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entitled 'Medicaid Waivers: HHS Approvals of Pharmacy Plus 
Demonstrations Continue to Raise Cost and Oversight Concerns' which was 
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Report to the Committee on Finance, U.S. Senate: 

United States General Accounting Office: 

GAO: 

June 2004: 

Medicaid Waivers: 

HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost 
and Oversight Concerns: 

GAO-04-480: 

GAO Highlights: 

Highlights of GAO-04-480, a report to the Committee on Finance, U.S. 
Senate: 

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.

What GAO Recommends: 

GAO recommends that the Secretary of HHS strengthen the processes for 
approving and overseeing Pharmacy Plus and other Medicaid section 1115 
demonstrations. HHS concurred with several recommendations for 
strengthening demonstration approval and oversight but disagreed that 
review criteria should be clarified and applied to already-approved 
demonstrations. GAO maintains that the criteria for HHS’s approvals 
should be clear and consistently applied.

www.gao.gov/cgi-bin/getrpt?GAO-04-480.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Kathryn G. Allen at (202) 
512-7118.

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

HHS Has Reviewed 15 Pharmacy Plus Proposals and Approved 4: 

HHS Has Not Ensured That Approved Demonstrations' Spending Limits Will 
Be Budget Neutral: 

Pharmacy Plus Savings Assumptions Not Well Supported: 

States Have Taken Few Steps to Evaluate Demonstrations, and HHS Has Not 
Ensured Sufficient or Timely Progress Reporting: 

Conclusions: 

Recommendations for Executive Action: 

Agency and State Comments and Our Evaluation: 

Appendixes

Appendix I: Calculating a State's Pharmacy Plus Spending Limit for All 
Medicaid Seniors: 

Appendix II: Denied, Withdrawn, and Pending Pharmacy Plus Demonstration 
Proposals as of May 2004: 

Appendix III: Comments from the Department of Health and Human 
Services: 

GAO's Response to the Department of Health and Human Services' Specific 
Comments on GAO's Findings: 

Appendix IV: Comments from the State of Florida: 

Appendix V: Comments from the State of Illinois: 

Appendix VI: Comments from the State of Wisconsin: 

GAO's Response to the State of Wisconsin's Specific Comments: 

Appendix VII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Highlights of Pharmacy Plus Demonstrations Approved as of May 
2004: 

Table 2: HHS-Approved, State Historical, and CMS Actuary Growth Rates: 

Table 3: HHS-Approved and Benchmark 5-Year Spending Limits: 

Table 4: States' Projections of Medicaid Senior Populations after 5 
Years, with and without HHS-Approved Pharmacy Plus Demonstrations: 

Figure: 

Figure 1: Steps to Calculate Projected 5-Year Without-Demonstration 
Costs: 

Abbreviations: 

CBO: Congressional Budget Office: 

CMS: Centers for Medicare & Medicaid Services: 

FPL: federal poverty level: 

HHS: Department of Health and Human Services: 

HIFA: Health Insurance Flexibility and Accountability: 

MMA: Medicare Prescription Drug, Improvement, and Modernization Act of 
2003: 

OMB: Office of Management and Budget: 

PACE: Pharmaceutical Assistance Contract for the Elderly: 

PACENET: Pharmaceutical Assistance Contract for the Elderly Needs 
Enhancement Tier: 

SCHIP: State Children's Health Insurance Program: 

SSA: Social Security Act: 

United States General Accounting Office: 

Washington, DC 20548: 

June 30, 2004: 

The Honorable Charles Grassley: 
Chairman: 
The Honorable Max Baucus: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

Under section 1115 of the Social Security Act (SSA), the Secretary of 
Health and Human Services may waive certain statutory requirements for 
Medicaid--the joint federal and state program financing health care for 
low-income families, certain seniors, and disabled individuals--in 
connection with experimental, pilot, or demonstration projects that are 
likely to promote program objectives.[Footnote 1] Because of the 
projects' experimental nature, the Department of Health and Human 
Services (HHS) requires demonstrations authorized under section 1115 to 
include measurable objectives and an evaluation component. In addition, 
since the early 1980s, HHS has required states to show that their 
proposals for section 1115 demonstrations are "budget neutral" for the 
federal government: that is, a proposed demonstration cannot raise 
federal expenditures beyond what they would be under a state's existing 
program.

In January 2002, HHS announced the Medicaid Pharmacy Plus section 1115 
demonstration initiative, offering states the opportunity to provide a 
prescription drug benefit to two groups--seniors (people age 65 or 
older) and disabled individuals--whose incomes, although low, exceed 
levels that would qualify them for full Medicaid eligibility. Under 
this initiative, HHS and the Centers for Medicare & Medicaid Services 
(CMS), the agency within HHS that has primary responsibility for 
reviewing the demonstration proposals, encourage states to test over 5 
years whether extending a drug benefit to seniors who are not eligible 
for Medicaid would maintain these seniors' health and hold down overall 
Medicaid costs.[Footnote 2]

Over the past decade, Congress and others have raised concerns about 
the extent to which HHS has ensured that approved section 1115 
demonstration waivers promote the goals and fiscal integrity of both 
Medicaid and the State Children's Health Insurance Program (SCHIP). In 
particular, Congress has been concerned about HHS's waiver approval 
process and the federal costs associated with some of the 
demonstrations. Our past work has found, for example, that HHS's 
process for approving demonstrations is not always clear or open to 
public input and that the department has not always ensured the budget 
neutrality of approved demonstrations, thereby raising federal 
expenditures.[Footnote 3]

You asked us for information on the Pharmacy Plus initiative. We 
focused our review on the following four questions: 

1. How many states have applied for Pharmacy Plus demonstration 
waivers, and what is the status of their proposals?

2. To what extent has HHS ensured that the approved demonstrations are 
budget neutral to the federal government?

3. How well supported are states' assumptions about savings that may 
accrue to Medicaid from the Pharmacy Plus demonstration waivers?

4. What steps are states and HHS taking to evaluate approved 
demonstrations and to monitor if they are functioning as intended?

Our work is based on a review and analysis of Pharmacy Plus 
demonstration waiver proposals considered and approved by HHS from 
January 2002 through May 2004. Our analysis covers only demonstration 
proposals submitted in response to HHS's Pharmacy Plus 
initiative.[Footnote 4] To determine the status of demonstrations under 
this initiative, we analyzed HHS data on all proposals it considered, 
including their number, outcomes, and characteristics. For approved 
demonstrations, we analyzed the applications as submitted by the 
states; HHS decision memorandums and approval letters; the applications 
as ultimately approved; HHS's terms and conditions for approved 
demonstrations; and, when available, the states' plans (called 
operational protocols) for how the demonstrations will operate. We also 
discussed the process of review and approval with officials of the 
reviewing agencies--HHS, CMS, and the Office of Management and Budget 
(OMB)--and we obtained information from officials representing the 
states with approved demonstrations. To assess budget neutrality, we 
obtained available budget justifications and documentation from state 
and federal officials and discussed with them the budget negotiations 
associated with each approved demonstration.[Footnote 5] To examine the 
assumptions behind the initiative and the likelihood of associated 
savings, we reviewed published literature and interviewed officials 
from the Kaiser Commission on Medicaid and the Uninsured and the 
Congressional Budget Office (CBO). We discussed plans for evaluating 
the approved demonstrations with HHS and state officials. During our 
review, Congress passed the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003, which adds a drug benefit to Medicare, 
the federal program providing health insurance for the majority of 
people age 65 or older regardless of income.[Footnote 6] We considered 
the limited information available as of May 2004 about the relationship 
between Pharmacy Plus and the act. We conducted our work from December 
2002 through June 2004 in accordance with generally accepted government 
auditing standards.

Results in Brief: 

From January 2002 through May 2004, HHS reviewed Pharmacy Plus 
demonstration waiver proposals from 15 states. It approved four 
demonstrations (Florida, Illinois, South Carolina, and Wisconsin), 
denied two (Delaware and Hawaii), and considered nine other proposals. 
The four demonstrations, each approved for a 5-year period, cover most 
prescription drugs and incorporate cost sharing by beneficiaries. 
Together, the four demonstrations may enroll as many as half a million 
people age 65 or older whose incomes are higher than states' limits for 
Medicaid eligibility. Combined 5-year state and federal spending for 
the four approved demonstrations' new drug benefit is projected to 
total approximately $3.6 billion, the federal share of which is 
estimated to be about $2.1 billion. The two proposals that HHS denied 
were inconsistent with Pharmacy Plus guidelines. One state had an 
existing program that covered the same population proposed for the 
demonstration; the other wanted to expand coverage to people with 
incomes above the initiative's limit of 200 percent of the federal 
poverty level (FPL). As of May 2004, most of the remaining nine 
demonstration proposals were not under active review by HHS, primarily 
because the department had not determined how the new Medicare 
legislation would affect the Pharmacy Plus initiative and whether HHS 
would continue to review Pharmacy Plus demonstration proposals.

HHS has not adequately ensured that the four approved Pharmacy Plus 
demonstrations will be budget neutral, that is, that the federal 
government will spend no more with the demonstrations than without 
them. HHS has approved 5-year demonstration spending limits based on 
projections of cost and beneficiary enrollment growth that exceeded 
benchmarks that department officials said they considered in assessing 
states' proposals for budget neutrality. These cost and enrollment 
growth benchmarks incorporate the states' recent historical average 
growth rates and projections developed by CMS's Office of the Actuary 
for Medicaid program growth nationwide. HHS has not established written 
criteria for how it reviews or approves state-proposed cost or 
enrollment growth rates against these benchmarks. HHS's basis for 
approving state demonstrations' spending limits as budget neutral is 
not clear, particularly for Illinois and Wisconsin, for neither the 
department's negotiations with the states nor its rationale for 
approving higher-than-benchmark rates of estimated growth is 
documented. HHS's internal decision memorandums--which described the 
factors that HHS, CMS, OMB, and others considered in reviewing the 
demonstrations and which are not publicly available--did not provide 
the rationale for the approved spending limits, and neither did the 
publicly available demonstration approval letters. The approved 5-year 
spending limit for Illinois is more than $2 billion higher than it 
would have been had benchmark growth rates been applied; Wisconsin's 
approved spending limit is $713 million more than it would have been 
with benchmark rates. We estimate that over 5 years, with the approved 
demonstrations, the federal government could spend over $1 billion more 
in Illinois, $416 million more in Wisconsin, $55 million more in 
Florida, and $42 million more in South Carolina than without the 
demonstrations, thus not meeting the stated policy of budget 
neutrality.

States' assumptions about savings that may accrue to Medicaid from the 
Pharmacy Plus demonstrations are not well supported by state experience 
or research. The four states with approved demonstrations assumed that 
the cost of extending drug benefits to seniors now ineligible for 
Medicaid would be offset by savings accrued because demonstration 
beneficiaries would stay relatively healthy and therefore not deplete 
their income or assets to Medicaid eligibility levels. HHS approved the 
four states' savings assumptions--some projecting significant 
reductions in overall Medicaid senior enrollment and ranging from $480 
million to $2 billion per state in combined federal and state spending 
over 5 years--without state-specific data supporting these assumptions. 
One state's estimate of savings, for example, was derived by 
determining how much the state needed to save in order to demonstrate 
that its proposal would be budget neutral, rather than how much the 
state could realistically expect to save. The limited research 
available indicates that health care savings due to improved access to 
prescription drugs are likely to be much less than what states assumed 
and HHS approved. Had more conservative savings assumptions been used 
to estimate the demonstrations' costs, the proposals likely could not 
have been approved as budget neutral. Because federal liability is 
capped by a 5-year spending limit for each demonstration, states will 
be at risk if anticipated savings do not accrue and if their 
demonstration spending reaches or exceeds the limits.

As of February 2004, efforts by the states and HHS to evaluate and 
monitor the Pharmacy Plus demonstrations--and particularly states' 
efforts to begin implementing their evaluation plans to address stated 
evaluation objectives--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 demonstration approval: 
Florida and South Carolina had not decided whether state officials or 
an outside entity would conduct their evaluations. Illinois and 
Wisconsin officials believed that participating in the independent 
evaluation contracted by HHS and started in October 2002 would take the 
place of their own evaluations. HHS officials, by contrast, told us 
that state evaluations were still required. This independent evaluation 
is scheduled to report by September 2005. But in the interim, HHS has 
not ensured that each state submits in its progress reports enough 
information for HHS to monitor that its demonstration is functioning as 
intended, that the information is in a form enabling comparisons across 
states, or that it is submitted in a timely manner. This lack of 
information limits the department's oversight capability. For example, 
Illinois did not submit required quarterly progress reports during the 
demonstration's first year of operation, and its annual report did not 
provide information that would allow HHS to assess whether the new drug 
benefit was enabling seniors to avoid enrollment for full Medicaid 
benefits.

HHS's process for approving Medicaid demonstrations under the Pharmacy 
Plus initiative continues to raise some of the same cost and oversight 
concerns raised by other Medicaid section 1115 waiver approvals over 
the past decade, including a failure to adequately justify the basis 
for states' spending limits. We are recommending that the Secretary of 
HHS clarify criteria for reviewing and approving demonstration spending 
limits, consider applying these criteria to the four approved Pharmacy 
Plus demonstrations, and publicly document the basis for Medicaid 
section 1115 demonstration approvals to better ensure that approved 
demonstrations will not raise costs to the federal government. We are 
also recommending that the Secretary ensure that approved Pharmacy Plus 
and other Medicaid section 1115 demonstrations fulfill the objectives 
stated in their evaluation plans and more actively monitor approved 
Pharmacy Plus and other Medicaid section 1115 demonstrations.

In commenting on a draft of this report, HHS concurred with our 
recommendations related to evaluating and monitoring the section 1115 
demonstrations and documenting the basis for demonstration approvals. 
HHS did not concur with our recommendations that it clarify criteria 
for reviewing and approving states' proposed demonstration spending 
limits and consider applying those criteria to its approval decisions 
for the four Pharmacy Plus demonstrations. HHS indicated that while 
review criteria are important, they cannot always be strictly applied 
because of variations in state Medicaid programs and demonstration 
proposals, and it also stated that the four approved demonstrations 
were based on well-supported budget estimates of future state spending. 
We have on several occasions raised concerns with HHS about the budget 
neutrality of particular Medicaid section 1115 demonstrations, and the 
Pharmacy Plus demonstrations are no exception. We acknowledge that 
variations in state demonstration proposals justify some review 
flexibility but believe that HHS has not clearly articulated or 
documented the rationale for its decisions in approving Pharmacy Plus 
demonstrations. Such lack of clarity raises questions about whether 
these demonstrations, involving billions of federal dollars, have been 
reviewed consistently.

We also provided a draft of this report to Florida, Illinois, South 
Carolina, and Wisconsin. Illinois and Wisconsin officials commented 
that we overstated the demonstrations' financial risk to the federal 
government in light of data showing that to date, the demonstrations 
were operating well within their spending limits. Both states asserted 
that their pharmacy demonstrations were providing a valuable benefit to 
seniors and would be budget neutral. Although we do not dispute the 
health benefit to seniors of expanded access to prescription drugs, 
demonstrating savings to the Medicaid program as a result of this 
expanded access is a separate issue. Assumptions about such potential 
savings are not well supported by research or by data from the states, 
even though all the states except Wisconsin operated state-funded 
pharmacy assistance programs before applying for their demonstrations. 
Florida commented that the spending limit approved for its 
demonstration was less than 1 percent above the benchmark spending 
level. South Carolina and Wisconsin provided technical comments that 
were incorporated in the report as appropriate.

Background: 

Established in 1965 under title XIX of SSA, Medicaid is the nation's 
health care financing program for low-income families and certain 
people who are age 65 or older or disabled. The program accounted for 
about $244 billion in federal and state expenditures in fiscal year 
2002 and covered an estimated 53 million people.[Footnote 7] The states 
and the federal government share Medicaid spending according to a 
formula that provides a more generous federal match for states where 
per capita income is lower.[Footnote 8]

Medicaid is an open-ended entitlement program, meaning that the federal 
government is obligated to pay its share of expenditures for all people 
and services covered under an HHS-approved state Medicaid plan. To 
qualify for federal matching payments, state Medicaid programs are 
required by law to cover certain categories of beneficiaries, including 
pregnant women and children with family incomes below specific limits, 
as well as individuals with limited income and assets who are age 65 or 
older or disabled.[Footnote 9] State programs are also required to 
cover certain services, including physician and hospital services and 
nursing home care. As long as states meet federal requirements and 
obtain HHS approval for their state Medicaid plans, they have 
considerable flexibility in designing and operating their programs. 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. In addition, section 1115 of SSA permits 
the Secretary of HHS to waive certain statutory requirements applicable 
to Medicaid to allow states to provide services or cover individuals 
not otherwise eligible for Medicaid and to provide federal funding for 
services and populations not usually eligible for federal matching 
payments.[Footnote 10]

The Pharmacy Plus initiative allows states to provide a prescription 
drug benefit to certain Medicare beneficiaries, specifically seniors 
and disabled people, with incomes at or below 200 percent of 
FPL.[Footnote 11] Typically, Medicaid eligibility under an approved 
state plan provides access to all state Medicaid-covered services, but 
eligibility under a Pharmacy Plus demonstration covers only a 
prescription drug benefit.[Footnote 12] The premise behind the 
initiative is that expanded access to medically necessary drugs will 
help keep low-income seniors healthy enough to avoid medical expenses 
that could cause them to "spend down" their resources to the point of 
Medicaid eligibility.[Footnote 13] The initiative assumes that budget 
neutrality for pharmacy-only coverage can be achieved by savings to 
Medicaid from fewer seniors' enrolling for full benefits, as well as 
from improved access to prescription drugs, improved service delivery 
or medication management, and better management of drug benefit costs.

Unlike some other section 1115 demonstration waivers, the Pharmacy Plus 
initiative requires a participating state to accept a fixed spending 
limit as part of its budget neutrality agreement with HHS. This 
spending limit--sometimes called an aggregate spending limit or global 
budget cap--applies not only to services and beneficiaries in the 
state's demonstration drug program, but also to all services for all 
Medicaid seniors in the state. The Pharmacy Plus budget neutrality 
approach limits the amount the federal government will match for a 
demonstration according to expected growth in both service costs and 
enrollment (see app. I). Once a state has reached its Pharmacy Plus 
spending limit, it cannot receive additional federal matching dollars 
for any Medicaid services for seniors in the state, nor can the state 
restrict enrollment of seniors who qualify for full Medicaid 
benefits.[Footnote 14] Under the Pharmacy Plus scenario, a state 
accepts the financial risks inherent in a fixed budget cap for 
unanticipated changes in both cost and enrollment growth. For some 
other section 1115 demonstrations, budget neutrality is based on a 
projected per capita cost for each demonstration beneficiary. This 
other scenario sets a limit on spending per person, but because federal 
matching funds are available for all people who enroll, a state does 
not have to accept financial risk for unexpected growth in enrollment.

HHS Has Reviewed 15 Pharmacy Plus Proposals and Approved 4: 

As of May 2004, HHS had approved four states' Pharmacy Plus 
demonstration proposals, denied two, and considered proposals from nine 
other states. All four approved demonstrations--Florida, Illinois, 
South Carolina, and Wisconsin--are to operate for 5 years, during which 
time they might enroll a total of half a million low-income individuals 
age 65 or older for the new prescription drug coverage. HHS denied two 
demonstration proposals, from Delaware and Hawaii, because they were 
not consistent with Pharmacy Plus guidelines. Of the remaining nine 
proposals, one was withdrawn by the state and others have been on hold 
since fall 2003, when Congress was considering Medicare prescription 
drug legislation. At the time we completed our work, legislation 
providing a new drug benefit through Medicare had been enacted, but HHS 
had not determined how the new drug program would affect the Pharmacy 
Plus initiative.

