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Testimony:

Before the Subcommittee on Health, Committee on Energy and Commerce, 
House of Representatives:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 9:30 a.m. EST:

Thursday, March 18, 2004:

Medicaid:

Intergovernmental Transfers Have Facilitated State Financing Schemes:

Statement of Kathryn G. Allen:

Director, Health Care--Medicaid and Private Health Insurance Issues:

GAO-04-574T:

GAO Highlights:

Highlights of GAO-04-574T, a testimony before the Subcommittee on 
Health, Committee on Energy and Commerce, House of Representatives:

Why GAO Did This Study:

Medicaid, the federal-state health financing program for many of the 
nation's most vulnerable populations, finances health care for an 
estimated 53 million low-income Americans, at a cost of $244 billion in 
2002. Congress structured Medicaid as a shared fiduciary responsibility 
of the federal government and the states, with the federal share of 
each state's Medicaid payments determined by a formula specified by 
law. In 2002, the federal share of each state's expenditures ranged 
from 50 to 76 percent under this formula; in the aggregate, the federal 
share of total Medicaid expenditures was 57 percent.

Some states have used a number of creative financing schemes that take 
advantage of statutory and regulatory loopholes to claim excessive 
federal matching payments. GAO was asked to summarize prior work on how 
some of these schemes operated, including the role of intergovernmental 
transfers (IGT), which enable government entities--such as the state 
and local-government facilities like county nursing homes--to transfer 
funds among themselves. GAO was also asked to discuss these schemes' 
effects on the federal-state Medicaid partnership and to discuss what 
can be done to curtail them.

What GAO Found:

For many years states have used varied financing schemes, sometimes 
involving IGTs, to inappropriately increase federal Medicaid matching 
payments. Some states, for example, receive federal matching funds on 
the basis of large Medicaid payments to certain providers, such as 
nursing homes operated by local governments, which greatly exceed 
established Medicaid rates. In reality, the large payments are often 
temporary, since states can require the local-government providers to 
return all or most of the money to the states. States can use these 
funds--which essentially make a round-trip from the states to providers 
and back to the states--at their own discretion.

States' financing schemes undermine the federal-state Medicaid 
partnership, as well as the program's fiscal integrity, in at least 
three ways.

The schemes effectively increase the federal matching rate established 
under federal law by increasing federal expenditures while state 
contributions remain unchanged or even decrease. GAO estimated that one 
state effectively increased the federal matching share of its total 
Medicaid expenditures from 59 percent to 68 percent in state fiscal 
year 2001, by obtaining excessive federal funds and using these as the 
state's share of other Medicaid expenditures.

There is no assurance that these increased federal matching payments 
are used for Medicaid services, since states use funds returned to them 
via these schemes at their own discretion. In examining how six states 
with large schemes used the federal funds they generated, GAO found 
that one state used the funds to help finance its education programs, 
and others deposited the funds into state general funds or other 
special state accounts that could be used for non-Medicaid purposes or 
to supplant the states' share of other Medicaid expenditures.

The schemes enable states to pay a few public providers amounts that 
well exceed the costs of services provided, which is inconsistent with 
the statutory requirement that states ensure economical and efficient 
Medicaid payments. In one state, GAO found that the state's proposed 
scheme increased the daily federal payment per Medicaid resident from 
$53 to $670 in six local-government-operated nursing homes.

Although Congress and the Centers for Medicare & Medicaid Services have 
acted to curtail financing schemes when detected, problems persist. 
States can still claim excessive federal matching funds for payments 
exceeding public facilities' actual costs. GAO suggests that Congress 
consider a recommendation open from prior work, that is, to prohibit 
Medicaid payments that exceed actual costs for any government-owned 
facility.

For more information, contact Kathryn G. Allen at (202) 512-7118.

[End of section]

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today as you explore the issue of states' use 
of intergovernmental transfers in the federal-state Medicaid program. 
Medicaid finances health care for an estimated 53 million low-income 
Americans at a cost of $244 billion.[Footnote 1] Medicaid is the third-
largest mandatory spending program in the federal budget and one of the 
largest components of state budgets, second only to education. The 
program fulfills a crucial national role by providing health coverage 
for a variety of vulnerable populations, including low-income families 
with children and certain people who are elderly, blind, or disabled. 
Congress has structured Medicaid as a shared responsibility of the 
federal government and the states, with the federal share of each 
state's Medicaid payments determined by a formula specified by law. The 
Centers for Medicare & Medicaid Services (CMS), within the Department 
of Health and Human Services (HHS), is the federal agency responsible 
for the program, and the states design and administer their programs 
with considerable discretion and flexibility.

