Under section 1115 of the Social  Security Act, the Secretary has authority to waive certain federal Medicaid  requirements and authorize otherwise unallowable expenditures for  “experimental, pilot, or demonstration projects” that are likely to promote  Medicaid objectives. Since the early 1980s, HHS has required that states show that their  proposed section 1115 demonstrations will be budget neutral to the  federal government—that is, federal expenditures under a state’s  demonstration will not be greater than if the state had continued its  existing Medicaid program. HHS Did Not Adequately Ensure the Budget Neutrality of Medicaid Demonstrations in Florida and Vermont before Approving Them

HHS approved 5-year demonstration spending limits for Florida and  Vermont based on projections of cost and beneficiary enrollment growth  rates that exceeded HHS’s own benchmarks—that is, the lower of the  state’s recent historical experience or estimates of Medicaid growth  nationwide—without adequate support for these deviations. HHS approved a spending limit  of $4.7 billion for Vermont’s 5-year demonstration. It also shows the limit that would apply if HHS  benchmarks had been used and the limit that HHS and state officials  explained and supported in documentation. For  beneficiary enrollment, however, HHS approved growth rates that were  higher than benchmark levels. A 2005 HHS financial  management review found several problems with the earlier financing  arrangement that involved supplemental payments to certain hospitals and  other health care providers. In Vermont, HHS allowed the state  to operate a managed care organization and, through this arrangement,  retain excess revenue from payments to the organization for previously  state-funded programs. In July 2007, we raised concerns about this  demonstration’s consistency with federal law. Vermont Allowed to Use Medicaid Funds to Supplant State Funding for Certain Purposes

Under Vermont’s demonstration, HHS authorized the state to operate its  own managed care organization and, through this arrangement, to apply  federal Medicaid matching funds to programs that were previously funded  by the state and that do not exclusively benefit those eligible for Medicaid. Matters for Congressional Consideration

The Congress should consider requiring increased attention to fiscal  responsibility in the approval of section 1115 Medicaid demonstrations by  requiring the Secretary of HHS to improve the demonstration review  process through steps such as (1) clarifying criteria for reviewing and  approving states’ proposed spending limits, (2) better ensuring that valid  methods are used to demonstrate budget neutrality, and (3) documenting  and making public material explaining the basis for any approvals. Recommendation for Executive Action

To help ensure that the Florida demonstration will maintain the fiscal  integrity of the Medicaid program, we recommend that the Secretary of  HHS ensure that the level of supplemental payments for which the state  could have obtained federal Medicaid funds in the absence of the  proposed demonstration is calculated using appropriate methods and  accurate data sources, and adjust the approved spending limit  appropriately. In 2002 and 2004, we  recommended that HHS undertake these changes. We disagree that Florida’s calculations were not relevant to the Florida  demonstration, since Florida’s historical payments were used as a basis  for the low-income pool spending limit under the demonstration, and as a  result, the spending limit allows for continuation of spending that a HHS  review suggests should not have been allowed. With regard to HHS’s approval of the Vermont demonstration, HHS  disagreed with our concerns and prior recommendation to reexamine the  terms of the demonstration and, where appropriate, to either modify its  terms or seek statutory authority for the demonstration to continue in its  current form. Finally, we base our  finding that HHS agreed to reimburse Vermont at a rate higher than what  the state received prior to its demonstration in part on our review of the  independent actuary’s report. Meeting HHS’s definition of comprehensive, that is, those that affect a  broad range of services for Medicaid populations statewide.
Why GAO Did This Study

Medicaid, a joint federal and state program, finances health care for 60 million low-income people. Section 1115 of the Social Security Act authorizes the Secretary of Health and Human Services to waive certain federal Medicaid requirements and allow demonstration projects that are likely to promote Medicaid objectives. Under federal policy, states must show that federal spending for proposed demonstrations will be no greater than if the state's existing Medicaid program were continued. GAO examined the extent to which HHS ensured that recent comprehensive 1115 demonstrations--affecting a broad range of services for beneficiaries statewide--will (1) be budget neutral to the federal government and (2) maintain Medicaid's fiscal integrity. For demonstrations approved in 2005 (Florida and Vermont), GAO obtained information from federal and state officials and also relied on past reviews of other demonstrations.

What GAO Found

HHS did not adequately ensure that Florida's and Vermont's Medicaid demonstrations will be budget neutral to the federal government before approving them. HHS approved spending limits that were higher than the limits that would have been granted if HHS had held the states to limits based on benchmark growth rates, that is, the lower of the state's historical spending growth or nationwide estimates of Medicaid growth. Although HHS allows states to deviate from these benchmarks if states can show that using them would not provide accurate projections, HHS's basis for approving the higher spending limits was not fully supported by documentation. In Florida, HHS approved a $52.6 billion spending limit for the 5 year demonstration-- $6.9 billion more than the documentation supported. In Vermont, HHS approved a $4.7 billion spending limit--$246 million higher than supported. HHS also did not ensure that the two demonstrations maintain Medicaid's fiscal integrity. In Florida, HHS allowed the state to establish a spending limit using a historical spending base that included payments HHS had previously identified as problematic. In 2005, an HHS review found several problems with the payment arrangement--problems that potentially resulted in inflated and inaccurate payments. In Vermont, where the state proposed operating a managed care organization, HHS agreed to an administrative reimbursement rate higher than what the state received prior to the demonstration. Under this arrangement, the state can use excess revenues to pay for health-related programs that were previously funded by the state and that do not exclusively benefit Medicaid beneficiaries, such as a grant to the University of Vermont medical school. A July 2007 GAO letter to the Secretary discussed concerns about this approval's consistency with federal law and recommended that the Secretary reexamine Vermont's demonstration and, where appropriate, either modify its terms or seek statutory authority for it to continue in its current form. Concerns about HHS's demonstration approval process in this report are consistent with those GAO has raised in past reviews of other states' demonstration proposals. In 2002 and 2004, GAO recommended that HHS take steps to strengthen its fiscal oversight of Medicaid by improving the Medicaid demonstration review and approval process, in part by (1) clarifying criteria for reviewing and approving states' demonstration spending limits, (2) better ensuring that valid methods are used to demonstrate budget neutrality and (3) documenting and making public material explaining the basis for any approvals. HHS has not taken action on these recommendations and maintains that its process is sufficient. Because HHS continues to disagree with these recommendations and with the need to reexamine the Vermont demonstration, GAO is elevating these issues to the Congress for consideration.