costs that would not  otherwise be eligible for federal matching funds—through “expenditure  authorities”—for experimental, pilot, or demonstration projects that, in the  Secretary’s judgment, are likely to assist in promoting Medicaid  objectives. HHS Approved Expenditure Authorities Allowing States to Fund State Programs and New Types of Funding Pools Without Clearly Showing How They Furthered Medicaid Objectives

HHS approved expenditure authorities for a broad range of purposes  beyond expanding Medicaid coverage to individuals, including state- operated programs and funding pools. However, how these programs and  funding pools would further Medicaid objectives was not always apparent  from HHS’s documentation. HHS Approved Expenditure Authorities Allowing States to Fund State Programs, but How Programs Would Promote Medicaid Objectives Was Not Always Clear

In our April 2015 report examining recent demonstration approvals in 25  states, we found that HHS had approved expenditure authorities allowing  5 states to receive federal Medicaid matching funds for state expenditures  for more than 150 state-operated programs. The 5 states were  approved to spend up to $9.5 billion in Medicaid funds (federal and state)  for these programs during their current demonstration approval periods,  which ranged from 2.5 to 5 years. The state programs were operated or funded by a wide range of different  state agencies, such as state departments of mental health, public health,  corrections, youth services, developmental disabilities, aging, and state  educational institutions. Further, we found that several state programs approved for federal  Medicaid funds appeared, based on information in the approvals, to be  only tangentially related to improving health coverage for low-income  individuals and lacked documentation explaining how their approval was  likely to promote Medicaid objectives. HHS Approved Expenditure Authorities Allowing States to Establish Funding Pools, but Links to Medicaid Purposes Were Not Always Transparent

Another major type of non-coverage-related expenditure authority that  HHS approved allowed states to make new kinds of supplemental  payments—that is, payments in addition to base payments for covered  services—to hospitals and other providers. HHS’s Recent Approvals Highlight the Need for Specific Criteria and Clear Documentation to Show How Expenditure Authorities Further Medicaid Objectives

While section 1115 of the Social Security Act provides HHS with broad  authority in approving expenditure authorities for demonstrations that, in  the Secretary’s judgment, are likely to promote Medicaid objectives, as  we reported in April 2015, according to HHS officials, the agency has not  issued explicit criteria explaining how it assesses whether demonstration  expenditures meet this broad statutory requirement. HHS’s Policy and Process for Approving Spending Limits Lack Transparency and Do Not Provide Assurances That Demonstrations Will Be Budget Neutral

HHS’s policy and process for approving state spending on Medicaid  demonstrations lack transparency and do not provide assurances that  demonstrations will be budget neutral for the federal government. HHS’s Budget Neutrality Policy and Process Lack Transparency

GAO’s prior work has found that HHS’s policy and process for  determining state demonstration spending limits lack transparency related  to the criteria and evidence used to support state spending limits, and the  most recent written policy, issued in 2001, does not reflect HHS’s actual  practices. Allowing questionable assumptions and methods increases projected  spending and allows for significant increase in federal costs. We have  found that had HHS developed demonstration spending limits based on  levels suggested by its policy, spending limits would have been tens of  billions of dollars lower. For example, for five states’ demonstrations we  reviewed in our 2013 and 2014 reports, we estimate that had HHS used  growth rates consistent with its policy and allowed only actual costs in  base year spending, demonstration spending limits would have been  almost $33 billion lower than what was actually approved.The federal share of the $33 billion reduction would constitute an  estimated $22 billion. As section 1115  demonstrations have become a significant and growing proportion of  Medicaid expenditures, ensuring that demonstration expenditures are  linked to Medicaid purposes and are budget neutral is even more critical  to ensuring the long-term sustainability of the program, upon which tens  of millions of low-income beneficiaries depend to cover their medical  costs. Appendix I: State Programs Funded by Expenditure Authorities in Section 1115 Demonstrations