For more than a decade, states have used a number of creative financing 
schemes to inappropriately increase the federal share of Medicaid 
expenditures. Intergovernmental transfers, or IGTs, are one of the 
tools that have enabled them to do so. State and local governments use 
IGTs to carry out their shared governmental functions, such as 
collecting and redistributing revenues to provide essential government 
services. But by using IGTs, states can also transfer funds to or from 
local-government entities, such as government-owned nursing homes, as 
part of complex financing schemes that inappropriately boost the 
federal share of Medicaid costs. In my testimony today, I will (1) 
describe how some state financing schemes have operated, including the 
role of IGTs in these schemes; (2) discuss how such financing schemes 
compromise the federal-state partnership that is the foundation of the 
Medicaid program; and (3) discuss what can be done to further curtail 
state financing schemes. My testimony today is based on our prior work 
assessing state financing schemes and federal oversight of them. We 
conducted this body of work from June 1993 through January 2004 in 
accordance with generally accepted government auditing 
standards.[Footnote 2]

In summary, for many years states have used varied financing schemes, 
sometimes involving IGTs, to inappropriately increase federal matching 
payments. Taking advantage of statutory and regulatory loopholes, some 
states, for example, have made large Medicaid payments to certain 
providers, such as nursing homes operated by local governments, which 
have greatly exceeded the established Medicaid payment rate. These 
state expenditures would enable states to claim large federal matching 
payments. Such transactions create the illusion of valid expenditures 
for services delivered by local-government providers to Medicaid-
eligible individuals. In reality, the spending is often only temporary 
because states require the local governments to return all or most of 
the money to the states through IGTs. Once states receive the returned 
funds, they can use them to supplant the states' own share of future 
Medicaid spending or even use them for non-Medicaid purposes. Because 
such arrangements effectively increase the federal Medicaid share above 
what is set under law, they violate the fiscal integrity of Medicaid's 
federal-state partnership. As new schemes have come to light, Congress 
and CMS have taken legislative and regulatory actions to curtail them; 
nonetheless, problems remain. We believe Congress and CMS should 
continue their efforts to preclude states' ability to claim excessive 
federal Medicaid payments, and we suggest that Congress consider a 
recommendation that remains open from our prior work, that is, to 
prohibit Medicaid payments that exceed actual costs for any government-
owned facility.

Background:

Title XIX of the Social Security Act authorizes federal funding to 
states for Medicaid, which finances health care services including 
acute and long-term care for certain low-income, aged, or disabled 
individuals. States have considerable flexibility in designing and 
operating their Medicaid programs. Within broad federal requirements, 
each state determines which services to cover and to what extent, 
establishes its own eligibility requirements, sets provider payment 
rates, and develops its own administrative structure. In addition to 
groups for which federal law requires coverage--such as children and 
pregnant women at specified income levels and certain persons with 
disabilities--states may choose to expand eligibility or add benefits 
that the statute defines as optional.

Medicaid is an open-ended entitlement: states are generally obligated 
to pay for covered services provided to eligible individuals, and the 
federal government is obligated to pay its share of a state's 
expenditures under a CMS-approved state Medicaid plan. The federal 
share of each state's Medicaid expenditures is based on a statutory 
formula linked to a state's per capita income in relation to national 
per capita income. In 2002, the specified federal share of each state's 
expenditures ranged from 50 percent to 76 percent; in the aggregate, 
the federal share of total Medicaid expenditures was 57 
percent.[Footnote 3] The Social Security Act provides that up to 60 
percent of the state share of Medicaid spending can come from local-
government revenues and sources.[Footnote 4] Some states design their 
Medicaid programs to require local governments to contribute to the 
programs' costs.

Some State Financing Schemes Have Used IGTs to Create the Illusion of 
Valid Medicaid Expenditures:

For more than a decade, some states have used various financing 
schemes, some involving IGTs, to create the illusion of a valid state 
Medicaid expenditure to a health care provider. This payment has 
enabled states to claim federal matching funds regardless of whether 
the program services paid for had actually been provided. As various 
schemes have come to light, Congress and CMS[Footnote 5] have taken 
actions to curtail them (see table 1). Many of these schemes involve 
payment arrangements between the state and government-owned or 
government-operated providers, such as local-government-operated 
nursing homes.