HHS Approved Four Pharmacy Plus Demonstrations: 

HHS has approved Pharmacy Plus demonstrations for low-income seniors in 
four states: Florida, Illinois, South Carolina, and Wisconsin.[Footnote 
15] As of May 2004, all four demonstrations had been implemented and 
under way for at least 17 months: Illinois', Florida's, and Wisconsin's 
demonstrations were implemented in 2002, South Carolina's in 2003 (see 
table 1). Together, the four approved demonstrations are projected to 
enroll as many as 527,800 individuals for Medicaid prescription drug 
benefits only; as of April 2004, they reported combined enrollment of 
nearly 372,200 people. Illinois' demonstration is the largest, with 
expected enrollment for the drug benefit of more than 250,000 seniors 
over 5 years. As of April 2004, more than 192,600 people were enrolled 
in Illinois' demonstration, the majority of them moved into the 
Medicaid program from an existing state-funded pharmacy assistance 
program.[Footnote 16]

Table 1: Highlights of Pharmacy Plus Demonstrations Approved as of May 
2004: 

State and demonstration status (in order of approval): Illinois, 
Approved January 2002, Implemented June 2002, Request for amendment 
submitted March 2003; 
Description: Projected enrollment: As many as 256,500 seniors with 
incomes at or below 200 percent of FPL; 192,600 participants enrolled 
as of April 2004. Seniors with incomes at or below 200 percent of FPL 
who were participating in Illinois' previous state-funded program were 
automatically enrolled in the demonstration; 
Description: Spending limit for all Medicaid seniors: $14.0 billion in 
federal and state Medicaid funding over 5 years; prescription drug 
benefit represents $1.4 billion; 
Description: Benefits and cost sharing: Covers most prescription and 
some over-the-counter drugs recommended by physicians. Seniors with 
private insurance may choose to enroll for a $25 monthly rebate 
program. No cost sharing for participants with incomes below 100 
percent of FPL; participants at or above 100 percent of FPL pay $1 for 
generic and $4 for brand-name drugs. All participants pay 20 percent 
coinsurance after their annual drug benefits under the program exceed 
$1,750; 
Description: State program: Before the demonstration, Illinois' state-
funded pharmacy assistance program enrolled about 170,000 
participants. The state continues to operate a state-funded program 
covering prescription drugs for specified conditions for seniors with 
incomes from 201 to 250 percent of FPL and for people with disabilities 
and incomes up to 250 percent of FPL. Amendment sought to expand 
coverage to eligible seniors with incomes at or below 250 percent of 
FPL; amendment was pending as of March 2004.

State and demonstration status (in order of approval): Florida, 
Approved July 2002, Implemented August 2002, Request for amendment 
submitted September 2003; 
Description: Projected enrollment: As many as 58,500 seniors with 
incomes from 88 to 120 percent of FPL; 54,400 participants enrolled as 
of April 2004; 
Description: Spending limit for all Medicaid seniors: $16.7 billion in 
federal and state Medicaid funding over 5 years; prescription drug 
benefit represents $477 million; 
Description: Benefits and cost sharing: Covers all prescription drugs 
up to a monthly benefit limit of $160 per participant. Except for some 
classes of drugs, such as mental health and HIV antiviral therapies, 
brand-name drugs are limited to four per month, although physicians are 
allowed to request exceptions. Participants pay $2 for generic drugs, 
$5 for drugs on the state's preferred drug list, and $15 for other 
brand-name drugs; 
Description: State program: Before the demonstration, Florida's state-
funded pharmacy assistance program enrolled about 9,000 participants. 
Replaced by the demonstration, the state-funded program had the same 
income eligibility criteria as the demonstration but a lower benefit 
limit: $80 per participant per month. Amendment sought to expand 
eligibility to seniors with incomes at or below 200 percent of FPL and 
to add a prescription drug discount program; amendment was pending as 
of March 2004.

State and demonstration status (in order of approval): Wisconsin, 
Approved July 2002, Implemented September 2002; 
Description: Projected enrollment: As many as 146,800 seniors with 
incomes at or below 200 percent of FPL; 70,300 participants enrolled 
as of April 2004; 
Description: Spending limit for all Medicaid seniors: $8.4 billion in 
federal and state Medicaid funding over 5 years; prescription drug 
benefit represents $919 million; 
Description: Benefits and cost sharing: Covers prescription drugs, 
including insulin. Participants pay an annual enrollment fee of $30 and 
those with incomes above 160 percent of FPL pay an annual deductible of 
$500. Participants pay $5 for generic and $15 for brand-name drugs 
(those with incomes from 160 to 200 percent of FPL begin co-payments 
after meeting the required deductible); 
Description: State program: Wisconsin did not have a state-funded 
pharmacy assistance program for seniors before this demonstration. 
When the state implemented the demonstration, it also began offering 
state-funded pharmacy benefits to seniors with incomes from 201 to 240 
percent of FPL.

State and demonstration status (in order of approval): South Carolina, 
Approved July 2002, Implemented January 2003; 
Description: Projected enrollment: As many as 66,000 seniors with 
incomes up to 200 percent of FPL; 54,900 enrolled as of April 2004; 
Description: Spending limit for all Medicaid seniors: $5.0 billion in 
federal and state Medicaid funding over 5 years; prescription drug 
benefit represents $764.7 million; 
Description: Benefits and cost sharing: Covers generic and, when no 
generic is available, brand-name prescription drugs, over-the-counter 
drugs prescribed by physicians, insulin and other self-injected drugs, 
and syringes. Except for medications for specified conditions, 
including behavioral health disorders, cardiac disease, cancer, 
HIV/AIDS, and terminal or life- threatening diseases, coverage limited 
to four prescriptions or refills per month. Participants pay an annual 
deductible of $500, plus $10 for generic drugs; $15 for brand-name 
drugs; and $21 for drugs requiring prior authorization; 
Description: State program: Before the demonstration, South Carolina's 
state-funded pharmacy assistance program enrolled about 41,000 
participants. Demonstration replaces that program and expands 
eligibility to seniors with incomes from 175 up to 200 percent of FPL. 

Source: GAO analysis of state and HHS documents.

[End of table]

All the demonstrations except Florida's are approved to enroll seniors 
with incomes at or below 200 percent of FPL, the maximum eligible 
income established in HHS's Pharmacy Plus guidance.[Footnote 17] As 
approved, Florida's demonstration covers seniors with incomes from 88 
to 120 percent of FPL, but in September 2003, the state submitted an 
amendment to expand income eligibility to 200 percent of FPL. Illinois 
also applied in March 2003 to amend its approved demonstration to 
expand eligibility, in its case to include seniors with incomes at or 
below 250 percent of FPL. The terms of Illinois' demonstration approval 
specifically permit the state to seek this amendment, as long as the 
state submits data supporting its ability to cover this expansion 
population at no additional cost to the federal government. As of March 
2004, HHS was reviewing both amendments.

Projected 5-year costs vary among the four approved demonstrations. 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. The combined federal 
and state Medicaid spending limits for the four demonstrations--for 
services to all Medicaid seniors in the four states--would total $44 
billion over 5 years, with a federal share of at least $25 billion. The 
estimated 5-year costs solely for the drug benefit range from $477 
million in Florida to $1.4 billion in Illinois, and combined 5-year 
federal and state spending limits (based on projected costs for 
services to all Medicaid seniors) range from $5.0 billion in South 
Carolina to $16.7 billion in Florida.

When they applied, three of the four states with approved 
demonstrations already operated state-funded pharmacy assistance 
programs for seniors. Most beneficiaries eligible for these programs 
are also eligible for Pharmacy Plus coverage. HHS allows the states to 
subsume all or a portion of an existing program under a demonstration, 
as long as the states' demonstrations propose to expand either the 
number of beneficiaries or the scope of drug coverage.[Footnote 18] In 
other words, the state may not simply secure federal matching dollars 
for the costs of an existing state-funded drug program with no 
expansion. To meet this condition, states with approved demonstrations 
either raised income eligibility thresholds or expanded the scope of 
drug coverage beyond that of their existing state programs. For 
example, Florida doubled its maximum monthly benefit from $80 to $160 
per person, and South Carolina expanded eligibility to include seniors 
with incomes from 175 through 200 percent of FPL. Illinois' 
demonstration offered a more comprehensive drug benefit than its state-
funded program did.[Footnote 19] Wisconsin did not previously have a 
state-funded pharmacy assistance program for seniors.[Footnote 20]

HHS Denied Two Demonstration Proposals: 

In 2003, HHS denied Pharmacy Plus demonstration proposals from two 
states, Delaware and Hawaii. (See app. II for descriptions of denied, 
withdrawn, and pending proposals.) Delaware's proposal was denied 
primarily because HHS required that the state expand beyond the 
existing state-funded program and limit coverage to seniors with 
incomes at or below 200 percent of FPL. Delaware's state-funded 
pharmacy assistance program already covered seniors and disabled adults 
with incomes up to 200 percent of FPL or whose prescription drug costs 
exceeded 40 percent of their annual incomes. For this reason, the state 
could not expand either eligibility or coverage and stay within 
Pharmacy Plus guidelines. Although Delaware proposed adding a pharmacy 
benefit management component to monitor appropriate prescription use 
and to control costs, HHS found this proposed change to the existing 
program insufficient.[Footnote 21]

Hawaii proposed to make prescription drugs available at the discounted 
Medicaid rate to state residents of all ages with family incomes at or 
below 300 percent of FPL. This benefit was to be funded through 
participant cost sharing, manufacturer rebates, and a fixed state 
contribution of $1 per prescription. HHS's denial was based primarily 
on the request to cover individuals with incomes up to 300 percent 
instead of 200 percent of FPL. Other reasons for the denial included 
the proposed coverage for all state residents, instead of targeting 
seniors and people with disabilities, and the minimal state financial 
participation of $1 per prescription in the first year of the 
demonstration.[Footnote 22]

HHS Has Considered Nine Other Demonstration Proposals: 

From January 2002 through May 2004, HHS considered Pharmacy Plus 
demonstration proposals from nine other states: Arkansas, Connecticut, 
Indiana, Maine, Massachusetts, Michigan, New Jersey, North Carolina, 
and Rhode Island. As of May 2004, eight were still pending; one 
proposal, from Massachusetts, had been withdrawn. Most proposals would 
cover seniors with incomes at or below 200 percent of FPL; several 
would also cover adults with disabilities. The drug benefits would 
generally be comprehensive and require participant cost sharing, which 
in some cases would include an annual enrollment fee and 20 percent co-
payment for each prescription. All but one of the states with pending 
proposals have state-funded pharmacy assistance programs that they 
propose to include in whole or in part in their demonstrations. (App. 
II describes these demonstration proposals.)

As of May 2004, most of the pending proposals were not under active 
review by HHS primarily because the department had not determined the 
effect of the Medicare prescription drug legislation on the Pharmacy 
Plus demonstration proposals. HHS officials told us in October 2003 
that Arkansas, Rhode Island, and Indiana officials had asked that 
review of their states' proposals be put on hold until after Congress 
had completed consideration of the Medicare legislation. At that time 
HHS was still reviewing a proposal from North Carolina but regarded 
proposals from four other states as inactive because longtime 
negotiations with those states had reached an impasse. Connecticut and 
New Jersey, for example, already had broad state-funded drug coverage 
for seniors with incomes up to 200 percent of FPL. In such cases, HHS 
has been unwilling to approve federal financing for existing state-
funded programs.

Medicare Prescription Drug Legislation May Affect Pharmacy Plus 
Initiative: 

The Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA) will provide seniors access to a Medicare-covered 
prescription drug benefit and will likely affect how HHS and the states 
manage the Medicaid Pharmacy Plus initiative. This law gives Medicare 
beneficiaries the opportunity to enroll for prescription drug coverage 
to begin on January 1, 2006, and, as an interim measure, the 
opportunity to enroll for Medicare-endorsed drug discount cards 
beginning in June 2004. It also directs HHS to establish effective 
coordination between Medicare plans and state Medicaid and pharmacy 
assistance programs and to establish a commission to address these and 
other transition issues.[Footnote 23] In 2006, the Medicare drug 
benefit will replace Medicaid as the primary source of prescription 
drug coverage for low-income seniors who would have been eligible for 
both full benefits under Medicaid and drug benefits under Medicare 
plans.[Footnote 24] Under MMA, individuals with limited assets and 
incomes below 150 percent of FPL will be eligible for federal subsidies 
to assist with the drug benefit's cost-sharing requirements.[Footnote 
25] But because Pharmacy Plus demonstrations in Illinois, South 
Carolina, and Wisconsin cover individuals with incomes above 150 
percent and at or below 200 percent of FPL regardless of other assets, 
some current demonstration beneficiaries may not qualify for these 
subsidies. Pharmacy Plus beneficiaries are likewise ineligible for the 
Medicare drug discount cards.[Footnote 26]

As of May 2004, HHS indicated it was considering how enactment of the 
new law would affect Pharmacy Plus demonstrations and 
proposals.[Footnote 27] Officials from the four states with approved 
demonstrations told us in December 2003 that they were uncertain how 
the law would affect their demonstrations, but they had no plans to end 
the demonstrations early. After the Medicare prescription drug benefit 
begins in 2006, some demonstrations could be discontinued or modified. 
Early termination could have an impact on the demonstrations' budget 
neutrality, which often depends on savings in later years to offset 
higher start-up costs. Officials in Illinois and Florida indicated in 
December 2003 that their pharmacy demonstrations might be converted to 
state-funded programs in 2006.

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. These cost and enrollment growth 
benchmarks incorporate states' historical experience and expectations 
for Medicaid program growth nationwide. The discrepancies between the 
growth benchmarks and the approved growth rates were greatest for 
Illinois and Wisconsin. Neither HHS's negotiations with the states nor 
the department's rationale for approving higher-than-benchmark growth 
rates is well documented. Had HHS based the 5-year demonstration 
spending limits on the benchmark growth rates, the federal share of 
approved spending would be considerably lower, particularly for 
Illinois and Wisconsin: specifically, $1 billion lower in Illinois and 
$416 million lower in Wisconsin.[Footnote 28] For Florida and South 
Carolina, the federal share of approved spending would have been $55 
million and $42 million lower, respectively.

HHS Approved Projected Growth Rates Exceeding Benchmarks: 

HHS based the Pharmacy Plus demonstration spending limits it approved 
on a range of estimated future growth rates for cost per beneficiary 
and for enrollment, which in some cases exceeded benchmarks[Footnote 
29] the department told us it considered in assessing the 
reasonableness of states' proposals. A standard Pharmacy Plus 
application form developed by HHS and a technical guidance document are 
the chief sources of criteria and formal guidance to states for 
developing demonstration proposals. But HHS has not established written 
criteria for how it reviews and approves the growth rates that states 
propose. These growth rates are key elements in the budget neutrality 
negotiations between states and the federal government because higher 
rates result in more generous spending limits, which represent the 
federal government's agreed-on maximum spending for all the states' 
Medicaid seniors during the demonstrations. An inappropriately high 
spending level can represent a higher federal liability than warranted.

The process used by HHS and the states to determine whether states' 
proposed Pharmacy Plus demonstrations will be budget neutral requires 
comparing two cost estimates: (1) projected 5-year costs of a state's 
existing Medicaid program for seniors ("without-demonstration costs") 
and (2) projected 5-year costs of the state's existing program plus the 
drug benefits and beneficiaries added by the demonstration ("with-
demonstration costs"). These calculations factor in projected growth in 
costs and enrollment each year. As long as projected with-demonstration 
costs do not exceed projected without-demonstration costs, the 
demonstration can be approved as budget neutral. As a result, the 
projected costs of a state's existing, without-waiver Medicaid program 
for seniors effectively sets the spending limit for all services 
provided to all Medicaid seniors in the state for the 5-year 
demonstration term. Appendix I outlines the basic steps HHS follows in 
setting Pharmacy Plus demonstration spending limits.

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,[Footnote 30] 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.[Footnote 
31]

* For enrollment growth, HHS considers the state's historical average 
annual growth in enrollment as a starting point and, to a lesser 
extent, the CMS Actuary's nationwide rate, but it allows states to 
present a rationale for a higher rate that anticipates rising future 
enrollments.

HHS's approved growth rates in some cases exceeded these benchmarks 
(see table 2). For per-beneficiary cost growth rates in Florida, 
Illinois, and Wisconsin, HHS did not approve the lower of either the 
state's historical average rate or the CMS Actuary's rate of 6.3 
percent. Similarly, for beneficiary enrollment growth rates, HHS 
approved rates for Illinois and Wisconsin that exceeded both the 
states' historical experience and the CMS Actuary's 1.8 percent 
projected annual growth rate. In Illinois' case, the approved rate for 
beneficiary enrollment growth--5 percent per year over the 5-year 
demonstration--was considerably higher than the state's 5-year 
historical average enrollment growth of 1.6 percent per year.

Table 2: HHS-Approved, State Historical, and CMS Actuary Growth Rates: 

Annual growth rates in percent: 

State: Florida%; 
Cost growth rates: HHS-approved: 6.5%; 
Cost growth rates: State historical average: 6.5%; 
Cost growth rates: CMS Actuary: 6.3%; 
Enrollment growth rates: HHS- approved: 1.4%; 
Enrollment growth rates: State historical average: 1.4%; 
Enrollment growth rates: CMS Actuary: 1.8%. 

State: Illinois[A]%; 
Cost growth rates: HHS-approved: 5.5%; 
Cost growth rates: State historical average: 4.5%; 
Cost growth rates: CMS Actuary: 6.3%; 
Enrollment growth rates: HHS- approved: 5.0%; 
Enrollment growth rates: State historical average: 1.6%; 
Enrollment growth rates: CMS Actuary: 1.8%. 

State: South Carolina[B]%; 
Cost growth rates: HHS-approved: 6.3%; 
Cost growth rates: State historical average: 10.0%; 
Cost growth rates: CMS Actuary: 6.3%; 
Enrollment growth rates: HHS-approved: 1.0%; 
Enrollment growth rates: State historical average: 0.7%; 
Enrollment growth rates: CMS Actuary: 1.8%. 

State: Wisconsin%; 
Cost growth rates: HHS-approved: 6.3%; 
Cost growth rates: State historical average: 5.4%; 
Cost growth rates: CMS Actuary: 6.3%; 
Enrollment growth rates: HHS- approved: 2.0%; 
Enrollment growth rates: State historical average: 0.01% [C]; 
Enrollment growth rates: CMS Actuary: 1.8%. 

Source: GAO analysis of HHS and state documents.

[A] The state historical average rates for Illinois (4.5 percent cost 
growth and 1.6 percent enrollment growth) reflect updated information 
provided by the state to HHS shortly before its approval decision on 
January 28, 2002. This information does not appear in the demonstration 
application that was submitted on July 31, 2001.

[B] For South Carolina, historical average rates reflect 3 years of 
data, rather than the generally required 5 years, because cost and 
enrollment data for Medicaid seniors were incomplete for 2 of the 5 
years (data for certain long-term care waivers for seniors were not 
included).

