CHIPRA required that these new demonstrations be budget neutral, and  required HHS to use a defined process of identifying the spending base  and growth rates for demonstration spending limits. HHS’s Approvals Allowed Two States to Establish Funding Pools to Make New Types of Supplemental Payments

Two states we reviewed—Arizona and Texas—obtained the authority  under their section 1115 demonstrations to establish funding pools for  purposes of making supplemental payments and to receive federal  matching funds for these payments. States Were Approved to Implement Different Coverage Strategies and New Cost Sharing on Certain Populations through the Demonstrations

All 10 states we reviewed were approved to implement new ways of  expanding coverage or imposing cost sharing requirements on different  Medicaid populations. For 4 of 10 Reviewed Demonstrations, HHS’s Policy and Process for Approving Spending Limits Did Not Provide Assurances That Demonstrations Will Not Increase Federal Costs

For 4 of 10 demonstrations we reviewed, HHS approved spending limits  that were based on assumptions of cost growth that were higher than  those reflected by the state’s historical spending and the President’s  budget. In addition, in some cases the approved spending limits included  costs in the base year that were hypothetical. If HHS had held spending  limits in the four demonstrations to levels suggested by its policy, we  estimate that the spending limits would have been $32 billion lower over  the 5-year term of the demonstrations. We also found that HHS’s budget  neutrality policy is out-dated, because it does not reflect HHS’s current  processes or provide assurances that data used for spending limits are  reliable. HHS Approved Spending Limits for Four States Based on Growth Projections That Exceeded Benchmarks and Included Hypothetical Costs, with Limited Support

HHS approved spending limits for the Arizona, Indiana, and Rhode Island  demonstrations that used growth rates that exceeded benchmark rates  and, in the case of Texas, included hypothetical costs in the base year  spending. Our  estimates show that, had HHS used benchmark growth rates and actual  base year costs, the 5-year spending limits would have been almost   $32 billion dollars lower than what was actually approved. The federal  share of the $32 billion reduction would constitute an estimated   $21 billion. HHS  officials said that the agency was not able to estimate the cost of the  Arizona Medicaid program without the demonstration using recent actual  expenditure data, because the state’s Medicaid program had operated  under a demonstration since 1982. This approach  helps provide assurances that the federal government will spend no more  under the demonstrations than what it would have spent without them. In 2008, because HHS disagreed  that changes to the budget neutrality policy and review process were  needed, we suggested that Congress consider requiring increased  attention to fiscal responsibility in the approval of section 1115 Medicaid  demonstrations and require the Secretary of Health and Human Services  to improve the demonstration review process by, for example, clarifying  the criteria for approving spending limits and documenting and making  public the basis for such approvals. Recommendations for Executive Action

To improve the transparency of the process for reviewing and approving  spending limits for comprehensive section 1115 demonstrations, we  recommend that the Secretary of Health and Human Services take the  following two actions:  1.  update the agency’s written budget neutrality policy to reflect actual  criteria and processes used to develop and approve demonstration  spending limits, and ensure the policy is readily available to state  Medicaid directors and others; and  2.  reconsider adjustments and costs used in setting the spending limits  for the Arizona and Texas demonstrations, and make appropriate  adjustments to spending limits for the remaining years of each  demonstration. They told us that this document was the  most recent document capturing the budget neutrality policy. Appendix II: A Summary of Key Features of Recent Demonstrations

This appendix summarizes key information on 10 new comprehensive  section 1115 demonstrations approved from January 2007 through May  2012.
Why GAO Did This Study

Medicaid, a $436 billion federal and state health care program for low-income individuals and families, is a significant and growing expenditure. Section 1115 of the Social Security Act authorizes the Secretary of Health and Human Services to waive certain Medicaid requirements and allow otherwise uncovered costs for demonstration projects that are likely to promote Medicaid objectives. By HHS policy, these demonstrations should be budget neutral, that is, not increase federal spending over what it would have been if the state's existing program had continued. States estimate what their spending would have been without the demonstration, and HHS approves a spending based on projected spending.
GAO was asked to review HHS approval of recent Medicaid section 1115 demonstrations. GAO examined (1) the purpose of new demonstrations, and (2) the extent to which HHS's policy and process for reviewing proposed demonstration spending provide assurances that federal costs will not increase. For 10 new comprehensive demonstrations approved from January 2007 through May 2012, GAO reviewed application, approval, and budget neutrality documents provided by HHS; calculated estimated spending limits; and interviewed HHS officials.

What GAO Found

The 10 new demonstrations GAO examined expanded states' use of federal funds and implemented new coverage strategies. Arizona and Texas established funding pools to make new supplemental payments beyond what they could have made under traditional Medicaid requirements and receive federal matching funds for the payments. All 10 demonstrations were approved to use different coverage strategies or impose new cost sharing requirements, including limiting benefits or imposing deductibles for certain populations.
The Department of Health and Human Services' (HHS) budget neutrality policy and process did not provide assurances that all recently approved demonstrations will be budget neutral. For 4 of 10 demonstrations GAO reviewed, HHS approved spending limits that were based on assumptions of cost growth that were higher than its benchmark rates, and that, in some cases, included costs states never incurred in their base year spending. HHS's benchmark growth rates are the lower of the state's recent growth rates or projections for Medicaid program growth nationwide. For example, HHS approved a spending limit for Arizona's demonstration using outdated information on spending--1982 data that was projected forward--that reflected significantly higher spending than what the state's Medicaid program had actually cost. For Texas, HHS approved a spending limit using a base year that included billions in costs the state had not incurred. GAO found limited support and documentation for the higher-than-benchmark limits HHS approved. If HHS had held the 4 demonstrations' spending to levels suggested by its policy, the 5-year spending limits would have been an estimated $32 billion lower than what was approved; the estimated federal share of this reduction would be about $21 billion.
For 6 other demonstrations, the approved spending limits reflected the states' actual historical costs or criteria that were specified in law, which HHS followed. In examining HHS's current written budget neutrality policy, GAO found that the policy is outdated and does not include a process for assuring the reliability of the data used to set spending limits. GAO has previously suggested that Congress require HHS to improve its budget neutrality process, in part, by improving the review criteria and methods, and by documenting and making clear the basis for approved limits. In addition to these suggestions, GAO believes HHS needs to take further actions to address the findings in this report.

What GAO Recommends

GAO recommends that HHS update its budget neutrality policy and reexamine spending limits for the Arizona and Texas demonstrations. HHS disagreed with GAO's recommendations. GAO believes these steps are needed to improve the budget neutrality process.