Table 1: Medicaid Financing Schemes Used to Inappropriately Generate 
Federal Payments and Federal Actions to Address Them:

Financing arrangement: Excessive payments to state health facilities; 
Description: States made excessive Medicaid payments to state-owned 
health facilities, which subsequently returned these funds to the state 
treasuries; 
Action taken: In 1987, the Health Care Financing Administration (HCFA) 
issued regulations that established payment limits specifically for 
inpatient and institutional facilities operated by states.

Financing arrangement: Provider taxes and donations; 
Description: Revenues from provider-specific taxes on hospitals and 
other providers and from provider "donations" were matched with federal 
funds and paid to the providers. These providers could then return most 
of the federal payment to the states; 
Action taken: The Medicaid Voluntary Contribution and Provider-Specific 
Tax Amendments of 1991 essentially barred certain provider donations, 
placed a series of restrictions on provider taxes, and set other 
restrictions for state contributions.

Financing arrangement: Excessive disproportionate share hospital (DSH) 
payments; 
Description: DSH payments are meant to compensate those hospitals that 
care for a disproportionate number of low-income patients. Unusually 
large DSH payments were made to certain hospitals, which then returned 
the bulk of the state and federal funds to the state; 
Action taken: The Omnibus Budget Reconciliation Act of 1993 placed 
limits on which hospitals could receive DSH payments and capped both 
the amount of DSH payments states could make and the amount individual 
hospitals could receive.

Financing arrangement: Excessive DSH payments to state mental 
hospitals; 
Description: A large share of DSH payments were paid to state-operated 
psychiatric hospitals, where they were used to pay for services not 
covered by Medicaid or were returned to the state treasuries; 
Action taken: The Balanced Budget Act of 1997 limited the proportion of 
a state's DSH payments that can be paid to state psychiatric hospitals.

Financing arrangement: Upper payment limit (UPL) for local government 
health facilities; 
Description: In an effort to ensure that Medicaid payments are 
reasonable, federal regulations prohibit Medicaid from paying more than 
a reasonable estimate of the amount that would be paid under Medicare 
payment principles for comparable services. This UPL applies to 
payments aggregated across a class of facilities and not for individual 
facilities. As a result of the aggregate upper limit, states were able 
to make large supplemental payments to a few local public health 
facilities, such as hospitals and nursing homes. The local government 
health facilities then returned the bulk of the state and federal 
payments to the states; 
Action taken: The Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 required HCFA to issue a final regulation 
that established a separate payment limit for each of several classes 
of local government health facilities. In 2002, CMS issued a regulation 
that further lowered the payment limit for local public hospitals. 

Source: GAO.

[End of table]

A variant of these creative financing arrangements involves states' 
exploitation of Medicaid's upper payment limit (UPL) 
provisions.[Footnote 6] These schemes share certain characteristics, 
including IGTs, with other financing schemes from prior years (see 
table 1). In particular, these arrangements create the illusion that a 
state has made a large Medicaid payment--separate from and in addition 
to Medicaid expenditures that providers have already received for 
covered services--which enables the state to obtain a federal matching 
payment. In reality, the large payment is temporary, since the funds 
essentially make a round-trip from the state to the Medicaid providers 
and back to the state. As a result of such round-trip arrangements, 
states obtain excessive federal Medicaid matching funds while their own 
state expenditures remain unchanged or even decrease. Figure 1, which 
is based on our earlier work, illustrates how this mechanism operated 
in one state (Michigan).[Footnote 7]

Figure 1: One State's Arrangement to Increase Federal Medicaid Payments 
Inappropriately:

[See PDF for image]

[End of figure]

As shown in figure 1, the state made Medicaid payments totaling $277 
million to certain county health facilities; the total included $155 
million in federal funds and $122 million in state funds (step 1). On 
the same day that the county health facilities received the funds, they 
transferred all but $6 million back to the state, which retained $271 
million (steps 2 and 3). From this transaction, the state realized a 
net gain of $149 million over the state's original outlay of $122 
million. In cases like this, local-government facilities can use IGTs 
to easily return the excessive Medicaid payments to the state via 
electronic wire transfers. We have found that these round-trip 
transfers can be accomplished in less than 1 hour. The IGT is critical, 
because if the payment does not go back to the state, the state gains 
no financial benefit and actually loses from the arrangement because it 
has simply paid the provider more than its standard Medicaid payment 
rate for the services. In a variant of this practice, some states 
require a few counties to initiate the transaction, by taking out bank 
loans for the total amount the states determined they can pay under the 
UPL. The counties wire the funds to the states, which then send most or 
all of the funds back to the counties as Medicaid payments. The 
counties use these "Medicaid payments" to repay the bank loans. 
Meanwhile, the states claim federal matching funds on the total amount.