From June 2012 through mid-October 2013, five states received approval  from the Department of Health and Human Services (HHS) for section  1115 demonstrations that included expenditure authorities allowing  funding for state programs. GAO-15-239.
Why GAO Did This Study

The long-term sustainability of the $500 billion joint federal-state Medicaid program is important for the low-income and medically needy populations that depend on it. Section 1115 of the Social Security Act provides the Secretary of Health and Human Services with broad authority to waive certain Medicaid requirements and to authorize federal and state expenditures that would not otherwise be allowed under Medicaid, for experimental or pilot projects likely to promote Medicaid objectives. Spending under section 1115 demonstrations has increased rapidly from about one-fifth of Medicaid expenditures in fiscal year 2011 to close to one-third in fiscal year 2014. Expenditure authorities in approved demonstrations have been used by states to expand Medicaid coverage to individuals and for other purposes. HHS policy requires that demonstrations not increase federal costs for the Medicaid program.
This testimony addresses (1) the types of expenditure authorities HHS has approved for non-coverage-related purposes and whether the approval documentation shows how they promote Medicaid objectives, and (2) HHS's policy and processes for ensuring demonstrations are not likely to raise federal costs. The testimony is based on GAO's April 2015 report on expenditure authorities in demonstrations approved from June 2012 through mid-October 2013 ( GAO 15 239 ) and several GAO reports issued from 2002 to 2014 addressing HHS's policies and practices for ensuring demonstrations are budget neutral.

What GAO Found

In April 2015, GAO found that under Medicaid section 1115 demonstrations—experimental or pilot projects to test new ways of providing services which account for nearly one-third of Medicaid expenditures—the Department of Health and Human Services (HHS) had authorized expenditures not otherwise allowed under Medicaid for a broad range of purposes beyond expanding coverage. How these expenditure authorities promoted Medicaid objectives was not always apparent. In the 25 states' demonstrations GAO reviewed, two types of non-coverage-related expenditure authorities—state-operated programs and funding pools—were significant in the amounts of spending approved. GAO found that
HHS allowed five states to spend up to $9.5 billion in Medicaid funds to support over 150 state-operated programs. The programs were wide-ranging in nature, such as workforce training, housing, and public health programs, and operated by a wide range of state agencies, such as educational institutions, corrections, aging, and public health agencies, and could have received funding from other sources.
HHS allowed eight states to spend more than $26 billion to establish capped funding pools through which states could make payments to hospitals and other providers for a range of purposes, including payments to incentivize hospital infrastructure or other improvements.
How the approved expenditures for the state-operated programs and funding pools would promote Medicaid objectives was not always clear in HHS's approval documentation. For example, some state programs approved for funding appeared to be only tangentially related to health coverage for low-income individuals. Although section 1115 of the Social Security Act provides HHS with broad authority in approving expenditure authorities that, in the Secretary's judgment, are likely to promote Medicaid objectives, GAO found that HHS has not issued specific criteria for making these determinations.
In multiple reports, issued from 2002 to 2014, GAO also found that HHS's policy and process for approving state spending limits under demonstrations have lacked transparency and have not ensured that demonstrations will be budget neutral to the federal government. The criteria and methods used to set spending limits were not always clear or well supported, such that approved spending limits for some demonstrations were billions of dollars higher than what was supported. For example, for five demonstrations GAO reviewed in 2013 and 2014, using assumptions suggested by HHS's policy, GAO found that spending limits would have been $33 billion lower than what was actually approved.
In its 2015 report and prior work, GAO has made multiple recommendations to HHS aimed at (1) improving the transparency of approved spending and how it furthers Medicaid purposes and (2) ensuring Medicaid demonstrations do not increase federal costs. HHS generally agreed to improve its expenditure authority approval documentation, but did not agree with several other recommendations aimed at improving its approval policies and processes and transparency. GAO maintains that, unless HHS takes the actions necessary to implement GAO's prior recommendations, tens of billions of dollars could be at risk.