[C] This figure is lower than the 0.12 percent enrollment growth rate 
Wisconsin proposed in its demonstration application. We included 5 
years of data in calculating our average rate for the state, while the 
state itself averaged 3 years of data, excluding 2 years when 
enrollment declined slightly.

[End of table]

Basis for Approved Spending Limits Not Clear or Well Documented: 

HHS's basis is unclear for approving growth rates higher than the 
benchmarks in some cases, particularly for approving higher enrollment 
growth rates for Illinois and Wisconsin. The department's negotiation 
process with these two states, during which officials reached agreement 
on allowed growth rates, was not documented, nor was its rationale for 
approving rates that differed from the lower of state historical 
experience or the CMS Actuary's projections. In particular, HHS's 
internal decision memorandums--which described the factors that HHS, 
CMS, OMB, and others considered in reviewing the demonstrations and 
which are not publicly available--did not provide the rationale for the 
approved spending limits, and neither did the publicly available 
demonstration approval letters.

HHS and state officials told us that Illinois and Wisconsin used a 
variety of arguments to convince the department that their situations 
warranted higher enrollment growth rates. But the states provided 
little specific documentation to HHS or to us to support these 
arguments. For example: 

* Illinois asserted that its projected annual enrollment growth rate 
for the demonstration years from 2002 through 2007 should be 
significantly higher than its 5-year average historical growth rate of 
1.6 percent, because income eligibility levels for seniors in its 
Medicaid program increased from 41 to 100 percent of FPL from July 2000 
through July 2002. As support, the state provided HHS with updated 
Medicaid enrollment data--which were more recent than those included in 
the original demonstration application and showed increased growth 
rates for seniors compared with earlier years--but these rates were 
still lower than the 5 percent HHS approved and did not raise the 
historical average to 5 percent.[Footnote 32] The state did not provide 
documents with actuarial projections of the estimated number of people 
expected to enroll in Medicaid because of the change in eligibility 
criteria. Illinois justified applying the 5 percent annual growth rate 
to all 5 years of the pharmacy demonstration by providing a chart 
showing that enrollment in a different state program, SCHIP, had grown 
more than 5 percent per year on average for 3 years after that 
program's eligibility criteria were expanded. In our view, however, 
Illinois' SCHIP enrollment experience with children does not provide a 
reasonable basis for predicting enrollment by seniors in the Pharmacy 
Plus demonstration.

* Wisconsin asserted that its projected annual enrollment growth rate 
for the demonstration years should be significantly higher than either 
its 5-year unadjusted historical growth rate of 0.01 percent or the 
0.12 percent rate based on 3 years of historical data reported in its 
application because of the anticipated effects of a nationwide Social 
Security Administration mail outreach program to low-income Medicare 
beneficiaries. This outreach program informed seniors enrolled in 
Medicare about other benefits, including Medicaid assistance for 
Medicare cost-sharing requirements, for which they might 
qualify.[Footnote 33] Wisconsin officials told us they proposed a 4 
percent future annual enrollment growth rate for seniors in the 
expectation that this outreach program, along with factors including an 
aging population and the economic downturn, would increase Medicaid 
enrollment. According to HHS, Wisconsin did not document any 
projections of how many newly eligible Medicaid individuals could be 
prompted to enroll after the Social Security Administration outreach 
mailing. Instead, it submitted information based on a review of a 
similar outreach effort in Minnesota. According to Wisconsin state 
officials, during negotiations HHS proposed 1 percent as a more 
reasonable growth rate, and HHS and state officials agreed to an 
approved enrollment growth rate of 2 percent per year. Our related work 
suggests that Wisconsin may be justified in claiming some increase in 
Medicaid enrollment as a result of the outreach program, but the effect 
appears to be less than 1 percent. Notably, although the Social 
Security Administration mail outreach program was nationwide, HHS did 
not consider its effects when approving enrollment rates for other 
states.[Footnote 34]

Demonstration Spending Limits Would Be Lower if Based on Benchmark 
Rates: 

Application of benchmark rates for projected per-beneficiary cost and 
enrollment growth would have produced lower spending limits for all 
four approved Pharmacy Plus demonstrations (see table 3). Benchmark-
based limits on combined federal and state spending would be 
approximately $3 billion lower over 5 years than what HHS approved for 
the four demonstrations, and the federal share alone would come to 
about $1.6 billion less. The higher-than-benchmark growth rates HHS 
approved for Illinois and Wisconsin accounted for most of these 
differences. Had the spending limit for Illinois' demonstration, in 
particular, been based strictly on the benchmark rates, combined 
federal and state spending would have been almost $2.2 billion, or 15 
percent, lower, and the federal government's liability under the 
demonstration (at the state's 50 percent federal matching rate) lower 
by more than $1 billion. The difference is less pronounced for 
Wisconsin, where the approved federal and state spending limit exceeds 
what it would have been had benchmark rates been applied by about $713 
million, translating into about $416 million in additional federal 
spending.

Table 3: HHS-Approved and Benchmark 5-Year Spending Limits: 

State: Florida; 
HHS- approved: $16,669; 
Benchmark: $16,575; 
Dollar difference (percentage difference)[A]: $94 (0.6%); 
Federal share of difference[B]: $55.

State: Illinois; 
HHS- approved: $14,047; 
Benchmark: $11,880; 
Dollar difference (percentage difference)[A]: $2,167 (15.4%); 
Federal share of difference[B]: $1,083.

State: South Carolina; 
HHS- approved: $4,962; 
Benchmark: $4,902; 
Dollar difference (percentage difference)[A]: $60 (1.2%); 
Federal share of difference[B]: $42.

State: Wisconsin; 
HHS- approved: $8,378; 
Benchmark: $7,666; 
Dollar difference (percentage difference)[A]: $713 (8.5%); 
Federal share of difference[B]: $416.

Total[A]; 
HHS- approved: $44,056; 
Benchmark: $41,023; 
Dollar difference (percentage difference)[A]: $3,033 (6.9%); 
Federal share of difference[B]: $1,596. 

Source: GAO analysis of HHS and state documents.

Notes: Figures reflect total approved federal and state spending limits 
for all Medicaid services for seniors over the 5 years of each 
demonstration, including spending on new Pharmacy Plus prescription 
drug benefits. We calculated benchmark spending limits using, for cost 
growth per beneficiary, the lower of either the state's historical 
average cost growth rate or the CMS Actuary's projected rate, and for 
enrollment growth, the state's unadjusted 5-year historical average 
enrollment growth rate, except for South Carolina, where we used the 
average of 3 years' data.

[A] Dollar differences and totals are based on numbers before rounding.

[B] Federal share calculated by applying fiscal year 2003 federal 
Medicaid matching rates for each state to the dollar difference for 
that state: Florida, 58.8 percent; Illinois, 50 percent; South 
Carolina, 69.8 percent; and Wisconsin, 58.4 percent.

[End of table]

The spending limits HHS approved for Illinois and Wisconsin exceed 
estimates based on consistent application of the benchmark growth rates 
by 15.4 percent and 8.5 percent, respectively.[Footnote 35] The limits 
approved for Florida and South Carolina, while not budget neutral 
compared with the benchmark spending estimates, reflect relatively 
small differences. Florida's approved spending limit exceeds the 
benchmark estimate by less than 1 percent--$94 million of a 5-year 
approved federal and state spending limit of nearly $16.7 billion--and 
South Carolina's approved spending limit exceeds the benchmark by 1.2 
percent, or $60 million.

CBO has similarly reported that Pharmacy Plus demonstrations are likely 
to increase federal Medicaid spending. Before passage of MMA, CBO 
estimated that the Pharmacy Plus demonstrations would add about $18 
billion to federal Medicaid spending over the 10 years from 2004 
through 2013. According to CBO officials, the agency considered a range 
of scenarios for how the initiative might grow with new demonstration 
approvals and estimated the initiative's overall effect on Medicaid 
spending.[Footnote 36] The officials told us that CBO did not include 
any of the demonstrations' projected savings in its analysis because it 
did not find the argument that savings would occur convincing.

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. But the limited research available 
suggests that potential health care savings due to improved access to 
prescription drugs are likely to be much less than the levels the 
states assumed and HHS approved. Had more conservative savings 
assumptions been used to estimate the demonstrations' costs, the 
proposals likely could not have been approved as budget neutral. 
Moreover, concerns have arisen about what actions states might take to 
control spending on behalf of seniors if estimated savings do not 
accrue and states reach or exceed their spending limits under the 
demonstrations.

HHS-Approved Savings Assumptions Are Not Supported by State Experience: 

The approved Pharmacy Plus demonstrations count on expected savings 
based on reductions in the projected number of seniors who will enroll 
in states' Medicaid programs--ranging from a 3 percent reduction in 
Florida to a 25 percent reduction in South Carolina over the 
demonstrations' 5 years. 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).

Table 4: States' Projections of Medicaid Senior Populations after 5 
Years, with and without HHS-Approved Pharmacy Plus Demonstrations: 

Projections: Total projected Medicaid seniors, without demonstration, 
by year 5; 
Florida: 210,200; 
Illinois: 186,683; 
South Carolina: 90,006; 
Wisconsin: 70,412.

Projections: Total projected Medicaid seniors, with demonstration, by 
year 5; 
Florida: 204,300; 
Illinois: 145,240; 
South Carolina: 67,946; 
Wisconsin: 57,297.

Projections: Projected number of seniors diverted from Medicaid by 
year 5; 
Florida: 5,900; 
Illinois: 41,442; 
South Carolina: 22,060; 
Wisconsin: 13,115.

Projections: Annual reduction in Medicaid seniors (percentage); 
Florida: 3%; 
Illinois: 5%; 
South Carolina: 5%; 
Wisconsin: 2.5-5%.

Projections: Cumulative 5-year reduction in Medicaid seniors 
(percentage); 
Florida: 3%; 
Illinois: 22%; 
South Carolina: 25%; 
Wisconsin: 19%.

Projections: Projected dollar savings due to diversion of seniors from 
Medicaid by year 5; 
Florida: $480 million; 
Illinois: $2 billion; 
South Carolina: $769 million; 
Wisconsin: $926 million. 

Source: GAO analysis.

Note: Analysis of state and HHS documents and of Jocelyn Guyer, The 
Financing of Pharmacy Plus Waivers: Trade-offs between Expanding Rx 
Coverage and Global Caps in Medicaid (Washington, D.C.: Kaiser 
Commission on Medicaid and the Uninsured, 2003).

[End of table]

To project the extent to which Pharmacy Plus would reduce its new 
enrollment of Medicaid seniors, and thus its total senior enrollment, 
Florida made the relatively conservative assumption that the drug 
benefit would enable seniors to avoid Medicaid eligibility for 1 year; 
after 5 years, the state's total projected number of Medicaid seniors 
would be 5,900 (3 percent) lower with the demonstration than without 
it. The other states, in contrast, assumed that everyone diverted in 
each year of their demonstrations would remain out of Medicaid 
throughout the full demonstration period and would not, for example, 
enter a nursing home, which often results in Medicaid eligibility. As a 
result, Illinois, South Carolina, and Wisconsin projected reductions of 
nearly 20 percent or more in Medicaid senior enrollments at the end of 
5 years. Had these states made more conservative assumptions--assuming, 
for example, as Florida chose to, that providing access to prescription 
drugs would delay seniors' entry into Medicaid by only 1 year instead 
of 5--their projected with-demonstration costs would have exceeded 
projected without-demonstration costs and would not have been budget 
neutral.

Although states' demonstration proposals aim to achieve savings by 
expanding seniors' access to prescription drugs and improving their 
health, in practice it appears that some states' estimates of expected 
savings may have been derived in part by determining how much in 
savings was needed to demonstrate budget neutrality. In their 
proposals, none of the three states that previously had state-funded 
pharmacy assistance programs (Florida, Illinois, and South Carolina) 
provided data from those programs that specifically supported such high 
projected savings. Based on conversations with Wisconsin health care 
financing officials and a review of documents, we found that the 
state's demonstration savings estimates were a residual of the budget-
negotiating process, derived from determining how much was needed in 
savings to demonstrate budget neutrality, rather than from research or 
data about what was realistic.

Premise behind Approved Demonstrations Not Well Supported by Research: 

The premise that Pharmacy Plus demonstrations will generate savings by 
keeping low-income seniors from becoming Medicaid-eligible is not 
supported by research. In a previous report, we reviewed the research 
studies cited in Illinois' demonstration proposal and found that they 
did not sufficiently support the state's theory that a full drug 
benefit for low-income seniors would yield the projected level of 
savings.[Footnote 37] Although these studies indicated that access to 
prescription drugs benefited people in poor health, they all focused on 
people who already had specific diagnosed conditions, such as diabetes, 
heart disease, or HIV, rather than on a general population of seniors. 
An extensive 2003 review of research examining drug coverage for low-
income seniors found relatively few studies about the effect on 
Medicaid spending of expanded access to a broad prescription drug 
benefit.[Footnote 38] The one study this review considered most 
relevant, conducted in the mid-1980s, assessed Pennsylvania's state-
funded program, Pharmaceutical Assistance Contract for the Elderly 
(PACE), and found that despite high enrollment, Medicaid entry among 
PACE participants was neither prevented nor delayed enough to have a 
discernible effect on the state's overall Medicaid budget.[Footnote 39] 
Other studies of broad prescription drug benefits for low-income 
seniors, including one of New York's program, found some reductions in 
participants' health care costs but mainly for inpatient hospital care, 
which, for people age 65 or older, is covered by Medicare rather than 
Medicaid.[Footnote 40] Still other studies in this review examined the 
more limited question of how access to appropriate drugs affects people 
already suffering from specific illnesses. Such research sheds little 
light on the cost-effectiveness of offering comprehensive drug benefits 
to a broad population of low-income seniors.

Some states that have not submitted Pharmacy Plus proposals examined 
the diversion and savings assumptions behind the demonstrations and 
found that they would not likely be realized. For example, in 
considering whether to apply for a demonstration, Minnesota found a 
substantial risk that seniors receiving only a drug benefit would 
eventually become Medicaid-eligible over a 5-year follow-up period. In 
its optimal model, the study estimated that to generate enough savings 
to offset the new drug costs, the risk of Medicaid entry would have to 
be reduced by 50 percent for non-nursing-home enrollees and by 30 
percent for those who become eligible after entering a nursing home. 
Minnesota Medicaid officials concluded that this scenario was not 
realistic and dropped the state's Pharmacy Plus demonstration 
proposal.[Footnote 41]

Pennsylvania also conducted a Pharmacy Plus demonstration feasibility 
study for PACE and the related Pharmaceutical Assistance Contract for 
the Elderly Needs Enhancement Tier (PACENET) programs, which together 
enrolled about 270,000 seniors in 2002.[Footnote 42] The study found 
that to offset drug benefit costs, the programs would need aggressive 
cost containment, through such approaches as increased co-payments, 
reduced provider reimbursements, and a preferred drug list. In 
addition, the study noted that in states with generous drug benefits, 
savings from expansion to more seniors are particularly difficult to 
realize because most beneficiaries who would have avoided expensive 
nursing home care have already done so. As of March 2004, Pennsylvania 
had not submitted a Pharmacy Plus demonstration proposal.

Concerns about Effects on States if Savings Do Not Accrue: 

Although it is early in demonstration implementation, we and others 
have raised concerns about how states may be affected if savings under 
Pharmacy Plus do not accrue and the states' spending reaches or exceeds 
HHS's approved spending limits. We noted in our July 2002 report that 
the Illinois Pharmacy Plus demonstration, as approved, makes several 
risky assumptions with regard to the extent of the expected 
savings.[Footnote 43] In such cases the federal government would not be 
at financial risk, but the states would be, because the spending limits 
cover services for all the states' Medicaid seniors. Any expenditures 
for Medicaid seniors beyond the demonstration's federally matched 
spending limit would be entirely the state's responsibility. Officials 
in Florida and Wisconsin expressed concerns that their demonstration 
spending limits, based on fixed rates of growth projected over 5 years, 
could not be adjusted to reflect unpredictable changes in costs and 
enrollment growth. One study has raised concerns about the potential 
effects on Medicaid seniors, noting that as state spending approaches 
the limit of what the federal government will match, states may feel 
pressed to reduce optional expansions of eligibility or optional 
benefits.[Footnote 44] States could also try to control spending 
without reducing eligibility or services by lowering provider 
reimbursements--a step already taken in Illinois, although not in 
response to pharmacy demonstration enrollment or spending--or by 
implementing preferred drug lists.[Footnote 45]

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. In the interim, HHS has not 
ensured that the states' required progress reports contain sufficient 
information for monitoring whether the demonstrations are functioning 
as intended or that these reports are submitted in a timely manner.

States Have Taken Few Steps to Implement Evaluation Plans: 

As a condition of Pharmacy Plus approval, HHS requires states to design 
and carry out an evaluation and to report their results after the 
demonstration ends.[Footnote 46] States are required to submit a plan 
for this evaluation in their proposals and in the operational protocols 
that HHS approves before states begin the demonstrations. Although the 
four states with approved Pharmacy Plus demonstrations submitted the 
required evaluation plans--containing research hypotheses, possible 
outcome measures, and data needs--as of February 2004, they had taken 
few steps to put their evaluation plans into practice.

As HHS requires, the four states' initial proposals and operational 
protocols included plans for how they would evaluate whether their 
demonstrations were working as intended. With some variations, all the 
plans proposed to address the overall research question of how 
providing a pharmacy benefit to non-Medicaid-covered seniors would 
affect Medicaid costs, service use, and future eligibility trends, 
including whether savings achieved by diverting individuals from 
Medicaid eligibility would offset the benefit's cost. The first 
demonstration proposal, from Illinois, initially contained an extensive 
plan to assess demonstration outcomes; the plan later changed 
significantly. The initial plan proposed that the state collect data 
from sources such as Medicaid and Medicare claims systems, surveys of 
participants or case-study interviews, and demonstration-specific 
claims. In terms of outcome measures, Illinois' plan proposed comparing 
seniors who do have the drug benefit with seniors who do not on such 
measures as hospitalization rates, health care service costs, use of 
emergency room services, and rates and length of nursing home stays. A 
later version of Illinois' plan (as described in the state's 
operational protocol), however, calls for using existing Medicaid 
claims data for only one outcome measure, Medicaid spending for 
seniors.

Both South Carolina and Wisconsin adopted Illinois' relatively 
extensive initial evaluation plan in their demonstration proposals, and 
as of February 2004, neither South Carolina nor Wisconsin had changed 
its proposed plan. Florida, which did not submit an evaluation plan in 
its demonstration proposal, provided a two-paragraph discussion in its 
operational protocol. This discussion listed several hypotheses and 
indicators to be monitored, noted that data would be collected using 
the state's current Medicaid system, and gave no details about how or 
when the plan would be implemented.

As of February 2004, the states had taken few steps to implement their 
demonstration evaluation plans or to determine how they would collect 
or analyze data to support their evaluations. States' evaluation 
activities were generally limited to collecting and reporting to HHS 
data from their existing Medicaid data systems. Although plans for 
Illinois, South Carolina, and Wisconsin call for starting their 
evaluations at the start of their demonstrations to draw on data about 
services used before and throughout beneficiaries' enrollment, these 
states and Florida indicated they were just beginning to collect and 
report data to implement their evaluation plans: 

* Florida and South Carolina officials told us that they had not 
decided whether their evaluations would be designed and conducted by 
the state Medicaid agency or by an outside entity such as a university. 
Neither state had developed an evaluation implementation schedule.