Consistent with past actions, Congress and CMS have taken steps to 
curtail UPL financing schemes when they have come to light. At the 
direction of Congress,[Footnote 8] the agency--then called the Health 
Care Financing Administration (HCFA)--finalized a regulation in 2001 
that significantly narrowed the UPL loophole by limiting the amount of 
excessive funds states could claim.[Footnote 9] HCFA estimated that its 
2001 regulation would reduce the federal government's financial 
liability due to inappropriate UPL arrangements by $55 billion over 10 
years;[Footnote 10] a related 2002 regulation was estimated to yield an 
additional $9 billion over 5 years.[Footnote 11] CMS recognized that 
some states had developed a long-standing reliance on these excessive 
UPL funds, and the law and regulation authorized transition periods of 
up to 8 years for states to come into compliance with the new 
requirements.[Footnote 12] As we recently reported,[Footnote 13] 
however, even under the new regulations, states can still aggregate 
payments to all local-government nursing homes under one UPL to 
generate excessive federal matching payments beyond their standard 
Medicaid claims. For example, CMS information about states complying 
with the new regulation indicates that, through UPL arrangements with 
public nursing homes and other public facilities, states can still 
claim about $2.2 billion annually in federal matching funds exceeding 
their standard Medicaid claims.

Financing Schemes Undermine Medicaid's Federal-State Partnership:

States' use of these creative financing mechanisms undermines the 
federal-state Medicaid partnership as well as the program's fiscal 
integrity in at least three ways.

First, state financing schemes effectively increase the federal 
matching rate established under federal law by increasing federal 
expenditures while state contributions remain unchanged or even 
decrease. For example, for one state we analyzed (Wisconsin), we 
estimated that by obtaining excessive federal matching payments and 
using these funds as the state share of other Medicaid expenditures, 
the state effectively increased the federal matching share of its total 
Medicaid expenditures from 59 percent to 68 percent in state fiscal 
year 2001.[Footnote 14] The state did so by generating nearly $400 
million in excessive federal matching funds via round-trip arrangements 
with three counties. Similarly, the HHS Office of the Inspector General 
found that a comparably structured arrangement in Pennsylvania 
effectively increased that state's statutorily determined matching rate 
from 54 percent to about 65 percent.[Footnote 15]

Second, CMS has no assurance that these increased federal matching 
payments are used for Medicaid services. Federal Medicaid matching 
funds are intended for Medicaid-covered services for the Medicaid-
eligible individuals on whose behalf payments are made.[Footnote 16] 
Under state financing schemes, however, states can use funds returned 
to them at their own discretion. We recently examined how six states 
with large UPL financing schemes involving nursing homes used the 
federal funds they generated.[Footnote 17] As in the past, some states 
in our review deposited excessive funds from UPL arrangements into 
their general funds, which the states may or may not use for Medicaid 
purposes. For example, one state (Oregon) has used funds generated by 
its UPL arrangement to help finance education programs. Table 2 
provides further information on how states used their UPL funds in 
recent years, as reported by the six states we reviewed.

Table 2: Selected States' Use of Funds Generated through UPL 
Arrangements:

State: Michigan; Use: Funds generated by the state's UPL arrangement 
are deposited in the state's general fund but are tracked separately as 
a local fund source. These local funds are earmarked for future 
Medicaid expenses and used as the state match, effectively recycling 
federal UPL matching funds to generate additional federal Medicaid 
matching funds.

State: New York; Use: Funds generated by the state's UPL arrangement 
are deposited into its Medical Assistance Account. Proceeds from this 
account are used to pay for the state share of the cost of Medicaid 
payments, effectively recycling federal funds to generate additional 
federal Medicaid matching funds.

