The agency also published in May 2007 a final  rule related to Medicaid payment and financing. Concerns about Certain Medicaid Financing Arrangements that Undermine Medicaid’s Fiscal Integrity Are Long-Standing

From 1994 to 2005, we have reported numerous times on a number of  financing arrangements that create the illusion of a valid state Medicaid  expenditure to a health care provider. The supplemental payments connected with these  arrangements were illusory, however, because states required these  government providers to return part or all of the payments to the states. Financing arrangements involving  illusory payments to Medicaid providers have significant fiscal  implications for the federal government and states. The exact amount of  additional federal Medicaid funds generated through these arrangements  is not known, but was in the billions of dollars. First, inappropriate state financing arrangements effectively  increased the federal matching rate established under federal law by  increasing federal expenditures while state contributions remained  unchanged or even decreased. Under  its Medicaid matching formula, the state paid $10.5 million and CMS paid  $30.5 million as the federal share of the supplemental payment. Second, CMS had no assurance that these increased federal matching  payments were retained by the providers and used to pay for Medicaid  services. Federal Medicaid matching funds are intended for Medicaid- covered services for the Medicaid-eligible individuals on whose behalf  payments are made. Third, these state financing arrangements undermined the fiscal integrity  of the Medicaid program because they enabled states to make payments to  government providers that significantly exceeded their costs. CMS Oversight Initiative to End State Financing Arrangements Lacked Transparency

Our March 2007 report on a recent CMS oversight initiative to end certain  financing arrangements where providers did not retain the payments  provides context for CMS’s May rule. Responding to concerns about  states’ continuing use of creative financing arrangements to shift costs to  the federal government, CMS has taken steps starting in August 2003 to  end inappropriate state financing arrangements by closely reviewing state  plan amendments on a state-by-state basis. As a result of CMS initiative,  from August 2003 through August 2006, 29 states ended one or more  arrangements for financing supplemental payments, because providers  were not retaining the Medicaid payments for which states had received  federal matching funds. CMS’s  initiative was a departure from the agency’s past oversight approach,  which did not focus on whether individual providers were retaining the  supplemental payments they received. CMS had not used any of the means  by which it typically provides information to states about the Medicaid  program, such as its published state Medicaid manual, standard letters  issued to all state Medicaid directors, or technical guidance manuals, to  inform states about the specific standards it used for reviewing and  approving states’ financing arrangements. The federal  government and states have a responsibility to administer the program in a  manner that assures expenditures benefit those low-income people for  whom benefits were intended. The  program’s long-term fiscal sustainability is important for beneficiaries,  providers, states, and the federal government. Related GAO Products

Medicaid Financing: Federal Oversight Initiative Is Consistent with  Medicaid Payment Principles but Needs Greater Transparency.
Why GAO Did This Study

Medicaid, a joint federal-state program, financed the health care for about 60 million low-income people in fiscal year 2005. States have considerable flexibility in deciding what medical services and individuals to cover and the amount to pay providers, and the federal government reimburses a proportion of states' expenditures according to a formula established by law. The Centers for Medicare & Medicaid Services (CMS) is the federal agency responsible for overseeing Medicaid. Growing pressures on federal and state budgets have increased tensions between the federal government and states regarding this program, including concerns about whether states were appropriately financing their share of the program. GAO's testimony describes findings from prior work conducted from 1994 through March 2007 on (1) certain inappropriate state Medicaid financing arrangements and their implications for Medicaid's fiscal integrity, and (2) outcomes and transparency of a CMS oversight initiative begun in 2003 to end such inappropriate arrangements.

What GAO Found

GAO has reported for more than a decade on varied financing arrangements that inappropriately increase federal Medicaid matching payments. In reports issued from 1994 through 2005, GAO found that some states had received federal matching funds by paying certain government providers, such as county operated nursing homes, amounts that greatly exceeded established Medicaid rates. States would then bill CMS for the federal share of the payment. However, these large payments were often temporary, since some states required the providers to return most or all of the amount. States used the federal matching funds obtained in making these payments as they wished. Such financing arrangements had significant fiscal implications for the federal government and states. The exact amount of additional federal Medicaid funds generated through these arrangements is unknown, but was in the billions of dollars. Because such financing arrangements effectively increase the federal Medicaid share above what is established by law, they threaten the fiscal integrity of Medicaid's federal and state partnership. They shift costs inappropriately from the states to the federal government, and take funding intended for covered Medicaid costs from providers, who do not under these arrangements retain the full payments. In 2003, CMS began an oversight initiative that by August 2006 resulted in 29 states ending inappropriate financing arrangements. Under the initiative, CMS sought satisfactory assurances that a state was ending financing arrangements that the agency found to be inappropriate. According to CMS, the arrangements had to be ended because the providers did not retain all payments made to them but returned all or a portion to the states. GAO reported in 2007 that, although CMS's initiative was consistent with Medicaid payment principles, it was not transparent in implementation. CMS had not used any of the means by which it normally provides states with information about Medicaid program requirements, such as the published state Medicaid manual, standard letters issued to all state Medicaid directors, or technical guidance manuals. Such guidance could be helpful to inform states about the specific standards it used for reviewing and approving states' financing arrangements. In May 2007, CMS issued a final rule that would limit Medicaid payments to government providers' costs. GAO has not reported on CMS's rule.