* Illinois and Wisconsin reported providing extensive state data for 
HHS's independent evaluation of their demonstrations but, at the time 
of our review, had not begun their own evaluations. State officials 
told us they understood that participating in the independent 
evaluation would exempt them from conducting their own evaluations. But 
HHS officials told us that state evaluations were still required.

HHS Has Contracted for an Independent Pharmacy Plus Evaluation: 

HHS has contracted with independent university researchers for an 
extensive evaluation of the Pharmacy Plus demonstrations in Illinois 
and Wisconsin. The evaluation's goal is to document achievements and 
difficulties in implementing a Pharmacy Plus demonstration, as well as 
to identify impacts on entry into Medicaid and on costs to Medicare. 
According to HHS, the evaluation aims to address whether providing 
prescription drug benefits to non-Medicaid seniors will keep 
individuals relatively healthy, divert them from full Medicaid 
eligibility, and thus lower Medicaid and Medicare costs. To address 
these issues, the evaluation contract calls for four components of 
work, including (1) site visits to Illinois and Wisconsin to describe 
the demonstrations and their implementation; (2) telephone surveys of 
demonstration beneficiaries in those states about their health status, 
access to health care, and prior drug coverage; (3) analysis of 
Medicaid, Medicare, and demonstration claims data to assess patterns of 
drug use and effects on Medicaid and Medicare costs; and (4) an 
analysis of enrollment trends in each state's Medicaid program to 
determine if diversion assumptions are met. In addition, the evaluation 
aims to compare the experiences of demonstration beneficiaries with a 
similar population in another state that does not offer a prescription 
drug benefit.[Footnote 47]

Final results for all components of this planned 3-year evaluation, 
which began in October 2002, are scheduled to be reported to HHS by 
September 2005.[Footnote 48] Specifically, a final report to HHS on the 
patterns of drug use is due in September 2004; final reports on the 
demonstrations' cost effects on Medicaid and Medicare are due in 
September 2005. The evaluation contract does not indicate when results 
from the work may be available to other researchers or the public.

According to the HHS evaluation project officer, the independent 
evaluators completed state site visits to Illinois and Wisconsin in 
July 2003 for the descriptive work component and submitted draft 
reports to HHS in December.[Footnote 49] These reports were in review 
as of March 2004, and the project officer expected them to be approved 
and posted on HHS's Web site, although he did not know when posting 
would occur. A report containing results from the second evaluation 
component, the telephone surveys of beneficiaries, was expected later 
in 2004.[Footnote 50]

HHS Has Not Ensured That States Meet Progress-Reporting Requirements: 

HHS's monitoring and reporting requirements, which the states agree to 
carry out under HHS oversight, are set forth in the terms and 
conditions attached to each demonstration's approval letter. Although 
HHS and the states participated in required telephone conference calls 
to monitor the demonstrations' start-up, HHS has not ensured that all 
states submit the required quarterly and annual progress reports. The 
lack of sufficient and timely information from progress reports may 
impair the department's ability to monitor demonstration operations and 
accomplishments.

Monitoring and reporting requirements are not as clearly established 
for the Pharmacy Plus initiative as for the Health Insurance 
Flexibility and Accountability (HIFA) initiative: 

* The HIFA and Pharmacy Plus initiatives both require states to 
participate with HHS in monthly telephone monitoring calls. For 
pharmacy demonstrations, however, monthly calls are required for 6 
months after implementation and only as needed thereafter; for most 
approved HIFA demonstrations, monthly calls are unlimited.

* States with approved HIFA demonstrations are required to submit 
quarterly progress reports in a format agreed upon with HHS, and 
demonstration terms and conditions describe the required content of 
these reports. The terms and conditions for Pharmacy Plus 
demonstrations are less specific regarding progress report format and 
content.

* HIFA demonstrations are expected to submit separate annual reports 
that discuss progress in evaluating the demonstrations, including 
results of data collection and analysis to test research hypotheses. 
Pharmacy Plus annual reports, in contrast, may be combined with or 
include the fourth quarterly progress report, may follow the same broad 
content guidelines as quarterly reports, and are not required to report 
progress in evaluation.

As of March 2004, HHS and the four Pharmacy Plus states had 
participated in the initial monitoring phone calls and begun to gather 
data on how their demonstrations were working. HHS and the states 
confirmed participating in monthly telephone calls for the first 6 
months and then agreeing to maintain contact as needed. An HHS official 
told us the department did not set agendas or document these informal 
contacts, which focused on demonstration operations as states tracked 
enrollment and began to gather information about drug use and 
expenditures for new beneficiaries. States reported taking some steps 
to develop the capacity to report on their demonstrations. Florida, 
Illinois, and Wisconsin, for example, reported having or developing 
data management systems containing state Medicaid and other data that 
are capable of generating demonstration-specific reports. South 
Carolina expected to rely on existing Medicaid data systems. None of 
the states, however, were tracking the number of demonstration 
enrollees who had become eligible for Medicaid, although officials in 
three states reported the ability to do so. Further, the states had not 
provided information to HHS to assess whether diversion savings were 
occurring.

The information that HHS requires states to report has been 
insufficient for determining whether the demonstrations are operating 
as intended. According to one HHS official, HHS has not prescribed a 
standard format for, or specific information to be provided in, either 
the quarterly or annual progress reports; rather, the department works 
with the states to obtain needed information. The Pharmacy Plus terms 
and conditions stipulate that written quarterly and annual progress 
reports contain, at minimum, (1) a discussion of events during the 
quarter, including "enrollment numbers, lessons learned, and a summary 
of expenditures";[Footnote 51] (2) notable accomplishments; and (3) 
problems and questions that arose and how they were resolved. The same 
HHS official told us that in response to these general requirements, 
states' progress reports did not always include all information 
considered useful for monitoring purposes. For example, HHS reported 
that officials were working with Illinois to obtain additional 
information to complete its draft annual progress report. Illinois' 
six-page annual report, submitted in September 2003, reported only on 
new demonstration beneficiaries and did not include first-year starting 
or ending enrollment or cost information for the state's Medicaid 
senior program as a whole--the services and population affected by the 
Pharmacy Plus spending limit. One HHS official told us that after 
review of Illinois' report, these cost and enrollment data were 
specifically requested to assess whether the new drug benefit was 
keeping seniors from becoming eligible for full Medicaid benefits. As 
of February 2004, Illinois had not provided this information.

Finally, HHS has not insisted on timely submission of the required 
quarterly and annual reports. Although Pharmacy Plus terms and 
conditions specify that quarterly reports are due 60 days after the end 
of the quarter, and annual reports are due 60 days after the end of the 
fourth quarter, HHS has not ensured that states submit the reports on 
time. Again, the department's policy is to work with the states toward 
compliance. As of January 2004, Florida and Wisconsin had submitted all 
required written quarterly reports, mostly on time, while South 
Carolina had submitted only one of three required progress 
reports.[Footnote 52] Illinois, whose demonstration was the first to be 
implemented, did not submit any of the three required quarterly reports 
before submitting its combined fourth quarterly and first annual report 
early in September 2003.

Conclusions: 

HHS's approval and monitoring of state demonstrations under the 
Pharmacy Plus initiative raise cost and oversight concerns and, 
ultimately, program concerns. The department's approval of four states' 
demonstrations raises questions about HHS's basis for its decisions. 
Because HHS based the spending limits it approved on higher-than-
justified growth rates, these spending limits do not, in our view, 
represent reasonable estimates of demonstration costs over the 5-year 
trial periods and are not budget neutral. It was difficult to assess 
the reasonableness of the spending limits themselves, given that they 
were decided upon through an undocumented negotiation process, and 
neither public nor HHS internal documents stated the rationale for 
approving higher growth rates. We found that if HHS's benchmarks had 
been used to establish the spending limits, the federal government's 
liability for the four demonstrations could have been $1.6 billion 
lower over 5 years. Moreover, the approved demonstrations rely on 
highly questionable assumptions about the extent to which savings would 
accrue to Medicaid from improved health of people receiving the new 
pharmacy benefit, particularly since many of them already had pharmacy 
benefits through existing state-funded programs.

In addition, the Pharmacy Plus initiative raises important evaluation 
questions about how improved access to prescription drugs may affect 
seniors' health and Medicaid and Medicare costs. Although some of these 
questions will likely be addressed by the independent evaluation of two 
states' demonstrations, in the interim HHS does not appear to be 
ensuring that states provide sufficient, consistent, and timely 
information for demonstration monitoring or that states begin 
implementing their own evaluation plans. The limited available 
information on how these demonstrations are operating makes it 
difficult to assess whether they are operating as intended.

The concerns about HHS's approved Pharmacy Plus demonstrations parallel 
those we have raised about other section 1115 waiver demonstration 
approvals over the past decade. These include the extent to which the 
department is protecting the Medicaid program's fiscal integrity and 
the need for clear criteria and a public process when HHS reviews and 
approves demonstrations. Along with the authority to waive Medicaid 
requirements, and the flexibility given states to test new approaches 
for delivering services more efficiently and effectively, comes the 
responsibility for making decisions based on clear criteria and for 
monitoring the demonstrations and learning from them. More can and 
should be done to fulfill this responsibility.

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.

To improve HHS's process for reviewing and approving states' budget 
neutrality proposals for Pharmacy Plus and other Medicaid section 1115 
demonstrations, we recommend that the Secretary take three actions: 

* For future demonstrations, clarify criteria for reviewing and 
approving states' proposed spending limits.

* Consider applying these criteria to the four approved Pharmacy Plus 
demonstrations and reconsider the approval decisions, as appropriate.

* Document and make public the basis for any section 1115 demonstration 
approvals, including the basis for the cost and enrollment growth rates 
used to arrive at the spending limits.

To ensure that approved Pharmacy Plus and other Medicaid section 1115 
demonstrations fulfill the objectives stated in their evaluation plans, 
we recommend that the Secretary take two actions: 

* Ensure that states are taking appropriate steps to develop evaluation 
designs and to implement them by collecting and reporting the specific 
information needed for a full evaluation of the demonstration 
objectives.

* On acceptance, make public the interim and final results of HHS's 
independent Pharmacy Plus evaluation.

To ensure that the Secretary and other stakeholders have the 
information needed to monitor approved Pharmacy Plus and other Medicaid 
section 1115 demonstrations to determine if they are functioning as 
intended, we recommend that the Secretary take two actions: 

* Ensure that states provide sufficient information in their 
demonstration progress reports, in a consistent format, to facilitate 
the department's monitoring.

* Ensure that states submit required demonstration progress reports in 
a timely manner.

Agency and State Comments and Our Evaluation: 

We provided a draft of this report for comment to HHS and the states of 
Florida, Illinois, South Carolina, and Wisconsin. HHS and Florida, 
Illinois, and Wisconsin responded with written comments, which are 
reproduced in appendixes III through VI, respectively. South Carolina 
provided technical comments, which we incorporated in our report as 
appropriate.

HHS's Comments and Our Evaluation: 

HHS concurred with five of our recommendations to strengthen the 
processes for approving and overseeing Pharmacy Plus and other Medicaid 
section 1115 waivers and disagreed with two. It concurred with our 
recommendations to make public the basis for section 1115 demonstration 
approvals and to ensure that Pharmacy Plus and other Medicaid section 
1115 demonstrations fulfill the objectives of their evaluation plans by 
working with the states toward useful program evaluations and making 
results of the independent Pharmacy Plus evaluation publicly available. 
HHS also concurred with our recommendation to ensure that adequate 
information is available to monitor the demonstrations to determine if 
they are functioning as intended. In this regard, HHS stated that it 
has provided each state that has implemented a Pharmacy Plus 
demonstration with an example of an outline and content to be used as a 
guide for progress reports and that it will make concerted efforts to 
ensure that states submit the reports in a timely manner.

HHS did not concur with our recommendation that the Secretary of HHS 
clarify criteria for reviewing and approving states' proposed 
demonstration spending limits, indicating that although the department 
recognizes the importance of using criteria for reviewing budget 
neutrality, strict criteria cannot be determined in advance because 
states' circumstances differ. HHS also strongly disagreed with our 
recommendation that the Secretary consider applying clarified criteria 
to the four approved Pharmacy Plus demonstrations and reconsider the 
approval decisions as appropriate. HHS stated that it used criteria to 
review each of the approved, disapproved, and pending demonstration 
proposals; believes the four approved demonstrations were based on 
well-supported budget estimates of future state spending; and does not 
believe it appropriate to reconsider approved demonstrations before the 
end of the approval periods.

We agree with HHS that some flexibility is appropriate in considering 
the unique Medicaid section 1115 demonstrations proposed by different 
states. Consistent with our analyses of other section 1115 
demonstration waivers over the past decade, however, we believe HHS's 
review process and decision criteria should be clear, and the results-
-particularly when approved spending limits deviate significantly from 
limits developed using benchmarks that HHS said it uses as a starting 
point--should be publicly explained and documented in the 
demonstrations' approval letters and terms and conditions. Even though 
HHS has developed a standard application form for Pharmacy Plus 
demonstrations, that form and other guidance does not provide written 
criteria for how HHS reviews and approves the growth rates that states 
propose. HHS's rationale for significantly deviating from benchmarks 
for projecting future program growth in establishing different states' 
spending limits has not been documented or made clear to us or to 
others, including other states that may be seeking approval of 
demonstration proposals. Without such clarity, questions arise as to 
how consistently states have been or will be treated in applying for 
demonstrations. Further, in our view, Pharmacy Plus demonstration 
approvals were based on questionable savings assumptions. We believe 
that HHS should establish clear criteria on which to base the spending 
limits and should reconsider its spending limit decisions for the 
approved Pharmacy Plus demonstrations in light of such criteria.

HHS also commented that it was premature to evaluate the Pharmacy Plus 
demonstrations given the limited experience from 12 to 18 months of 
operation. HHS said that were the outcome predetermined, a 
demonstration would serve no purpose. The agency believes the Pharmacy 
Plus initiative provides states an opportunity to use a Medicaid 
demonstration to test if providing drug coverage will prevent the aged 
and disabled low-income population from becoming Medicaid eligible. HHS 
noted that the four approved demonstrations together are providing drug 
coverage to 346,000 seniors who would otherwise be without this 
important benefit.

We agree that it is too early to evaluate the outcomes of the 5-year 
demonstrations and that section 1115 demonstrations are intended to 
test new propositions. More needs to be done, however, to ensure that 
states' evaluations collect the information needed to determine whether 
those new propositions are functioning as intended. Four states have 
Pharmacy Plus demonstrations in place to test such propositions, and 
substantial federal funding is involved, including costs that were 
previously paid for by the states themselves. For these reasons, HHS 
has a responsibility to (1) make fiscally prudent decisions in its 
approvals, (2) ensure that savings hypotheses have some grounding in 
experience or research, and (3) ensure that the evaluations are planned 
and conducted in a way that will produce adequate information regarding 
the demonstrations' research hypotheses.

We also agree that the demonstrations can provide a valuable benefit to 
low-income seniors and disabled individuals who might otherwise be 
without drug coverage. But three of the four states with approved 
demonstrations had state-funded drug coverage programs in place before 
implementing their Pharmacy Plus demonstrations, and these state-funded 
programs became eligible for federal matching funds when the 
demonstrations were approved. We therefore find HHS's statement that 
the demonstrations are providing drug coverage to seniors who would 
otherwise be without it to be an overstatement.

HHS also commented on how MMA may affect the operation of approved 
Pharmacy Plus demonstrations and the review of pending and new 
demonstration proposals. HHS stated that seniors covered by the four 
Pharmacy Plus demonstrations will be able to begin receiving drug 
coverage under the Medicare Part D program in January 2006, and states 
will be able to use their own funds to "wrap around" the Medicare 
benefit to assist other Medicare beneficiaries whose incomes exceed the 
level for low-income subsidies. At that time, HHS believes there will 
be less need for Pharmacy Plus demonstrations, given expanded Medicare 
coverage for prescription drugs, and states operating the 
demonstrations will need to decide if they want to continue doing so 
and if their demonstrations can continue to be budget neutral. We have 
reviewed and incorporated this new information as appropriate.

HHS's written comments appear in appendix III, along with our response 
to additional comments that HHS provided on the findings in our draft 
report. The department also provided technical comments, which we 
considered and incorporated as appropriate.

Illinois' and Wisconsin's Comments and Our Evaluation: 

Illinois and Wisconsin officials commented that our draft report 
overstated the demonstrations' financial risk to the federal government 
and was unnecessarily alarming in light of data showing that the 
demonstrations are operating well within their spending limits. In its 
comments, Illinois said that it stood by the growth rates it used to 
develop the spending limit for its Pharmacy Plus demonstration; it 
further argued for the soundness of its demonstration's premise--that 
providing a drug benefit to seniors will keep them healthier than if 
they had no drug coverage. In its comments, Wisconsin said that the 
draft report failed to consider the significant benefits its 
demonstration offers to the federal government and to seniors.

We agree that providing a drug benefit to seniors could keep them 
healthier, and we do not dispute the benefit to seniors of the states' 
drug programs started or expanded through Pharmacy Plus demonstrations. 
The demonstrations were approved, however, on the presumption that the 
cost of each state's prescription drug program would be paid for in 
savings from keeping seniors with little or no previous drug coverage 
healthy enough that they would not become eligible for full Medicaid 
benefits. Illinois' demonstration was approved on this presumption even 
though most of the beneficiaries were already receiving some 
prescription drug coverage through the state's existing state-funded 
program. We remain concerned that HHS is not maintaining its policy to 
ensure demonstrations are budget neutral.

Illinois also commented that it had taken all necessary steps to 
conduct its own evaluation and that it had cooperated fully with 
federal evaluators and HHS officials. Illinois said that although it 
officially filed its quarterly reports late, it submitted all the 
detailed data contained in those reports to CMS monthly. We are 
principally concerned with the extent to which the information that 
Illinois provided could be used to monitor whether the demonstration 
was operating as intended. Its one-to two-page quarterly reports, filed 
late, tallied the number of beneficiaries enrolled in the demonstration 
and drug expenditures to date and provided a narrative paragraph on 
accomplishments, problems, or issues. The information itself, however, 
furnishes little insight as to whether the demonstration is operating 
as intended or whether the benefit is reducing Medicaid costs.

Wisconsin commented that the draft report failed to ascribe any value 
to the government of Wisconsin's agreement to cap its federal Medicaid 
funding for seniors as a condition of Pharmacy Plus demonstration 
approval. We believe the draft report accurately captured HHS's 
approach to limiting the federal liability for the Pharmacy Plus 
demonstrations by establishing a "cap," or spending limit, as a 
condition of approval. We remain neutral on the "value" of this cap for 
several reasons. Requiring states to abide by a spending limit is a 
departure from the open-ended entitlement nature of the Medicaid 
program. We also recognize that under the Medicaid program, states have 
considerable discretion to alter spending by increasing--or decreasing-
-coverage for certain populations and services. In addition, we 
recognize that HHS's budget neutrality practices provide for 
flexibility in approach and that HHS has established such a limit on 
other section 1115 demonstrations before the Pharmacy Plus initiative.

Wisconsin also commented that the draft report failed to mention that 
the demonstrations were reviewed, determined reasonable, and approved 
by OMB. We recognize that OMB is involved in assessing budget 
neutrality and other aspects of Pharmacy Plus and mentioned that 
agency's role in our draft report. Nevertheless, as OMB officials told 
us, the authority for section 1115 waiver approval rests with the 
Secretary of HHS, and responsibility for final Pharmacy Plus approval 
decisions rests with the Secretary and his designees.