State: Oregon; Use: Funds generated by the state's UPL arrangement are 
being used to help finance education programs and other non-Medicaid 
health programs. UPL matching funds recouped from providers are 
deposited into a special UPL fund. Facing a large budget deficit, a 
February 2002 special session of the Oregon legislature allocated the 
fund balance, about $131 million, to finance kindergarten to 12th grade 
education programs. According to state budget documents, the UPL funds 
are being used to replace financing from the state's general fund.

State: Pennsylvania; Use: Funds generated by the state's UPL 
arrangement are used for a number of Medicaid and non-Medicaid 
purposes, including long-term care and behavioral health services. In 
state fiscal years 2001-2003, the state generated $2.4 billion in 
excessive federal matching funds, of which 43 percent was used for the 
state share of Medicaid expenses (recycled to generate additional 
federal matching funds), 6 percent was used for non-Medicaid purposes, 
and 52 percent was unspent and available for non-Medicaid uses. 
(Percentages do not total 100 percent because of rounding.).

State: Washington; Use: Funds generated by the state's UPL arrangement 
are commingled with a number of other revenue sources in a state fund. 
The fund is used for various state health programs, including a state-
funded basic health plan, public health programs, and health benefits 
for home care workers. A portion of the fund is also transferred to the 
state's general fund. The fund is also used for selected Medicaid 
services and the State Children's Health Insurance Program, which 
effectively recycles the federal funds to generate additional federal 
Medicaid matching funds.

State: Wisconsin; Use: Funds generated by the state's UPL arrangement 
are deposited in a state fund, which is used to pay for Medicaid-
covered services in both public and private nursing homes. Because the 
state uses these payments as the state share, the federal funds are 
effectively recycled to generate additional federal Medicaid matching 
funds.

Source: GAO.

[End of table]

Third, these state financing schemes undermine the fiscal integrity of 
the Medicaid program because they enable states to make to providers 
payments that significantly exceed their costs. In our view, this 
practice is inconsistent with the statutory requirement that states 
ensure that Medicaid payments are economical and efficient.[Footnote 
18] Under UPL financing arrangements, some states pay a few public 
providers excessive amounts, well beyond the cost of services provided. 
We found, for example, that Virginia's proposed arrangement would allow 
the state to pay six local-government nursing homes, on average, $670 
in federal funds per Medicaid nursing home resident per day--more than 
12 times the $53 daily federal payment these nursing homes normally 
received, on average, per Medicaid resident.[Footnote 19]

Further Federal Action Would Help Address Continuing Concerns with 
State Financing Schemes:

Although CMS and the Congress have often acted to curtail states' 
financing schemes, problems persist. Improved CMS oversight and 
additional congressional action could help address continuing concerns 
with UPL financing schemes and other inappropriate arrangements.

We recently reported that CMS has taken several actions to improve its 
oversight of state UPL arrangements, including forming a team to 
coordinate its review of states' proposed and continuing arrangements, 
drafting internal guidelines for reviewing state methods for 
calculating UPL amounts, and conducting financial reviews that have 
identified hundreds of millions of dollars in improper claims.[Footnote 
20] Starting in August 2003, when considering states' proposals to 
change how they would pay nursing homes or other institutions, CMS also 
began to ask states to provide previously unrequested information. The 
information includes sources of state matching funds for supplemental 
payments to Medicaid providers, the extent to which total payments 
would exceed providers' costs, how a state would use the additional 
funds, and whether a state required providers to return payments (and, 
if so, how the state planned to spend such funds). As of October 2003, 
CMS indicated that it had asked 30 states with proposed state Medicaid 
plan amendments to provide additional information, and the agency was 
in the process of receiving and reviewing states' initial responses.

We also reported, however, that CMS's efforts do not go far enough to 
ensure that states' UPL claims are for Medicaid-covered services 
provided to eligible beneficiaries. Moreover, we remain concerned that 
in carrying out its oversight responsibilities, CMS at times takes 
actions inconsistent with its stated goals for limiting states' use of 
these arrangements. For example, we previously reported that while the 
agency was attempting to narrow the glaring UPL loophole in 2001, it 
was allowing additional states to engage in the very schemes it was 
trying to shut down, at a substantial cost to the federal 
government.[Footnote 21] More recently, we reported that CMS's granting 
two states the longest available transition period of 8 years, for 
phasing out excessive claims under their UPL arrangements, was not 
consistent with the agency's stated goals. We estimated that, as a 
result of these decisions, these two states can claim about $633 
million more in federal matching funds under their 8-year transition 
periods than they could have claimed under shorter transition periods 
consistent with CMS's stated policies and goals.[Footnote 22]

