For example, states may choose to expand  coverage to seniors whose incomes are above statutory limits, and all  states have opted to provide prescription drug coverage. HHS denied two  demonstration proposals, from Delaware and Hawaii, because they were  not consistent with Pharmacy Plus guidelines. For  Florida, Illinois, South Carolina, and Wisconsin, total combined federal  and state Medicaid spending on the new drug benefit alone is expected to  be more than $3.6 billion over 5 years, of which the federal share would be  approximately $2.1 billion. HHS Has Not Ensured That Approved Demonstrations’ Spending Limits Will Be Budget Neutral

HHS has not adequately ensured that the spending limits it has approved  for Pharmacy Plus demonstrations will be budget neutral—in other words,  that the federal government will spend no more under the demonstrations  than without them. For all four demonstrations, HHS approved 5-year  spending limits based on projections of cost and beneficiary enrollment  growth that exceeded benchmarks that department officials told us they  considered in assessing the reasonableness of states’ demonstration  proposals. Neither HHS’s negotiations with the states nor the department’s rationale  for approving higher-than-benchmark growth rates is well documented. To determine budget neutral spending limits for the pharmacy  demonstrations, HHS officials told us they consider the following for  estimating growth in costs and enrollment through the course of the  demonstrations:    For cost growth per beneficiary, similar to guidelines for other types of  section 1115 demonstrations, HHS seeks to approve a growth rate equal  to the lower of either the state’s historical average annual growth in per- beneficiary cost (that is, the average annual rate for the 5 years before the  demonstration proposal) or the nationwide projected growth rate,  developed by CMS’s Office of the Actuary, for Medicaid cost per  beneficiary age 65 or older. Pharmacy Plus Savings Assumptions Not Well Supported

Neither data from state experience nor other research supports the  savings assumptions necessary for budget neutrality in the Pharmacy Plus  demonstrations. In developing their demonstration proposals, states  assumed that keeping low-income seniors healthy—thus preventing them  from spending down their financial resources on health services and  “diverting” them from Medicaid eligibility—would generate savings to help  offset the increased costs of providing a new drug benefit. Without state- specific evidence, HHS approved savings assumptions negotiated with the  states, including significant projected reductions in Medicaid senior  enrollment. Had  more conservative savings assumptions been used to estimate the  demonstrations’ costs, the proposals likely could not have been approved  as budget neutral. The dollar amounts of combined federal and state savings  projected under these assumptions in the demonstrations’ budget  neutrality calculations range from $480 million in Florida to $2 billion in  Illinois (see table 4). States Have Taken Few Steps to Evaluate Demonstrations, and HHS Has Not Ensured Sufficient or Timely Progress Reporting

As of February 2004, efforts by the states and HHS to evaluate and monitor  the four approved demonstrations, and to address some of the research  questions the Pharmacy Plus initiative raises, were in their early stages. The four states with approved demonstrations had taken few steps toward  implementing the evaluation plans required as a condition of approval, and  an independent evaluation of two of the demonstrations, contracted by  HHS and started in October 2002, was not scheduled to report until  September 2005. The information that HHS requires states to report has been insufficient  for determining whether the demonstrations are operating as intended. Recommendations for Executive Action

In light of our findings that the four HHS-approved Pharmacy Plus  demonstrations are likely to substantially increase federal Medicaid  spending, as previously approved Medicaid section 1115 demonstrations  have done; that HHS’s review process and basis for these approvals have  not been clearly set forth; and that approved demonstrations are not all  meeting evaluation and monitoring requirements, we are making seven  recommendations to the Secretary of HHS related to the section 1115  demonstration process. 1. 2. 3. 5.
Why GAO Did This Study

Under section 1115 of the Social Security Act, the Secretary of Health and Human Services may waive certain Medicaid requirements for states seeking to deliver services through demonstration projects. By policy, these demonstrations must not increase federal spending. GAO has previously reported concerns with HHS's approval process. GAO was asked to provide information on a new Medicaid section 1115 demonstration initiative called Pharmacy Plus, intended to allow states to cover prescription drugs for seniors not otherwise eligible for Medicaid. GAO reviewed the (1) approval status of state proposals, (2) extent to which HHS ensured that demonstrations are budget neutral, (3) basis for savings assumptions, and (4) federal and state steps to evaluate and monitor the demonstrations.

What GAO Found

From January 2002 through May 2004, HHS reviewed Pharmacy Plus proposals from 15 states and approved four: Florida, Illinois, South Carolina, and Wisconsin. These demonstrations offer prescription drug coverage to low-income seniors not otherwise eligible for Medicaid. HHS denied proposals from Delaware and Hawaii as inconsistent with demonstration guidelines; most of the rest were not under active review because HHS had not determined how new Medicare prescription drug legislation will affect proposed or operating Pharmacy Plus demonstrations. Over 5 years, the four approved demonstrations will provide prescription drug coverage to half a million low-income people age 65 or older, at a projected cost of about $3.6 billion, of which the federal share would be about $2.1 billion. HHS has not adequately ensured that the four approved demonstrations will be budget neutral, that is, that the federal government will not spend more with the demonstrations than without them. HHS approved the demonstrations' 5-year spending limits using projections of cost and beneficiary enrollment growth that exceeded benchmarks that HHS said it considered in assessing budget neutrality, specifically, states' recent average growth rates and projections for Medicaid program growth nationwide. Neither HHS's negotiations with the states nor its rationale for approving higher growth rates is documented. Using the benchmark growth rates, GAO estimates that none of the four demonstrations will be budget neutral and federal spending may increase significantly, for example, by more than $1 billion in Illinois and $416 million in Wisconsin over 5 years. Unrealistic savings assumptions also contribute to demonstration spending limits that are not likely to be budget neutral. States assumed that keeping low-income seniors healthy--thus preventing them from spending down their financial resources on health services and "diverting" them from Medicaid eligibility--would generate sufficient savings to offset the increased costs of providing a new drug benefit. GAO found neither state experience nor other research to support such savings. Without state-specific evidence, HHS approved savings assumptions for the four states ranging from $480 million to $2 billion per state over 5 years. Had more conservative assumptions been used to estimate demonstration savings, the proposals likely could not have been approved as budget neutral. Efforts by the states and HHS to evaluate and monitor the Pharmacy Plus demonstrations are in their early stages. The four states have taken few steps to put their own required evaluation plans into practice, and an independent evaluation contracted by HHS and started in October 2002 is scheduled to report in September 2005. In the interim, HHS has not ensured that all states meet requirements for progress reporting on the demonstrations. The information that states have submitted is often insufficient for determining whether the demonstrations are operating as intended, and this shortcoming will limit HHS's oversight capability.