Wisconsin further commented that in criticizing CMS for not obtaining 
better evidence to support projected savings, our report fails to 
consider that the reason for demonstration projects is precisely to 
test such propositions. We maintain, however, that when HHS establishes 
a new initiative to encourage states to apply for Pharmacy Plus 
demonstrations, it is the agency's responsibility to ensure that each 
demonstration's evaluation objectives are reasonable, each 
demonstration's savings assumptions are realistic and grounded in some 
evidence, and the evaluations are well planned and data monitoring is 
established early enough to assure that the questions can be answered.

Other States' Comments and Our Evaluation: 

Florida commented that its demonstration was predicated upon savings to 
be achieved over the 5-year life of the program and that its proposed 
spending limit was close to--less than 1 percent above--the 
conservative benchmark spending level we calculated. We agree that 
Florida's spending limit was relatively close to a limit based on the 
benchmarks and included that information in the draft report.

South Carolina provided technical comments that we incorporated as 
appropriate.

As arranged with your offices, unless you release its contents earlier, 
we plan no further distribution of this report until 30 days after its 
date. At that time, we will send copies of this report to the Secretary 
of Health and Human Services, the Administrator of the Centers for 
Medicare & Medicaid Services, and others who are interested. We will 
also make copies available to others upon request. In addition, the 
report will be available at no charge on the GAO Web site at http://
www.gao.gov.

If you or your staff have any questions, please contact me at (202) 
512-7118. Another contact and other major contributors are listed in 
appendix VII.

Signed by: 

Kathryn G. Allen: 
Director: 
Health Care--Medicaid and Private Health Insurance Issues: 

[End of section]

Appendix I: Calculating a State's Pharmacy Plus Spending Limit for All 
Medicaid Seniors: 

To achieve budget neutrality, a state's projected 5-year spending with 
its Pharmacy Plus demonstration cannot exceed 5-year projected costs 
without the demonstration. As a result, the projected costs of a 
state's existing Medicaid program for seniors effectively sets the 
spending limit while the demonstration is under way. Calculating this 
without-demonstration limit (steps 1-5 in fig. 1) starts with a base 
year, generally the most recent full year for which data are available; 
calculations for each subsequent year are based on numbers from the 
previous year. The result limits a state's Medicaid spending for all 
services provided to all Medicaid seniors in the state.

Figure 1: Steps to Calculate Projected 5-Year Without-Demonstration 
Costs: 

[See PDF for image]

[End of figure]

Calculating projected 5-year with-demonstration costs follows the same 
steps but, in addition, factors in the estimated number of new 
beneficiaries receiving only the prescription drug benefit; the costs 
of providing them the benefit; and the expected savings, mainly from 
keeping these beneficiaries healthy enough to avoid eligibility for 
full Medicaid.

[End of section]

Appendix II: Denied, Withdrawn, and Pending Pharmacy Plus Demonstration 
Proposals as of May 2004: 

State and status: Denied.

State and status: Hawaii Submitted January 2003 Denied April 2003; 
Description: Projected enrollment: Individuals with incomes at or below 
300 percent of the federal poverty level (FPL); Coverage and cost 
sharing: Sought federal assistance only for administrative costs for a 
demonstration to make prescription drugs available at the discounted 
Medicaid rate plus a dispensing fee. State was to contribute $1 toward 
the cost of each prescription in the first year, increasing to $8 by 
the fifth year; Reasons for denial: Exceeded the Pharmacy Plus income 
limit at or below 200 percent of FPL, provided for only minimal state 
financial contributions to pharmacists, and did not include the 
necessary budget neutrality analysis.

State and status: Delaware Submitted December 2002 Denied July 2003; 
Description: Projected enrollment: Seniors and adults with disabilities 
with incomes at or below 200 percent of FPL or, if income is above 200 
percent of FPL, with prescription drug expenses exceeding 40 percent of 
their incomes; Coverage and cost sharing: All prescriptions covered by 
the Medicaid state plan, up to an annual benefit limit of $2,500. 
Participants to pay co-payments of $5 or 25 percent of the cost per 
prescription, whichever is greater; Reason for denial: State already 
provided drug benefits to the people to be covered under the 
demonstration.

State and status: Withdrawn; Description: [Empty].

State and status: Massachusetts[A[SUBMITTED JULY 2002] 002 Withdrawn 
March 2003; Description: Projected enrollment: Seniors with incomes at 
or below 188 percent of FPL; Coverage and cost sharing: Same broad 
prescription drug coverage as state Medicaid plan. State proposed three 
levels of co-payments (exact amounts not specified): generic drugs, 
designated brand-name drugs, and all other brand-name drugs. Full cost 
of prescriptions to be covered after participants reached annual out-
of-pocket spending limits: for example, a single person would pay the 
lesser of $2,000 or 10 percent of gross annual income; Reason for 
withdrawal: State's existing pharmacy assistance program for seniors 
already covered the populations to be included in the demonstration, 
and without an expansion the state and the Department of Health and 
Human Services (HHS) could not reach agreement on budget neutrality.

State and status: Pending; Description: [Empty].

State and status: Connecticut Submitted December 2001; Description: 
Projected enrollment: Seniors and adults with disabilities with incomes 
up to 300 percent of FPL; Coverage and cost sharing: All prescription 
drugs and insulin and syringes with specified exceptions, such as 
cosmetics and antihistamines. Annual registration fee of $25 and co-
payments of $12 for those with incomes up to approximately 233 percent 
of FPL and $20 for those above; State program: Covers low-income 
seniors and people with disabilities with incomes up to approximately 
233 percent of FPL. Demonstration would expand eligibility up to 300 
percent of FPL.

State and status: New Jersey Submitted March 2002; Description: 
Projected enrollment: Seniors and adults with disabilities with incomes 
at or below 200 percent of FPL; Coverage and cost sharing: All 
prescription drugs covered by state Medicaid plan, with $5 co-payment 
for each prescription. For brand-name drug when generic is available, 
$5 co-payment plus cost difference between the two; State program: 
Covers seniors and adults with disabilities with incomes up to 222 
percent of FPL if single and 202 percent if married. Demonstration 
would cover individuals with incomes at or below 200 percent of FPL.

State and status: Arkansas Submitted September 2002; Description: 
Projected enrollment: Qualified Medicare beneficiaries age 65 or older 
with incomes at or below 85 percent of FPL; Coverage and cost sharing: 
Would cover two prescriptions per beneficiary per month. Annual $25 
enrollment fee and co-payments of $10 for each generic prescription and 
$20 for each brand-name drug; State program: No state-funded pharmacy 
assistance program for seniors at the time of demonstration proposal 
submission.

State and status: Indiana Submitted June 2002 Revised proposal 
submitted May 2003; Description: Projected enrollment: Seniors with 
incomes at or below 135 percent of FPL; Coverage and cost sharing: 
Same prescription drugs as the state's Medicaid program, plus insulin, 
up to annual benefit caps set on a sliding scale: $1,000 for people 
with incomes up to 100 percent of FPL; $750 for those with incomes up 
to 120 percent of FPL; and $500 for those with incomes at or below 135 
percent of FPL. Participants would pay 50 percent of the discounted 
program price, which is the same as the Medicaid price, for each 
prescription; State program: Existing state-funded pharmacy program 
for low-income seniors to be covered under the demonstration with no 
change in eligibility or drug coverage. State indicated that increased 
enrollment was expected in the demonstration following a change from a 
mail-in rebate system to a point-of-sale system using a discount card.

State and status: Maine Submitted August 2002; Description: Projected 
enrollment: Seniors age 62 or older and adults with disabilities with 
incomes at or below 185 percent of FPL; Coverage and cost sharing: 
Prescription drugs for specified conditions with 20 percent co-payment 
for each prescription, or 10 percent if from mail-order sources. 
Broader range of drugs available for coverage with 20 percent co-
payment after $1,000 out-of-pocket expenses; State program: 
Demonstration would cover state-funded pharmacy program, expand 
conditions covered, and add voluntary mail-order purchase.

State and status: Rhode Island Submitted October 2002; Description: 
Projected enrollment: Seniors and adults with disabilities or chronic 
illness, including chronic mental illness, with incomes at or below 200 
percent of FPL; Coverage and cost sharing: All prescription drugs 
covered by state Medicaid plan. Annual $25 enrollment fee (waived for 
first year of program) and co-payments that increase after participants 
have incurred $1,800 of drug expenses per year under the program, from 
$2 to $4 for generics and from $8 to $12 for brand-name drugs with no 
generic equivalent; other brand-name drugs have a $25 co-payment; 
State program: The demonstration would cover individuals with incomes 
at or below 200 percent of FPL from three state-funded pharmacy 
programs, while individuals in those programs with higher incomes would 
continue to be state funded. The scope of drugs covered by state 
programs would be expanded under the demonstration.

State and status: North Carolina Submitted January 2003; Description: 
Projected enrollment: Seniors with incomes at or below 200 percent of 
FPL; Coverage and cost sharing: All prescription drugs and insulin. 
Co-payments of $5 for generic and $15 for brand-name drugs; annual 
benefit limit of $1,000 per participant; State program: Demonstration 
would cover and expand existing state-funded program by broadening 
prescription drugs covered from drugs for three specific conditions to 
those for all conditions, reducing cost sharing, and increasing annual 
benefit limit from $600 to $1,000.

State and status: Michigan Submitted February 2003; Description: 
Projected enrollment: Seniors with incomes at or below 200 percent of 
FPL; Coverage and cost sharing: Most prescription drugs covered by 
state Medicaid plan, plus insulin and syringes. Annual $25 enrollment 
fee and coinsurance of 20 percent of cost of each prescription up to a 
monthly cap on a sliding scale determined by household income. An 
additional co-payment would be charged for brand-name drugs with 
generic equivalents; State program: Demonstration would cover existing 
state-funded pharmacy assistance program with the same eligibility and 
coverage and expand enrollment.

Source: GAO analysis of state and HHS documents.

Notes: These descriptions of states' Pharmacy Plus demonstration 
proposals are based on the proposals as submitted for HHS review. 
Changes to proposals that may be made during the review process and 
before approval are not available in documents.

[A] In March 2003, Massachusetts withdrew two separate section 1115 
demonstration proposals from review: a Pharmacy Plus demonstration for 
seniors (the proposal described in this appendix) and a prescription 
drug benefit for individuals with disabilities as an amendment to the 
state's section 1115 Medicaid managed care demonstration. At the same 
time, Massachusetts submitted a new proposal--not a Pharmacy Plus 
proposal--to add a drug benefit for certain seniors and disabled 
individuals as an amendment to its existing managed care demonstration. 
In August 2003, that proposal was also withdrawn.

[End of table]

[End of section]

Appendix III: Comments from the Department of Health and Human 
Services: 

DEPARTMENT OF HEALTH & HUMAN SERVICES: 
office of Inspector General:

JUN 8 2004:

Ms. Kathryn G. Allen:
Director: 
Health Care - Medicaid And Private Health Insurance Issues: 
United States General Accounting Office: 
Washington, D.C. 20548:

Dear Ms. Allen:

Enclosed are the Department's comments on your draft report entitled, 
"Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations 
Continue to Raise Cost and Oversight Concerns" (GAO-04-480). The 
comments represent the tentative position of the Department and are 
subject to reevaluation when the final version of this report is 
received.

The Department provided several technical comments directly to your 
staff.

The Department appreciates the opportunity to comment on this draft 
report before its publication.

Signed by: 

Dennis J. Duquette:

Deputy Inspector General of the Office of Management and Policy:

Enclosure:

The Office of Inspector General (OIG) is transmitting the Department's 
response to this draft report in our capacity as the Department's 
designated focal point and coordinator for General Accounting Office 
reports. OIG has not conducted an independent assessment of these 
comments and therefore expresses no opinion on them.

COMMENTS OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES (HHS) ON THE 
GENERAL ACCOUNTING OFFICE'S DRAFT REPORT: "MEDICAID WAIVERS: HHS 
APPROVALS OF PHARMACY PLUS DEMONSTRATIONS CONTINUE TO RAISE COST AND 
OVERSIGHT CONCERNS" (GAO-04-480):

This report looks at the Administration's initiative to simplify and 
encourage States to consider demonstrations under section 1115 of the 
Social Security Act to expand coverage for prescription drugs under the 
Medicaid program to seniors and individuals with disabilities who have 
income exceeding that permitted for Medicaid eligibility but not 
exceeding 200 percent of the Federal poverty level.

As the report notes, HHS' Centers for Medicare & Medicaid Services 
(CMS) approved four States' applications for Pharmacy Plus waivers. 
These programs together are providing drug coverage to 346,000 seniors 
who would otherwise be without this important benefit. However, 
beginning in January 2006, these individuals will be able to begin 
receiving drug coverage under the Medicare Part D program. When 
Pharmacy Plus began, enactment of a drug benefit under Medicare was far 
from certain. With enactment of this historic legislation, Medicare 
beneficiaries will receive substantial coverage for drugs. Low-income 
beneficiaries will receive additional benefits, leaving them with 
minimal out-of-pocket costs. And, States will be able to use their own 
funds to wrap around the Medicare benefit to assist other Medicare 
beneficiaries with incomes that exceed the level for low-income 
subsidies.

When the Medicare Part D benefit is in place, we believe there will be 
less need for Pharmacy Plus waivers. States with waivers in effect will 
need to decide if they want to continue their waiver and if their 
waiver can continue to be budget neutral. Furthermore, the overlap of 
the Pharmacy Plus and Medicare Part D programs will make it difficult 
to fully evaluate the cost-effectiveness of Pharmacy Plus waivers. 
States generally projected that the break-even point for Pharmacy Plus 
would not occur until the fourth or fifth year of the demonstrations. 
In all of the Pharmacy Plus States, the Medicare drug benefit will 
begin before the time projected by the State for the savings generated 
by pharmacy coverage to exceed the cost of the benefit.

Based on the amount of time expected by the States and HHS for the 
Pharmacy Plus investment to pay off, our overall comment to GAO's 
findings and recommendations is that it is premature to evaluate the 
Pharmacy Plus waivers based on the limited experience available to 
date. It is important to note that the very nature of a demonstration 
project is to test new concepts and approaches in the Medicaid program. 
Were the outcome predetermined, a demonstration would serve no purpose. 
Each of the approved demonstration programs is scheduled to run for 5 
years. As noted in the report, when this review was conducted, the 
four programs reviewed had been in operation from 12 to 18 
months-hardly sufficient time to determine the demonstrations' 
outcomes.

The premise underlying the Pharmacy Plus demonstration program is 
straightforward. Prescription drugs are an increasingly important and a 
costly part of medical care. Medicare beneficiaries-the aged and 
disabled-who have income marginally in excess of that permitted for 
Medicaid eligibility, are at high risk of not adhering to their drug 
regimens if they lack insurance or other financial support to pay for 
prescription drugs. This is why 20 States established State-funded 
pharmacy assistance programs for their low-income citizens. Failure to 
take prescribed medications results in poorer health and increased 
health care costs. Pharmacy Plus provides the States an opportunity to 
use a Medicaid demonstration to test if providing drug coverage will 
prevent these populations from becoming Medicaid eligible and result in 
lower Medicaid costs.

GAO Recommendation:

To improve HHS' process for reviewing and approving Slates' budget 
neutrality proposals for Pharmacy Plus and other Medicaid section 1115 
demonstrations, we recommend that the Secretary take three actions 
first:

First, for future demonstrations, clarify criteria for reviewing and 
approving States'proposed spending limits.

HHS Response:

We nonconcur. We recognize the importance of using criteria for 
reviewing budget neutrality for Pharmacy Plus and other Medicaid 
section 1115 demonstrations; however, because State circumstances 
differ, strict criteria cannot be predetermined as our review is 
dependent on the specific proposal at issue. CMS, together with the 
Federal team of staff in other components of HHS and the Office of 
Management and Budget (OMB), works with the submitting States to 
understand the States' proposals and budget estimates. This review 
process involves much back and forth conversation to clarify the 
submission, note omissions or needed changes, and discuss budget 
assumptions. It is unrealistic and impractical to document all of these 
discussions. However, we note that for Pharmacy Plus we developed a 
template for the State application. This provides guidance both on the 
program elements that HHS expects to be included in the application and 
State historical budget data that must be submitted. The program and 
budget templates guide States through the program elements that must be 
submitted in the application in order for HHS to review and approve the 
proposal. We believe that the template brings a considerable degree of 
standardization to the Pharmacy Plus application review process over 
that which would exist were no template available. In fact, of all the 
types of demonstrations, those with HHS-developed templates (such as 
Pharmacy Plus, Health Insurance Flexibility and Accountability, and 
Independence Plus) provide the most clarity in the development and 
approval process.

GAO Recommendation:

Second, consider applying these criteria to the four approved Pharmacy 
Plus waivers and reconsider the approval decisions, as appropriate.

HHS Response:

We strongly nonconcur. The Federal team has used the process and 
criteria stated above to review each of the approved, disapproved, and 
pending Pharmacy Plus demonstrations.

This process has resulted not only in the approval of four 
demonstrations, but two denials of demonstration applications, and nine 
pending demonstrations that have not been approved largely due to 
concerns about budget neutrality. HHS believes that the four projects 
approved were based on well-supported budget estimates of future State 
spending. We do not believe it is appropriate to reopen approved 
demonstrations before the end of the approval period.

GAO Recommendation:

Third, document and make publicly available the basis for any section 
1115 demonstration approvals, including the basis, for the cost and 
enrollment growth rates used to arrive at the spending limits.

HHS Response:

We concur. HHS makes available on our CMS web site the incoming 
applications (including the budget neutrality spreadsheets, which 
contain all growth trend rates and show the historical, without waiver, 
and with waiver trend rates), the approval or disapproval letters, 
terms and conditions, and final budget neutrality spreadsheets.

GAO Recommendation:

To ensure that approved Pharmacy Plus and other Medicaid section 1115 
demonstrations fulfill the objectives stated in their evaluation plans, 
we recommend that the Secretary take two actions:

First, ensure that States are taking appropriate steps to develop 
evaluation designs and to implement them by collecting and reporting 
the specific information needed for a full evaluation of the 
objectives.

HHS Response:

We concur. HHS agrees that the evaluation component of demonstrations 
is important, which is why it is a requirement of approval. The 
application specifies that there must be an evaluation conducted by the 
State. States are required to submit an evaluation plan for their 
Pharmacy Plus demonstrations prior to implementation. We will continue 
to work with States toward a useful evaluation of their programs.

GAO Recommendation:

Second make the interim and final evaluation results of HHS' 
independent Pharmacy Plus evaluation public when approved by HHS.

HHS Response:

We concur. HHS agrees with this recommendation and plans to make the 
results of this evaluation public by making it available on our CMS web 
site.

GAO Recommendation:

To ensure that the Secretary and other stakeholders have information 
needed to monitor approved Pharmacy Plus and other Medicaid section 
1115 demonstrations to determine if they are functioning as intended, 
we recommend that the Secretary take two actions:

First, ensure that States provide sufficient information in their 
demonstration progress reports, in a consistent format, to facilitate 
the Department's monitoring.

HHS Response:

We concur. During implementation and the initial years of the 
demonstration, HHS' monitoring focus is to ensure that: a) individuals 
are not adversely affected by the demonstration, b) individuals are 
being served by the program, and c) that actual State and Federal 
spending does not exceed the budget neutrality projections. We think 
that receiving this information is sufficient to monitor the program as 
it develops. For every State that has implemented a Pharmacy Plus 
program, HHS has provided an example of an outline and content that is 
to be used as a guide for the progress reports.