In our view, additional congressional action also could help address 
continuing concerns about Medicaid financing schemes. Although Congress 
and CMS have taken significant steps to help curb inappropriate UPL 
arrangements and other financing schemes, states can still claim 
federal matching funds for more than a public provider's actual costs 
of providing Medicaid-covered services. As long as states are allowed 
to make payments exceeding a facility's actual costs, the loophole 
remains. A recommendation open from one of our earlier reports would, 
if implemented, close the existing loophole and thus mitigate these 
continuing concerns. We previously recommended that Congress consider 
prohibiting Medicaid payments that exceed actual costs for any 
government-owned facility.[Footnote 23] If this recommendation were 
implemented, a facility's payment would be limited to the reasonable 
costs of covered services it actually provides to eligible 
beneficiaries, thus eliminating the possibility of the exorbitant 
payments that are now passed through individual facilities to states. 
The Administration appears to support such legislative action; the 
President's budget for fiscal year 2005 sets forth a legislative 
proposal to cap Medicaid payments to government providers (such as 
public hospitals or county-owned nursing homes) to the actual cost of 
providing services to Medicaid beneficiaries.[Footnote 24]

Conclusions:

The term "IGTs" has come to be closely associated--if not synonymous--
with the abusive financing schemes undertaken by some states in 
connection with illusory payments for Medicaid services to claim 
excessive federal matching funds. IGTs are a legitimate state budget 
tool and not problematic in themselves. But when they are used to carry 
out questionable financial transactions that inappropriately shift 
state Medicaid costs to the federal government, they become 
problematic.

We believe the problem goes beyond IGTs. An observation we made in our 
first report on this issue in 1994 is as valid today as it was then: in 
our view, the Medicaid program should not allow states to benefit from 
arrangements where federal funds purported to benefit providers are 
given to providers with one hand, only to be taken back with the 
other.[Footnote 25] State financing schemes, variants of which have 
been applied for a decade or longer, circumvent the federal and state 
funding balance set under law. They have also resulted in the diversion 
of federal funds intended to pay for covered services for Medicaid-
eligible individuals to whatever purpose a state chooses.

Although Congress and CMS have often acted to address Medicaid 
financing schemes once they become apparent, new variations continue to 
emerge. Experience shows that some states are likely to continue 
looking for creative means to supplant state financing, making a 
compelling case for the Congress and CMS to sustain vigilance over 
federal Medicaid payments. Understandably, states that have relied on 
federal funding as a staple for their own share of Medicaid spending 
are feeling the budgetary pressure from the actual or potential loss of 
these funds. The continuing challenge remains to find the proper 
balance between states' flexibility to administer their Medicaid 
programs and the shared federal-state fiduciary responsibility to 
manage program finances efficiently and economically in a way that 
ensures the program's fiscal integrity.

Mr. Chairman, this concludes my prepared statement. I will be happy to 
answer any questions that you or Members of the Subcommittee may have.

Contact and Acknowledgments:

For future contacts regarding this testimony, please call Kathryn G. 
Allen at (202) 512-7118. Katherine Iritani, Tim Bushfield, Ellen W. 
Chu, Helen Desaulniers, Behn Miller Kelly, and Terry Saiki also made 
key contributions to this testimony.

[End of section]

Related GAO Products:

Medicaid: Improved Federal Oversight of State Financing Schemes Is 
Needed. GAO-04-228. Washington, D.C.: February 13, 2004.

Major Management Challenges and Program Risks: Department of Health and 
Human Services. GAO-03-101. Washington, D.C.: January 2003.

Medicaid: HCFA Reversed Its Position and Approved Additional State 
Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001.

Medicaid: State Financing Schemes Again Drive Up Federal Payments. GAO/
T-HEHS-00-193. Washington, D.C.: September 6, 2000.

State Medicaid Financing Practices. GAO/HEHS-96-76R. Washington, D.C.: 
January 23, 1996.

Michigan Financing Arrangements. GAO/HEHS-95-146R. Washington, D.C.: 
May 5, 1995.