We think that a consistent format is more important for evaluative 
purposes than it is for monitoring purposes. To evaluate the Pharmacy 
Plus initiative as a whole, it is helpful to have standard data 
collected to measure the effects of the program. As HHS continues to 
work with the Pharmacy Plus States toward an evaluation of the program, 
we will seek to have States collect consistent data to help us best 
understand the effect of these demonstrations.

GAO Recommendation:

Second, ensure that States submit required demonstration progress 
reports in a timely manner.

HHS Response:

We concur. HHS agrees that States should submit their reports timely 
and will make concerted efforts to ensure that States do so.

The following are HHS' comments to the GAO Findings in the draft 
report:

GAO Finding: Four HHS-Approved Pharmacy Plus Demonstrations are Likely 
to Substantially Increase Federal Medicaid Spending.

GAO concludes that the four approved Pharmacy Plus demonstration 
projects will not prove to be budget neutral to the Medicaid program, 
resulting in increased costs to the program. HHS disagrees with this 
conclusion. We find the GAO analysis faulty and lacking in substance. 
We note that while we approved four applications, we disapproved two 
others, and reviewed but did not approve another nine. The reason we 
approved only four applications is that we take seriously our 
responsibility to ensure budget neutrality and will not approve 
applications until we are confident that the budget estimates are well 
supported.

As noted in the report, HHS requires that Medicaid demonstrations be 
budget neutral to the Medicaid program. Because the premise of Pharmacy 
Plus is that a drug benefit will "divert" low-income individuals from 
Medicaid, budget neutrality needs to encompass not only the 
expenditures for those covered by the demonstration, but also the 
entire affected population group. That is, we include expenditures for 
the regular Medicaid population from which costs are to be diverted, as 
well as the expansion benefit to Pharmacy Plus demonstration 
participants. States seeking Pharmacy Plus waivers are required to 
agree to a 5-year aggregate budget cap. This cap is an estimate of 
total Medicaid expenditures for the population group included in the 
waiver (e.g., aged), including the States' long-term care 
expenditures--the most costly category of care in Medicaid. Clearly, 
this cap puts the States at risk, making it critical that the cap be an 
accurate estimate of future Medicaid costs without the waiver. 
Likewise, it is important to HHS that the estimate be accurate because 
the Federal Government commits to matching State expenditures up to the 
cap. For each State, HITS worked closely with State and Federal staff 
to develop and agree to the best estimate of each State's expenditures
over the 5-year life of the waiver. Clearly, there is no standard 
formula that can be used for this calculation.

The GAO report spends much time discussing deviations from "benchmark" 
numbers for expected program growth, going as far as to calculate the 
difference between the States' agreed upon caps and what the caps would 
have been based on the benchmarks, and equating these to $1.5 billion 
in excess Medicaid payments. We take strong exception to this analysis 
and its conclusions, and find the arguments made by GAO invalid. HHS 
policy has never been to hold States to benchmark levels of growth. 
Rather, we used two benchmarks as a starting point in our discussions 
with States. The starting point for evaluating budget neutrality is the 
lower of the State's historical rates of growth, based on the most 
recent 5 years, for costs and enrollment, or the national growth rate 
estimated by the Office of the Actuary in CMS and used in the 
President's Budget.

We are concerned that GAO has missed the fundamental purpose of budget 
neutrality. It is not to hold the State to a formula-driven cap. 
Rather, the goal is to estimate the amount the State would have spent 
in the absence of the demonstration. The estimation process is 
necessarily an individualized one, and must take into account the 
particular demographic, economic, and program characteristics of the 
State at issue. For this reason, we regard the growth measure described 
above not as a "benchmark" but as a "starting point" for the estimation 
process.

This starting point is viewed as the low-end estimate for the State. 
Both estimates have limitations that would make it unreasonable of us 
to use either one as the sole standard in setting an aggregate budget 
cap for future spending. We know that State historical growth rates may 
not be predictive of future growth rates and that growth rarely occurs 
at a steady pace. Regarding the President's budget estimates, these are 
estimated on a national basis: clearly growth for individual States is 
expected to vary both up and down from these estimates. Estimating 
future expenditures for an individual State's Medicaid program is a 
process that takes into account many different factors. State Medicaid 
programs are dynamic. Change is routine, not the exception. We 
acknowledge that this makes estimating future expenditures on an 
aggregate basis very difficult. This is why budget neutrality for 
section 1115 demonstration programs is generally constructed on a per 
capita basis. But the nature of the hypothesis underlying Pharmacy Plus 
requires an aggregate cap. We work closely with States to define that 
cap because of the risk the States are accepting. We believe that each 
State best knows its Medicaid program, population, cost drivers, and 
effects of exogenous factors. HHS tries to balance State historical 
growth, HHS' own national estimates, and the State's individual best 
estimates. From there, budget neutrality estimates are negotiated and 
agreed to by all parties. This is consistent with the approach taken 
with other demonstrations. Demonstrations approved in the past, such as 
State Health Reform demonstrations, have included future program growth 
estimated by States, including increases due to planned program 
expansions.

GAO focuses inappropriately on two "benchmarks" for growth in State 
costs and enrollment. It argues that the aggregate budget caps are not 
budget neutral because HHS approved caps based on higher growth 
assumptions. As GAO acknowledges (pages 25 and 26), HHS allows States 
to present a rationale for higher growth rates. GAO's conclusion that 
we violated our own approval criteria in allowing higher growth rates 
is wrong.

The report also gives the impression that we grossly exceeded the 
benchmarks (the starting point for us); in fact only two (for Illinois 
and Wisconsin) of the eight estimates (cost and enrollment growth for 
each of the four States) did we approve a growth rate that exceeded 
both the State average and the President's budget estimate.[ In these 
cases we were convinced, by data presented by the State, that changed 
circumstances in the State would result in higher enrollment growth. In 
three instances, we used the lower of the State historical growth and 
the President's budget estimate. In one instance the number agreed was 
between the two benchmarks. In the remaining two instances, we used the 
greater of the two benchmarks.

It is also worth taking a closer look at instances where the estimate 
used exceeded the two benchmarks. For those instances that involve 
enrollment growth, it is generally more volatile than cost growth, as a 
variety of factors can result in abrupt and significant caseload 
growth. Liberalizing program eligibility clearly causes enrollment to 
grow. Other factors, such as program exposure, outreach, and the 
creation of an easier enrollment process, have the same effect. It is 
important to remember that enrollment growth by State varies more 
widely from the national President's Budget estimates than does cost 
growth.

Illinois' growth was largely the result of an expansion in eligibility 
scheduled to take effect shortly after the start of the Pharmacy Plus 
demonstration. The Federal team reviewed the estimates used by the 
State in its budget. These estimates were not developed to support the 
State's Pharmacy Plus application. They were used to request funds 
needed to implement a legislated program expansion. We found these 
numbers to be credible.

In Wisconsin, the State's estimates were based on several factors 
including enrollment/education initiatives launched by the Social 
Security Administration and several State initiatives designed to 
increase enrollment by removing application and renewal barriers to 
Medicaid eligibility. Wisconsin estimated annual enrollment increases 
of 4 percent. The enrollment growth rate approved was 2 percent. HHS 
neither violated its own benchmarks, as GAO describes them, nor 
approved unreasonable, unfounded cost increases to the Medicaid 
program.

We note an error in the GAO chart on page 26 of the report. Our 
records show South Carolina's historical average for enrollment growth 
to be 1.0, not 0.7 as indicated by GAO. Our records show Wisconsin's 3-
year growth rate to be 6.6 percent (5.4 percent if using 5 years as was 
used by GAO). CMS used the 3-year estimate; therefore, the approved 
percentage was the lower benchmark.

GAO Finding: HHS' Review Process and Basis for These Approvals Have Not 
Been Clearly Set Forth.

The Federal review process for Pharmacy Plus demonstrations is similar 
to that for other Medicaid Section 1115 demonstration applications and 
does not differ greatly from other types of program requests that HHS 
processes. HHS considers many other types of State program requests 
that require us to evaluate future costs in order to avoid incurring 
new expenditures in the Medicaid program. These programs with costs 
tests, such as section 1915(6) waivers, section 1915(c) waivers, and 
section 1115 demonstrations, are all reviewed similarly in HHS. CMS, 
other HHS components, and, at times, OMB work with the State to reach 
agreement on best estimates for future spending using historical costs 
trends. The Federal team takes into consideration the information 
provided by the State as well as its own estimates.

The process for all these program reviews, including Pharmacy Plus, is 
very interactive. Numerous teleconferences take place within the 
Federal team and between Federal and State staff. The HHS staff also 
regularly report progress to senior management and receive guidance on 
how to proceed. A prime focus of this interaction is to develop the 
best estimate of future State spending to use in the budget neutrality 
calculation. We see no reason to establish a different review process 
for Pharmacy Plus demonstration applications.

GAO Finding: Approved Demonstrations Are Not All Meeting Evaluation and 
Monitoring Requirements.

A standard Term and Condition of approvals of Medicaid 1115 
demonstration projects is a requirement for the State to evaluate the 
program. At times, HHS also undertakes its own evaluation. As noted in 
the GAO report, HHS has a contract with Brandeis University to evaluate 
the Illinois and Wisconsin Pharmacy Plus demonstrations. Ideally, a 
State would develop its evaluation plan prior to program 
implementation. In practice, HHS has found that, even when States 
present an evaluation design prior to the start of the demonstration, 
it frequently changes as States gain experience implementing the 
program, gathering initial data, and discovering new questions to 
address. HHS is also aware that States have limited resources to fund 
independent evaluations and usually rely on in-house staff. States 
frequently do not have staff with the skills needed to develop or carry 
out a sophisticated evaluation design, nor the funds for a costly 
evaluation. For these reasons, HHS works with State staff to assist 
them in developing a reasonable evaluation plan that addresses the key 
questions of benefit coverage and costs in the demonstration program.

In monitoring the demonstration programs, HHS is primarily concerned 
with tracking Medicaid enrollment and expenditures. As we noted during 
implementation and the initial years of the demonstration, HHS' focus 
is to ensure that: a) individuals are not adversely affected by the 
demonstration; b) individuals are being served by the program, and 
c) that actual State and Federal spending does not exceed the budget 
neutrality projections. The monthly calls held between HHS and the 
State, and the quarterly progress reports are designed to help HHS 
monitor program activity. HHS monitors actual spending by reviewing 
financial reports submitted through the CMS 64 system. HHS is 
monitoring the Pharmacy Plus demonstrations through these means.

HHS provided examples of progress reports to all States and specified 
those items that HHS wanted to be reported on a quarterly basis. While 
Illinois has not been timely on some of its quarterly progress reports 
(but did provide them), the State has been sending HHS enrollment data, 
utilization data, and data about program enrollees.

This information, together with the financial expenditure reports and 
the monthly phone calls, provide us adequate information to monitor 
their program. HHS also asked Illinois to revise its originally 
submitted annual report to include more information. South Carolina, 
likewise, has not been timely in submitting its formal progress 
reports. However, the State and HHS continue to have monthly progress 
calls that involve discussions about program enrollment and operation. 
Florida and Wisconsin have been timely on their report submissions. As 
noted above in our response to a GAO recommendation, HHS plans to make 
concerted efforts to ensure timely submission of these reports in the 
future.

GAO's Response to the Department of Health and Human Services' Specific 
Comments on GAO's Findings: 

In addition to indicating whether it concurred with our seven 
recommendations, HHS commented on the report draft's findings in three 
areas.

Effect of HHS-Approved Pharmacy Plus Demonstrations on Federal Medicaid 
Spending: 

HHS disagreed with our conclusion that the four approved Pharmacy Plus 
demonstrations will not prove to be budget neutral to the Medicaid 
program and will possibly result in increased federal Medicaid 
spending. HHS stated that the department takes seriously its 
responsibility to ensure budget neutrality in the Medicaid 
demonstrations it approves, noting that it approved four Pharmacy Plus 
demonstrations while denying two and reviewing but not approving nine 
other proposals whose budget estimates were not well supported.

HHS was concerned that we missed the fundamental purpose of budget 
neutrality, which HHS says is not to hold states to a formula-driven 
cap but to estimate the amount of future Medicaid spending. HHS 
believes that the four approved demonstrations' spending limits were 
based on well-supported budget estimates of future state 
spending,[Footnote 53] and said its policy has never been to hold 
states to benchmark levels of growth. Those benchmarks are, in HHS's 
view, a starting point in projecting how the program will grow, because 
HHS typically permits states to present rationales for higher growth 
rates.

We agree that there may be state-specific circumstances that justify 
departures from benchmarks HHS considers as starting points. 
Nevertheless, we believe that, given the potential impact on federal 
Medicaid spending, HHS and states should justify and document any 
significant departures from those starting points. In conducting our 
assessment, we interviewed HHS officials and Illinois and Wisconsin 
state officials and requested all documents that were considered in 
their budget neutrality negotiations. Those interviews and documents, 
which we discussed in the draft report, did not fully support the 
higher growth rates that were approved. We note that enrollment growth 
rates, in particular, can have a significant multiplier effect on 
future spending estimates. Further, we note that HHS allowed at least 
one state to argue for a higher growth rate using broad justifications-
-such as the effect of the Social Security Administration's nationwide 
outreach program for low-income Medicare beneficiaries--that other 
states could also have used but did not, raising questions of clarity 
and consistency in both the process and the final decisions.

Documentation of HHS's approval decisions and the basis for approved 
spending limits could provide a rationale for higher cost and 
enrollment growth rates and offer guidance and assurance of consistent 
treatment to other states applying for Pharmacy Plus demonstrations. 
Absent such documentation, neither HHS nor the states have adequately 
justified the departures from states' historical growth rates or the 
CMS Actuary's growth projections in establishing states' spending 
limits.

HHS's Review Process and Basis for Approvals: 

In its comments, HHS stated that the federal review process for 
Pharmacy Plus demonstration proposals is similar to the review process 
for other Medicaid section 1115 demonstrations, indicating that the 
process is necessarily interactive and involves numerous meetings 
within the federal team and with states. We acknowledge that the review 
process for Medicaid section 1115 demonstration proposals benefits from 
being inclusive and interactive, and we are not suggesting that HHS 
should establish a new or different review process specifically for the 
Pharmacy Plus demonstrations. Our concern is that the basis for its 
decisions and any agreed-upon spending limit be clear and justified, 
not only for Pharmacy Plus demonstrations but for all section 1115 
approvals. As noted in the draft report, the concerns raised by HHS's 
approved Pharmacy Plus demonstrations parallel those we have raised 
about other section 1115 waiver demonstration approvals over the past 
decade, including concerns about the extent to which the department is 
protecting the Medicaid program's fiscal integrity and the need for 
clear criteria and a public process in reviewing and approving 
demonstrations.

Approved Demonstrations' Evaluation and Monitoring Requirements: 

HHS commented that the department plans to continue working with states 
toward developing useful program evaluations based on consistent data 
collection as well as sufficient, consistent, and timely monitoring 
information. HHS also plans to make results of the independent Pharmacy 
Plus evaluation available on the CMS Web site. With regard to states' 
own evaluations, HHS emphasized practical limitations, such as 
constraints on state financial and staff resources, indicating that 
while states ideally would develop evaluation plans before implementing 
demonstrations, in practice such plans often change. HHS commented that 
it obtains sufficient information for monitoring the demonstrations 
through telephone contacts and progress reports that respond to an 
example outline the department provided to each demonstration state.

We recognize that state resources are limited, demonstration 
implementation tends to be a higher priority than evaluation, and the 
independent contractor evaluation of Pharmacy Plus will provide 
substantial information. Nonetheless, the lack of action to monitor key 
information--such as whether demonstration enrollees are being diverted 
from Medicaid--to plan how their evaluations will be conducted, or to 
collect data needed for such evaluations suggests a low priority for 
ensuring that evaluations can and will be done. HHS needs to ensure 
that states provide sufficient, consistent, and timely information for 
both demonstration monitoring and for determining whether the 
demonstrations are functioning as intended and to ensure that 
evaluation plans are put into place.

[End of section]

Appendix IV: Comments from the State of Florida: 

FLORIDA MEDICAID:
JEB BUSH: 
GOVERNOR: 
MARY PAT MOORE: 
INTERIM SECRETARY:

May 14, 2004:

Katherine Iritani: 
Assistant Director: 
U.S. General Accounting Office: 
Washington, D.C. 20548:

Dear Ms. Iritani:

This letter responds to your request for written comments concerning 
draft report GAO-04-480 "Medicaid Waivers - HHS Approval of Pharmacy 
Plus Demonstrations Continue to Raise Cost and Oversight Concerns". The 
report raises concerns with both state and federal methodologies used 
to substantiate budget neutrality for Medicaid Pharmacy Plus 
demonstration waivers.

We would note that the Florida waiver application was based in part 
upon assumptions provided to Florida Medicaid by CMS, and that 
Florida's proposed limits were less than 1 % above the conservative 
benchmark spending levels in the GAO reports.

Florida's Pharmacy Plus waiver was predicated upon savings to be 
achieved over the five-year life of the program. Larger savings were 
expected to accrue in the last two years of the program, based upon 
avoiding nursing home admissions and hospital based care as a result of 
improved prescription drug therapies available during the early years 
of the program. While the program may be terminated early due to the 
implementation of the Medicare prescription drug benefit, Florida's 
calculations continue to reflect budget neutrality at a minimum, and 
possible incremental savings.

Sincerely,

Signed by: 

Steven A. Grigas: 
Acting Deputy Secretary: 
Florida Medicaid:

[End of section]

Appendix V: Comments from the State of Illinois: 

Illinois Department of Public Aid:
201 South Grand Avenue East: 
Springfield, Illinois 62763-0002:

Rod R. Blagojevich: 
Governor: 
Barry S. Maram: 
Director: 
Telephone: (217) 782-1200 TTY: (800) 526-5812:

May 14, 2004:

Ms. Kathryn G. Allen: 
Director: 
Health Care - Medicaid and Private Health Insurance Issues: 
United States General Accounting Office: 
Washington, D.C. 20548:

Dear Ms. Allen:

Illinois provides the following comments on the GAO draft Report to the 
Committee on Finance, U.S. Senate, "Medicaid Waivers: HHS Approvals of 
Pharmacy Plus Demonstrations Continue to Raise Cost and Oversight 
Concerns (GAO-04-480)." These comments should be included in the final 
report as Illinois' comments.

Illinois stands by the growth rates used to develop the cost neutrality 
cap for its pharmacy plus waiver. They are supported by the data and 
other information submitted with the state's waiver application. 
Illinois also believes that the basic premise of the demonstration-that 
providing a drug benefit to an aged population without comprehensive 
drug coverage will keep that population healthier-is a sound premise. 
In fact, it is self-evident. Some states may have determined that a 
drug benefit for seniors would not produce sufficient diversion from 
Medicaid to make a pharmacy plus waiver cost neutral. However, every 
state's Medicaid program is different with respect to benefits and 
population. Illinois is confident that due to its particular program 
structure and population, particularly with respect to spend down and 
long term care, there will be sufficient diversion to make the 
demonstration budget neutral. In fact, preliminary data already shows a 
drop in nursing facility admissions.

Concerns expressed about reduction in services to the aged population 
are unfounded and unnecessarily alarming in light of the fact that cost 
data shows Illinois' demonstration operating within the cost neutrality 
cap.

Illinois has taken all necessary steps to conduct its own evaluation in 
addition to supplying extensive data and participating in numerous 
lengthy interviews for the federal evaluation. Every data element 
necessary for the evaluation is being collected.

Although Illinois' first three quarterly reports were officially filed 
late, all of the detailed data contained in those quarterly reports had 
previously been submitted to CMS on a monthly basis. All issues 
discussed in the narrative portion had been discussed with CMS during 
the monitoring phone calls and on-site visit. Official reporting for 
Demonstration Program purposes of the cost data for the Medicaid aged 
population has not and will not occur until the data set is complete. 
Medicaid law allows one year to submit a claim. Therefore, complete 
data for the first year will not be available until after July 1, 2004. 
Nevertheless, preliminary budget neutrality cost data is submitted 
quarterly to CMS on the CMS-64.

Sincerely,

Signed by: 

Acme Marie Murphy Ph.D. 
Administrator:
Division of Medical Programs:

E-mail: dpawebmaster@mail.idpa.state.il.us: 
Internet: http://www.state.il.us/dpa/:

[End of section]

Appendix VI: Comments from the State of Wisconsin: 

DIVISION OF HEALTH CARE FINANCING:
1 WEST WILSON STREET: 
P O BOX 309: 
MADISON WI 53701-0309:

Jim Doyle Governor:
Telephone: 608-266-8922:

Helene Nelson: 
Secretary:

State of Wisconsin: 
Department of Health and Family Services

FAX: 608-266-1096:
TTY: 668-261-7798:
dhfs.wisconsin.gov:

May 14, 2004:

Kathryn G. Allen: 
Director:
Health Care - Medicaid and Private Health Insurance Issues: 
General Accounting Office:

Washington, DC 20548:

Dear Ms. Allen:

Thank you for the opportunity to provide comments to the draft report 
"Medicaid Waivers: Health and Human Service Approvals of Pharmacy Plus 
Demonstrations Continue to Raise Cost and Oversight Concerns" (GAO-04-
480). The attached addresses substantive comments, corrections, 
clarifications and omissions that we believe should be incorporated in 
the General Accounting Office (GAO) final report.

We believe the GAO audit vastly overstates the financial risk to the 
federal government of Wisconsin's Pharmacy Plus waiver and fails to 
consider the significant benefits to the federal government of the 
terms and conditions of the SeniorCare waiver. Under the terms of the 
approved Pharmacy Plus waiver, in the current state fiscal year 
SeniorCare will reduce drug costs for 90,000 Wisconsin seniors by over 
$112 million, of which the federal government will pay approximately 
$39 million (34.8 percent).

Wisconsin data shows that our costs for SeniorCare are significantly 
below the benchmark, and that the risk to the federal government of 
higher federal spending is significantly less than anticipated. Even 
prior to adjusting SeniorCare for savings derived from individuals 
diverting from Medicaid and from reduced hospitalization and nursing 
home expenditures, the cost to the federal government would total $250 
million, not $416 million based on more recent, actual data. The 
transmittal letter is not consistent with statements in the draft 
report. While the transmittal letter states unequivocally that the 
approved terms will cost the federal government an additional $416 
million, the report indicates that it might cost up to that amount. 
Since statements in the transmittal letter may unduly influence some, 
it is important that this false impression be corrected in the 
transmittal letter. The draft report also fails to note that the terms 
and conditions of Pharmacy Plus waivers for Wisconsin and the other 
states were independently reviewed, determined reasonable, and approved 
by the federal Office of Management and Budget (OMB).

The Pharmacy Plus program is a unique and valuable demonstration of the 
importance of providing a comprehensive drug benefit program to low-
income seniors with significant drug costs. Under the Pharmacy Plus 
model, the Wisconsin SeniorCare program has proven to be an efficient 
and cost-effective program, currently providing full prescription drug 
benefits to 90,000 low-income Wisconsin seniors.

Moreover, the draft report fails to ascribe any value to the federal 
government of Wisconsin's agreement to cap its federal Medicaid funding 
for seniors as a condition of Pharmacy Plus waiver approval. Wisconsin 
took considerable risk in agreeing to cap federal Medicaid matching 
funds for the elderly, and the federal government unquestionably 
realizes a benefit from capping its exposure. While reasonable people 
may differ on the exact value of that benefit, it cannot be assigned 
zero value. In addition, when criticizing CMS for not obtaining better 
evidence to support projected savings, the GAO report fails to consider 
that the reason for demonstration projects is precisely to test such 
propositions. In order to encourage sufficient participation to test 
questions in the real world, the risk parameters must be reasonable.

The Wisconsin SeniorCare waiver was approved prior to the recent 
federal enactment of Medicare drug coverage as an effort to address 
both state and federal interest in expanding assistance for low-income 
senior drug costs. At the time it was approved, the Wisconsin program 
provided the Centers for Medicare and Medicaid Services (CMS) a cost-
effective way to make progress towards that goal. As such, the 
SeniorCare program has proven to be a bargain for taxpayers and 
beneficiaries. In the first 18 months of operation, SeniorCare has 
demonstrated successful and efficient delivery of a drug benefit that 
justifies continued strong support from the Federal government. We 
encourage Congress, CMS and GAO to carefully weigh the importance of 
SeniorCare to 90,000 low-income seniors in Wisconsin as a cost-
effective model for prescription drug coverage.

In summary, Wisconsin's SeniorCare waiver will generate significant 
cost savings to the federal government through reduced Medicaid and 
Medicare payments for hospital and nursing home care. The waiver will 
ensure that low-income seniors have continued access to an easy 
application, to a simple, comprehensive prescription drug benefit, and 
to uncomplicated, reasonable cost sharing requirements when the 
Medicare Part D drug benefit is implemented.

Please find attached a list of complete comments and clarifications to 
the report. Again, thank you for the opportunity to respond to the 
draft. You may contact Russell Pederson, (608) 266-1720, with questions 
regarding this matter.

In closing, I would like to thank you and the GAO staff responsible for 
this report. The GAO has demonstrated a collaborative and collegial 
approach to learning more about the Wisconsin SeniorCare program in 
order to produce this report to Congress.

Sincerely,

Signed by:

Mark B. Moody: 
Administrator:

Attachment:

Wisconsin Department of Health and Family Services Comments to GAO 
Draft Report:

Medicaid Waivers: Health and Human Service (HHS) Approvals of Pharmacy 
Plus Demonstrations Continue to Raise Cost and Oversight Concerns (GAO-
04-480):

Submitted May 14, 2004:

Comments:

1. The General Accounting Office (GAO) uses a figure of $416 million as 
the potential liability for the federal government because of "too 
liberal" benchmarks. However, the five-year costs of SeniorCare to the 
federal government will be significantly less than this amount. GAO's 
use of this figure without any mention of the actual cost of SeniorCare 
exaggerates the federal fiscal effect. The current projection for the 
five-year cost of SeniorCare is $250 million (FED). As such, even prior 
to adjusting SeniorCare for savings derived from individuals diverting 
from Medicaid, the cost to the federal government would total $250 
million - not $416 million. Most importantly, the $250 million of 
federal expenditures will provide Wisconsin seniors over $641 million 
in prescription drug savings and will result in savings from reduced 
hospitalizations and nursing home care.

2. The draft states that the Centers for Medicare and Medicaid Services 
(CMS) should have applied a rule to use the lower of the state 
experience or the CMS standard in setting the budget neutrality 
parameters. We believe this is an unreasonable standard and rule to 
apply to Pharmacy Plus waivers. If historical experience provides 
sufficient justification to lower the accepted benchmark, it should 
also be permitted to expand the benchmark. In addition, the GAO report 
mentions several criteria that were discussed throughout the 
negotiations on the waiver, including the potential impact of the SSA 
outreach on Medicaid enrollment, the growth in the elderly population, 
and the cost trends and enrollment projections for the elderly in the 
President's budget. The report, however, does not incorporate these 
factors into the benchmark factor analysis, and as noted earlier, the 
failure to do so is not reasonable given the requirement to place an 
aggregate cap on federal Medicaid matching funds for the elderly.

3. The report questions the savings from expanding drug coverage by 
noting that some of the savings (such as hospital care) will accrue to 
Medicare, rather than Medicaid. This argument is an unreasonably narrow 
interpretation considering the federal government pays 100 percent of 
Medicare and, in Wisconsin, about 60 percent of Medicaid.Although the 
benefit to the Medicare program is not considered in the CMS test of 
Medicaid savings, Medicare savings should be considered and are 
relevant to the GAO review of the overall federal fiscal effect of the 
waivers. In fact, the CMS independent evaluation of the Wisconsin 
Pharmacy Plus waiver expressly requires a component that will review 
the Medicare costs of SeniorCare participants. An estimate of savings 
could be developed using these data.

4. The GAO criticizes the CMS approval of a Wisconsin standard 
benchmark increase of 6.3 percent for the cost per eligible because 
Wisconsin's historical experience was lower. However, the historical 
trend was an increasing trend so that the five-year average may very 
well underestimate what will happen in the five years of the SeniorCare 
waiver. The higher cost per eligible figure (6.3 percent) is reasonable 
given the upward trend that Wisconsin was experiencing at the time the 
waiver was in negotiation. In particular, the historical trend in the 
last three years was 7.3 percent.

5. The GAO references the Social Security Administration outreach 
factor for the higher caseload growth factor. However, the draft does 
not mention other important factors, such as the expansion of Wisconsin 
FamilyCare and PACE/Partnership. Because FamilyCare and Pace/
Partnership expand access to home and community-based waiver services, 
there is an expansion in the number of eligibles on Medicaid that will 
be enrolled as waiting lists for community-based care are eliminated.

6. The GAO suggests there is not firm evidence that expansion of drug 
coverage would produce savings in Medicaid by diverting or delaying 
Medicaid enrollment. We strongly object to this characterization of the 
Wisconsin waiver negotiation and intent of the Pharmacy Plus programs. 
The GAO criticism ignores the central purpose of demonstration waivers. 
In fact, Pharmacy Plus demonstrations are intended to determine if this 
important health care benefit can be delivered cost-effectively. In 
addition, research does suggest that coverage of prescription drugs is 
beneficial to seniors.

7. The draft also suggests Congress and others have raised concerns 
about whether 1115 demonstration waivers actually promote the goals of 
Medicaid. We strongly dispute the implication that the Wisconsin 
SeniorCare Pharmacy Plus waiver is not, in fact, providing critical 
prescription drugs to a vulnerable elderly, low-income, uninsured 
population. The report provides no information that is routinely 
reported by Wisconsin to CMS under the terms of the approved waiver 
(and shared with GAO) that demonstrates budget neutrality to date. It 
should be noted that the waiver was obtained to serve more low-income 
seniors under Medicaid and it did not limit benefits or services to 
current Medicaid recipients.

Contrary to the GAO draft summary, there is no evidence to date that 
the Wisconsin SeniorCare demonstration waiver will increase federal 
spending. SeniorCare is lauded by virtually every local, state and 
federal stakeholder, and participant audience as an exemplary, cost-
effective, uncomplicated program that provides critical prescription 
drugs to low-income Wisconsin seniors.

8. The GAO mis-characterizes the benchmark standards for Wisconsin. 
Wisconsin was not allowed significant "extra room" in the trend rates 
given reasonable variation that is expected in any trend. In addition, 
the benchmarks must also address the risk to the state of capping all 
federal Medicaid matching funds for Medicaid benefits to the elderly.

The report states that a "lack of information" on how the 
demonstrations are operating "compromises any attempt to assess whether 
they are operating as intended." We strongly object to this statement. 
The Wisconsin Division of Health Care Financing (DHCF) has developed 
sophisticated fiscal and program utilization monitoring systems and 
reports all of which are available and reported in aggregate on a 
quarterly basis to CMS. DHCF has met all requirements under the Terms 
and Conditions in providing timely, comprehensive program cost and 
utilization reports.

10. DHCF administers a data reporting system that allows staff to 
conduct ongoing reporting and monitoring of the state commitment to 
budget neutrality through evaluative analysis. As such, we strongly 
object to the draft statement, "the information states have submitted 
is insufficient for determining whether the demonstrations are 
operating as intended which will limit HHS oversight capability." 
Wisconsin has submitted detailed quarterly and annual reports that 
correspond directly to CMS operational protocols. The reports provide 
CMS, state staff, and the public with quantitative measures and 
analysis of the budget neutrality calculation, program costs, 
participant utilization and an array of program data. As such, we are 
confident the SeniorCare program is, in fact, functioning as intended 
and reported.

11. In addition, Wisconsin has agreed to a rigorous independent 
evaluation by a CMS contractor to ensure a complete and impartial 
analysis of Wisconsin SeniorCare and Medicaid data, as well as 
corresponding analysis of participant Medicare medical claims data. The 
independent evaluation is a comprehensive review of the program 
effectiveness, including state, federal and participant costs, drug 
utilization, and overall impact on low-income Wisconsin seniors. 
Wisconsin has provided the CMS contractor, Brandeis University, with 
extensive program information and data over the course of the past 
year, including direct program and participant cost information, 
detailed fiscal analyses and any information requested for the purpose 
of the evaluation.

The GAO draft omits any reference to the importance of the independent 
evaluation as an effective approach to review CMS assumptions relating 
to budget neutrality and program effectiveness. We believe Congress' 
interest in the effectiveness of the approved Pharmacy Plus waivers is 
best addressed through the unbiased and independent evaluation. We also 
believe CMS has correctly exercised its authority under the SeniorCare 
Terms and Conditions to allow the independent evaluation as meeting the 
program evaluation requirement under the waiver.

GAO's Response to the State of Wisconsin's Specific Comments: 

In addition to overall comments on our draft report contained in its 
letter and discussed in the body of this report, Wisconsin provided 11 
specific comments in an attachment to its letter, which is reproduced 
on pages 67 through 69. Our responses to Wisconsin's specific comments 
are numbered below to correspond with each of the state's numbered 
comments.

5. Wisconsin commented that our $416 million figure (the estimated 
federal share of the difference between HHS-approved and benchmark 5-
year spending limits in table 3) exaggerates the federal fiscal effect, 
because the actual costs of the demonstration's first years have come 
in under the projected costs. The state currently projects federal 
costs for the new drug benefit under the demonstration totaling $250 
million over 5 years instead of roughly $537 million, which is the 
federal share of $919 million approved for the new benefit (see table 
1). Although we recognize that the actual costs of Wisconsin's 
demonstration to date are less than the costs projected at the time the 
waiver was approved, our analysis examined the extent to which HHS 
ensured that the demonstrations--in the form they were approved--
maintained spending limits that were budget neutral to the federal 
government. Because Wisconsin's approved spending limit represents the 
total amount the state is authorized to spend over the demonstration's 
5-year life-span, the federal government could be liable for as much as 
$416 million more than what it would have been liable for had HHS held 
the state to a spending limit based on benchmark rates (see table 3).

6. Wisconsin commented that it is unreasonable to hold HHS to applying 
the lower of two benchmark growth rates in calculating budget 
neutrality: state experience or projections by the Centers for Medicare 
& Medicaid Services' (CMS) Actuary for Medicaid costs. The state also 
expressed concern that our analysis did not incorporate factors other 
than the benchmarks that affect program growth. We believe that it is 
reasonable to expect HHS to use objective benchmark growth rates in 
projecting the Medicaid costs on which it bases spending limits and to 
document its reasons for deviating from those benchmarks--even if the 
department regards them as starting points. Otherwise, the department's 
rationale for setting higher spending limits (based on higher growth 
rates) for some states than for others is not apparent to other states 
involved in waiver negotiations and reviews. As noted in the draft 
report, HHS responded to Wisconsin's request for higher growth rates 
but did not, in our view, adequately document the basis for approving 
higher rates. In our own analysis of the spending limits, we did not 
include the additional factors that Wisconsin asserted should raise its 
spending limits because neither the state nor HHS provided adequate 
support to justify doing so.

7. Wisconsin stated that our interpretation was unreasonably narrow in 
not accounting for potential savings accruing to Medicare, as well as 
to Medicaid, from expanding prescription drug coverage for seniors. We 
considered savings to Medicaid alone because HHS allows states to 
include savings only to Medicaid, not Medicare, in determining whether 
their Medicaid demonstrations are budget neutral.

8. Wisconsin commented that because its historical cost growth rate has 
been rising, it was appropriate for HHS to calculate the state's 
spending limit using a rate higher than its historical 5-year average. 
We believe that whenever HHS allows growth rate projections that exceed 
its benchmarks, it should document the basis for this deviation.

9. Wisconsin mentioned two state programs that it believes will, like 
the Social Security Administration's outreach program for low-income 
Medicare beneficiaries, help increase senior enrollment in Wisconsin's 
Medicaid program because they are likely to identify individuals who 
qualify for full Medicaid benefits. But the state did not quantify or 
provide any data or other evidence to show the potential effects of 
these programs or of Social Security Administration outreach. We did 
not include these effects in our benchmark analysis for the same reason 
we did not include other factors that Wisconsin believed should raise 
is spending limit (see our response to comment 2).

10. Wisconsin noted that we found no firm evidence to support the idea 
that expanding drug coverage would produce significant savings in 
Medicaid by diverting or delaying Medicaid enrollment. The state 
asserts that this criticism ignores the central purpose of these 
demonstrations: to determine if an important health care benefit can be 
delivered cost effectively. We acknowledge the value of demonstrations 
to test health care alternatives, but we believe that the case for 
substantial savings to Medicaid due to expanded prescription drug 
coverage is not well supported. We also believe that HHS has not done 
enough to ensure that states develop and implement demonstration 
evaluation designs. Although we do not dispute Wisconsin's comment that 
research suggests coverage of prescription drugs benefits seniors, we 
believe that demonstrating the effects of drug coverage on avoiding 
Medicaid enrollment is a separate issue.

11. Wisconsin has interpreted our mention of congressional concern 
about the extent to which HHS has ensured that section 1115 
demonstration waivers promote the goals of Medicaid as implying that 
the state's demonstration is not providing critical prescription drugs 
to a vulnerable elderly, low-income, uninsured population. We did not 
intend to suggest that Wisconsin's demonstration is not a valuable 
benefit to these individuals. We were referring to our earlier work on 
section 1115 Medicaid and State Children's Health Insurance Program 
(SCHIP) demonstrations, which, in addition to raising concerns about 
HHS's use of section 1115 waiver authority to approve demonstration 
spending limits that were not budget neutral, also found that HHS was 
allowing states to use unspent SCHIP funding to cover childless adults, 
despite SCHIP's statutory objective of expanding health coverage to 
low-income children.[Footnote 54]

12. Wisconsin commented that we mischaracterized the growth rates 
approved by HHS for the state's demonstration as too high. See our 
response to comment 2.

13. Wisconsin objected to our conclusion that the lack of available 
information on how these demonstrations are operating compromises 
attempts to assess whether they are operating as intended. This 
statement does not apply to any one state alone but synthesizes our 
findings for the four approved demonstrations taken together. We 
acknowledge that Wisconsin has been responsive to HHS's requirements 
for informative and timely progress reports and have revised our report 
as appropriate.

14. Wisconsin stated that its data reporting system allows its staff to 
monitor that the demonstration is operating as intended. In the draft 
report, we noted that Wisconsin officials reported having the 
capability for monitoring. We have not assessed Wisconsin's monitoring 
system.