Medicaid: States Use Illusory Approaches to Shift Program Costs to 
Federal Government. GAO/HEHS-94-133. Washington, D.C.: August 1, 1994.

FOOTNOTES

[1] Estimated federal-state cost is for fiscal year 2002, the latest 
year for which data are available.

[2] See related GAO products at the end of this statement.

[3] In May 2003, Congress passed the Jobs and Growth Tax Relief 
Reconciliation Act, which appropriated $10 billion for a temporary 
increase in the federal matching rate for states. This across-the-board 
increase of 2.95 percent was effective from April 1, 2003, through June 
30, 2004.

[4] See 42 U.S.C.  1396a(a)(2) (2000).

[5] In June 2001, the Health Care Financing Administration (HCFA) was 
renamed the Centers for Medicare & Medicaid Services (CMS). We continue 
to refer to HCFA throughout this testimony where agency actions were 
taken under its former name.

[6] The UPL sets the ceiling on what the federal government will pay as 
its share of the Medicaid costs for different classes of covered 
services and often exceeds what states actually pay providers for 
Medicaid-covered services. States were able to exploit the UPL loophole 
by paying nursing homes and hospitals owned by local governments much 
more than the established Medicaid payment rate and requiring the 
providers to return, through IGTs, the excess payments to the state.

[7] See U.S. General Accounting Office, Medicaid: States Use Illusory 
Approaches to Shift Program Costs to Federal Government, GAO/
HEHS-94-133 (Washington, D.C.: Aug. 1, 1994), and Major Management 
Challenges and Program Risks: Department of Health and Human Services,, 
GAO-03-101 (Washington, D.C.: January 2003).

[8] The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 directed HCFA to issue a final regulation to 
limit states' ability to claim excessive federal matching funds through 
UPL arrangements. See Pub. L. No. 106-554, App. F,  705(a), 114 Stat. 
2763A-463, 575-576 (2000).

[9] Specifically, HCFA eliminated states' ability to combine, or 
aggregate, UPLs across private and local-government providers. Before 
this regulation, a state could claim excessive payments on the basis of 
the combined amount potentially payable to all private and local-
government providers in the state. The regulation established separate 
UPLs for separate classes of non-state-government facilities (those 
owned by local governments), including inpatient hospitals, nursing 
homes, and intermediate care facilities for the mentally retarded. See 
66 Fed. Reg. 3148 (2001) (codified at 42 C.F.R. part 447 (2002)).

[10] HCFA's estimate covered UPL arrangements for nursing homes, 
inpatient hospital services, and outpatient hospital services.

[11] The 2002 regulation reduced the upper limit for local-government 
hospitals from 150 percent to 100 percent.

[12] The length of a state's transition period was to be based in part 
on how long the state had had in place a UPL arrangement meeting 
certain specified criteria. During the assigned transition period--
established in 1-, 2-, 5-, or 8-year intervals--excessive UPL payments 
were to be phased out.

[13] See U.S. General Accounting Office, Medicaid: Improved Federal 
Oversight of State Financing Schemes Is Needed, GAO-04-228 (Washington 
D.C.: Feb. 13, 2004).

[14] U.S. General Accounting Office, Medicaid: HCFA Reversed Its 
Position and Approved Additional State Financing Schemes, GAO-02-147 
(Washington D.C.: Oct. 30, 2001), and GAO-04-228.

[15] U.S. Department of Health and Human Services, Office of the 
Inspector General, Review of the Commonwealth of Pennsylvania's Use of 
Intergovernmental Transfers to Finance Medicaid Supplementation 
Payments to County Nursing Facilities, A-03-00-00203 (Washington, D.C.: 
2001).

[16] See 42 U.S.C.  1396 and  1396d(a).

[17] GAO-04-228.

[18] See 42 U.S.C.  1396a(a)(30)(A).

[19] GAO-02-147.

[20] GAO-04-228.

[21] GAO-02-147.

[22] GAO-04-228.

[23] U.S. General Accounting Office, Medicaid: States Use Illusory 
Approaches to Shift Program Costs to Federal Government, GAO/
HEHS-94-133 (Washington D.C.: Aug. 1, 1994).

[24] U.S. Department of Health and Human Services, Budget in Brief FY 
2005 (Washington, D.C.: Mar. 1, 2004), http://www.hhs.gov/budget/
docbudget.htm (downloaded Mar. 15, 2004).

[25] GAO/HEHS-94-133.