15. Wisconsin commented on the importance of, and Wisconsin's full 
participation in, CMS's contracted independent evaluation as an 
effective approach to reviewing the agency's assumptions relating to 
budget neutrality and program effectiveness. We believe the draft 
report captured the plans for this independent evaluation, as well as 
the apparent confusion over each state's responsibility for conducting 
its own evaluation. We have revised our report to reflect that 
Wisconsin officials believe the state is not required to conduct an 
evaluation, whereas HHS officials told us the state would be required 
to do so.

[End of section]

Appendix VII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Katherine Iritani, (206) 287-4820: 

Acknowledgments: 

In addition, Tim Bushfield, Ellen W. Chu, Helen Desaulniers, Behn 
Kelly, Suzanne Rubins, Ellen M. Smith, and Stan Stenersen made key 
contributions to this report.

[End of section]

Related GAO Products: 

SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with 
Program Goals. GAO-04-166R. Washington, D.C.: January 5, 2004.

Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver 
Projects Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002.

Medicare and Medicaid: Implementing State Demonstrations for Dual 
Eligibles Has Proven Challenging. GAO/HEHS-00-94. Washington, D.C.: 
August 18, 2000.

Medicaid Section 1115 Waivers: Flexible Approach to Approving 
Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44. 
Washington, D.C.: November 8, 1995.

Medicaid: State Flexibility in Implementing Managed Care Programs 
Requires Appropriate Oversight. GAO/T-HEHS-95-206. Washington, D.C.: 
July 12, 1995.

Medicaid: Statewide Section 1115 Demonstrations' Impact on Eligibility, 
Service Delivery, and Program Cost. GAO/T-HEHS-95-182. Washington, 
D.C.: June 21, 1995.

Medicaid: Spending Pressures Drive States toward Program Reinvention. 
GAO/T-HEHS-95-129. Washington, D.C.: April 4, 1995.

Medicaid: Spending Pressures Drive States toward Program Reinvention. 
GAO/HEHS-95-122. Washington, D.C.: April 4, 1995.

Medicaid: Experience with State Waivers to Promote Cost Control and 
Access to Care. GAO/T-HEHS-95-115. Washington, D.C.: March 23, 1995.

FOOTNOTES

[1] Section 1115 allows waivers of requirements in Medicaid, the State 
Children's Health Insurance Program (SCHIP), and several other programs 
authorized under SSA. See section 1115 (codified at 42 U.S.C. § 1315 
(2000)); see also section 2107(e) of SSA (codified at 42 U.S.C. § 
1397gg(e)) (regarding the applicability of section 1115 to SCHIP).

[2] Although CMS is the agency within HHS that has primary 
responsibility for reviewing section 1115 demonstration waiver 
proposals, we refer to HHS throughout this report as the primary 
program entity because the authority to grant waivers for the 
demonstrations resides with the Secretary of HHS.

[3] A list of related GAO products appears at the end of this report.

[4] We do not include proposals to provide a prescription drug benefit 
to low-income seniors under an amendment to an existing section 1115 
Medicaid managed care waiver, like those approved for Vermont and 
Maryland, because such proposals are reviewed under different 
guidelines.

[5] To verify the accuracy of data included in state demonstration 
applications, we discussed these data and their sources with state 
officials.

[6] Pub. L. No. 108-173, 117 Stat. 2066.

[7] In fiscal year 2001, the latest year for which complete data are 
available, beneficiaries who were aged, blind, or disabled represented 
about 30 percent of those served by Medicaid but accounted for more 
than 65 percent ($141 billion) of Medicaid's total $216 billion in 
federal and state spending. Beneficiaries age 65 and older accounted 
for 26.5 percent of total Medicaid spending, or $57 billion; blind or 
disabled individuals accounted for nearly 39 percent, or $84 billion.

[8] In fiscal year 2003, the federal share of individual states' 
Medicaid expenditures ranged from 50 to 77 percent. Federal Medicaid 
matching rates were increased temporarily by 2.95 percentage points 
from April 1, 2003, through June 30, 2004, pursuant to title IV of the 
Jobs and Growth Tax Relief Reconciliation Act of 2003. See Pub. L. No. 
108-27, § 401(a)(3), 117 Stat. 752, 764-765 (to be codified at 42 
U.S.C. § 1396d note).

[9] Medicaid eligibility is determined by several factors, including 
individual or family income, age, and eligibility for certain other 
federal benefits. For example, although state Medicaid programs vary, 
most people who are age 65 or older, or are disabled, qualify 
automatically for Medicaid if their incomes and assets qualify them for 
cash assistance under the federal Supplemental Security Income program.

[10] In fiscal year 2001, more than 20 percent of total federal Medicaid 
spending was governed by the terms and conditions of section 1115 
waivers rather than by standard Medicaid program requirements. See 
Jeanne Lambrew, Section 1115 Waivers in Medicaid and the State 
Children's Health Insurance Program: An Overview (Washington, D.C.: 
Kaiser Commission on Medicaid and the Uninsured, 2001).

[11] In 2003, the annual income that represented 200 percent of FPL was 
$17,960 for an individual, $24,240 for a family of two.

[12] States are also required to ensure that beneficiaries receiving 
only the prescription drug benefit have access to primary care services 
to assist with medical management related to pharmacy products, 
although they are not required to pay for these services. Most Pharmacy 
Plus beneficiaries are seniors covered by Medicare, which generally 
covers hospital and physician services.

[13] To be eligible for Medicaid, seniors must meet income and asset 
limits specified by each state, within federal requirements. Some 
individuals with income and assets too high to be immediately eligible 
may qualify for coverage on a monthly basis if they incur such high 
medical costs that they "spend down" to a qualifying income and asset 
level. Such spending down often happens when people enter nursing homes 
and quickly deplete their resources.

[14] According to the terms of approval for Pharmacy Plus 
demonstrations, to maintain budget neutrality, states may not alter 
eligibility or benefits for seniors who qualify for full Medicaid. 
States may pursue a variety of cost-control measures for the drug-only 
expansion, including limiting enrollment and increasing cost sharing 
for Pharmacy Plus beneficiaries.

[15] HHS approved a fifth demonstration proposal, from Indiana, in 
April 2003, but the state declined to accept the terms of HHS's 
approval, primarily because of the state's concerns about the spending 
limit for all Medicaid seniors. Instead, Indiana proposed a different 
budget approach that would not require the state to project and commit 
to a spending limit covering all Medicaid seniors. Indiana's 
alternative proposal, submitted May 2003, was one of the nine proposals 
under consideration by HHS as of March 2004.

[16] Illinois' state-funded program covered seniors and people with 
disabilities with incomes up to 250 percent of FPL. Participants who 
were 65 or older with incomes at or below 200 percent of FPL were 
automatically enrolled in the demonstration on June 1, 2002. Eligible 
seniors with incomes from 201 to 250 percent of FPL and people with 
disabilities continue to be covered by the state-funded program.

[17] Although HHS has identified the initiative's target population as 
seniors and people with disabilities who have incomes at or below 200 
percent of FPL, none of the states with approved pharmacy 
demonstrations have chosen to include people with disabilities.

[18] The Pharmacy Plus application form and standard terms and 
conditions for three of the four approved demonstrations do not include 
a specific maintenance-of-effort requirement. Only Illinois, the first 
Pharmacy Plus demonstration approved, has such a maintenance-of-effort 
requirement. HHS officials told us that the department's policy 
regarding state maintenance of effort has been evolving. Since the 
Illinois approval, the officials told us that they have asked states to 
demonstrate that they are expanding their programs. 

[19] Illinois' state-funded program began in 1985 to cover 
prescriptions for cardiovascular disease and has expanded over the 
years to include drugs for several conditions, including arthritis, 
diabetes, Alzheimer's disease, cancer, glaucoma, lung disease, and 
Parkinson's disease.

[20] Wisconsin began offering state-funded drug benefits to seniors 
with incomes from 200 up to and including 240 percent of FPL at the 
same time that it implemented its demonstration.

[21] A Delaware Medicaid official expressed concern that HHS's denial 
was inconsistent with its guidelines, which, as set forth in the 
application form, indicate that states may be allowed to provide 
enhanced pharmacy benefit management services as one option for 
expanding state-funded programs under the demonstration. HHS officials 
told us that the denial of Delaware's proposal would not be 
reconsidered because the proposed expansion was not large enough, and 
approving it would simply make the state-funded program eligible for 
federal matching payments.

[22] A Hawaii Medicaid official reported that the agency was unable to 
fundamentally change the nature of the proposal during HHS review 
because the proposal had been outlined in state law.

[23] Specifically, the law establishes a State Pharmaceutical 
Assistance Transition Commission to develop a proposal for addressing 
the transitional issues facing state-funded pharmacy assistance 
programs and their participants because of implementation of the new 
Medicare prescription drug benefit. Members of the commission are to 
include representatives of states operating pharmacy benefit programs, 
interested organizations, private insurers, and others. The commission 
is required to submit a detailed proposal, including specific 
legislative or administrative recommendations, to Congress and the 
President by January 1, 2005. See Pub. L. No. 108-173, § 101(a), 117 
Stat. 2071, 2128-31 (adding sections 1860D-23 and 1860D-24 to SSA) (to 
be codified at 42 U.S.C. §§ 1395w-133 and 1395w-134); see also section 
106, 117 Stat. 2168-9.

[24] See Section 103(c), 117 Stat. 2158 (amending section 1935 of SSA) 
(to be codified at 42 U.S.C. § 1396n-5).

[25] For example, individuals with incomes below 135 percent of FPL 
generally will be entitled to a full premium subsidy; individuals with 
incomes up to 150 percent of FPL will be entitled to an income-related 
premium subsidy determined on a sliding scale. In addition, after 
reaching an out-of-pocket threshold of $3,600, individuals with incomes 
below 135 percent of FPL will have no co-payment for covered drugs, 
while those with incomes below 150 percent of FPL will pay either $2 or 
$5 for each drug. See Section 101(a), 117 Stat. 2107-9 (adding sections 
1860D-14(a)(1) and (2) to SSA) (to be codified at 42 U.S.C. §§ 1395w-
114(a)(1) and (2)); see also section 101(a), 117 Stat. 2077-9 (adding 
section 1860D-2(b)(4) to SSA) (to be codified at 42 U.S.C. § 1395w-
102(b)(4)).

[26] See Section 101(a), 117 Stat. 2132-3 (adding section 1860D-31(b) 
to SSA) (to be codified at 42 U.S.C. § 1395w-141(b)).

[27] In commenting on a draft of this report, HHS said that it expected 
less need for Pharmacy Plus demonstrations when Medicare coverage for 
prescription drugs is expanded under MMA and that states would need to 
decide if they want to continue their demonstrations.

[28] We have reported that by allowing Illinois to include 
impermissible costs in its projected spending under the Medicaid 
program without the demonstration, HHS approved a Pharmacy Plus 
demonstration in the state that was not budget neutral, inappropriately 
raising allowed costs for the project by $275 million. We recommended 
to the Secretary of HHS that the agency ensure that valid methods are 
used to demonstrate budget neutrality and that it apply such methods to 
adjust the federal spending commitment under Illinois' demonstration. 
See U.S. General Accounting Office, Medicaid and SCHIP: Recent HHS 
Approvals of Demonstration Waiver Projects Raise Concerns, GAO-02-817 
(Washington, D.C.: July 12, 2002). As of March 2004, HHS had not 
adjusted the state's spending limit.

[29] We use the term "benchmark" throughout this report to describe the 
cost and Medicaid enrollment growth rates HHS considered when making 
its approval decisions for Pharmacy Plus demonstrations. We use 
"benchmark" rather than "criterion" because, in contrast to its 
practice in approving some other section 1115 demonstrations, HHS did 
not have written cost or enrollment growth criteria for Pharmacy Plus.

[30] The Health Insurance Flexibility and Accountability (HIFA) 
initiative, for example, another Medicaid section 1115 demonstration 
waiver initiative, specifies a similar benchmark for cost growth per 
beneficiary in its standard application form. The HIFA initiative 
provides two options for projecting cost growth per beneficiary: the 
Medical Care Consumer Price Index, developed by the Bureau of Labor 
Statistics, or a state-specific projection of what the program would 
have cost without the demonstration. For the second option, HHS policy 
is to apply the lower of state-specific experience--using 5 years of 
Medicaid data--or the CMS Actuary's Medicaid baseline for the eligible 
groups covered by the demonstration.

[31] The CMS Actuary's growth projections in effect during budget 
discussions for the four approved Pharmacy Plus demonstrations were a 
6.3 percent annual increase in cost per beneficiary and a 1.8 percent 
annual increase in enrollment.

[32] Illinois provided HHS with updated information on senior 
enrollment in the state's Medicaid program, including growth of 1.3 
percent between state fiscal years 1999 and 2000 and 4.2 percent 
between state fiscal years 2000 and 2001. These updated figures are 
incorporated in the 5-year historical average enrollment growth rate of 
1.6 percent, covering state fiscal years 1997 through 2001.

[33] The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 requires the Social Security Administration to 
notify Medicare beneficiaries nationwide about other benefits, 
including Medicaid, for which they could potentially be eligible. See 
Pub. L. No. 106-554, App. F, § 911(a), 114 Stat. 2763, 2763A-583 
(adding section 1144 to SSA) (to be codified at 42 U.S.C. § 1320b-14). 
See U.S. General Accounting Office, Medicare Savings Programs: Results 
of Social Security Administration's 2002 Outreach to Low-Income 
Beneficiaries, GAO-04-363 (Washington, D.C.: Mar. 26, 2004).

[34] See GAO-04-363. In 2002, the Social Security Administration 
outreach program sent letters to about 16.4 million low-income Medicare 
beneficiaries nationwide, yielding an estimated 74,000 additional 
individuals--a further increase in enrollment of 0.5 percent--enrolling 
in Medicaid programs that help low-income Medicare beneficiaries pay 
their Medicare premiums and, in some cases, their deductibles and 
coinsurance. On the basis of a sample, we estimated that Wisconsin 
experienced a statistically significant increase in additional Medicaid 
enrollment after the Social Security Administration mailing, although 
at 0.4 percent, the response was slightly less than the U.S. average. 
The Social Security Administration outreach program continued on a 
smaller scale in 2003 and thereafter.

[35] We calculated Wisconsin's benchmark spending limit based on the 
0.01 percent average annual enrollment growth rate for 5 years of 
historical data, which included 2 years when enrollment declined 
slightly. Had the 0.12 percent average annual enrollment growth rate 
been used, based on 3 years of historical data as the state proposed in 
its demonstration application, Wisconsin's combined federal and state 
spending limit would have been $7.9 billion, about 5.7 percent, or $477 
million, below what HHS approved.

[36] According to CBO officials, the agency did not analyze the cost 
impact of individual Pharmacy Plus demonstrations but estimated 
potential impact on Medicaid spending overall under various growth 
scenarios. CBO estimated that roughly 1.2 million people would join the 
Medicaid rolls for the prescription drug benefit only. See U.S. 
Congressional Budget Office, An Analysis of the President's Budgetary 
Proposals for Fiscal Year 2004: An Interim Report (Washington, D.C.: 
March 2003).

[37] GAO-02-817.

[38] Ellen O'Brien, "Will Prescription Drug Coverage for the Low-income 
Elderly Pay for Itself? A Review of the Literature," Georgetown 
University Health Policy Institute working paper, prepared for the 
Kaiser Commission on Medicaid and the Uninsured, May 2003, cited with 
permission. See www.hpi.georgetown.edu/pdfs/obrienrxcostoff.pdf, 
downloaded March 16, 2004. The author identified sources through a 
Medline search of the research literature and a manual search of 
citations in published papers. The analysis covered research literature 
on the effects of prescription drug coverage on low-income seniors, 
access limits in Medicaid and other insurance plans, studies of 
specific drugs or drug classes, and studies of the cost-effectiveness 
of recent prescription drugs.

[39] Bruce Stuart and Daniel Lago, "Prescription Drug Coverage and 
Medical Indigence among the Elderly," Journal of Aging and Health, vol. 
1, no. 4 (1989), 452-469.

[40] In 2002 we reported that in assessing the cost of a Medicare 
prescription drug benefit at that time, CBO, OMB, and CMS's Actuary did 
not accept the premise that providing a prescription drug benefit to 
low-income seniors would pay for itself (GAO-02-817). CBO raised 
several reasons for caution, including that greater use of drugs among 
seniors could increase the risk of side effects and adverse drug 
reactions, which could in turn increase use of hospitals, emergency 
rooms, and other health care services. CBO concluded that Medicare 
beneficiaries without any drug coverage already consumed a large number 
of prescription drugs, and therefore any savings due to increased 
access would likely be small.

[41] The results of this study by JEN Associates of Cambridge, 
Massachusetts, were reported in a memorandum to the Minnesota 
Department of Human Services, "Feasibility Analysis of PDP Expansion," 
dated March 7, 2002.

[42] Pennsylvania's PACE program has operated since 1984 and PACENET 
has provided an expanded benefit to additional low-income seniors since 
1996. See Mercer Government Human Services Consulting, Pharmacy Plus 
1115 Waiver Feasibility Study, Commonwealth of Pennsylvania (Phoenix: 
October 2002).

[43] See GAO-02-817, 23-24.

[44] Jocelyn Guyer, The Financing of Pharmacy Plus Waivers: Trade-offs 
between Expanding Rx Coverage and Global Caps in Medicaid (Washington, 
D.C.: Kaiser Commission on Medicaid and the Uninsured, May 2003).

[45] According to an Illinois official, the reimbursement rate for all 
providers, including pharmacists, was cut by 6 percent in state fiscal 
year 2003, and that step helped the pharmacy demonstration operate well 
below its targeted first-year spending limit.

[46] States are required to provide HHS with drafts of their final 
evaluation reports within 180 days of the end of the 5-year 
demonstrations; Pharmacy Plus terms and conditions do not require 
interim evaluation reports from the states. HHS also requires the 
states to cooperate with federal evaluators and contractors in the 
independent evaluation.

[47] The evaluators chose Ohio because of its proximity to both 
Illinois and Wisconsin; the characteristics of its senior population; 
and likely similarities in the attitudes of that state's policymakers, 
physicians, and public about the use of long-term care services.

[48] HHS selected Illinois and Wisconsin, the first two demonstrations 
to be implemented (in June and July 2002), for the independent 
evaluation. In March 2004, HHS's evaluation project officer indicated 
that the new Medicare prescription drug program and its potential 
effects on Pharmacy Plus demonstrations may lead the department to 
reassess plans and schedules for the independent evaluation.

[49] The descriptions include such information as how each 
demonstration was established, demonstration features, each state's 
economic and political environment, obstacles encountered during 
program implementation, and the state's progress toward implementation 
and ensuring beneficiary access to prescription drugs.

[50] The evaluators have also developed a database, including data 
provided from Illinois' and Wisconsin's Medicaid data systems, allowing 
them to track and analyze demonstration enrollment, costs, drug use, 
and demographics, along with HHS Medicare claims data for Pharmacy Plus 
beneficiaries from 1 year before enrollment in the demonstration 
through their first year.

[51] Centers for Medicare & Medicaid Services, Pharmacy Plus: A 
Demonstration Program under Section 1115: Model Special Terms and 
Conditions of Approval (Washington, D.C.: U.S. Department of Health and 
Human Services, n.d.), 4, www.cms.hhs.gov/medicaid/1115/
pharmplustemptc.pdf (downloaded Apr. 6, 2004).

[52] According to an HHS official, quarterly reports for South 
Carolina's demonstration were delayed because the state had difficulty 
generating data on demonstration expenses, requiring department 
officials to work with the state on the problem.

[53] HHS also stated that the 0.7 percent per year state historical 
average enrollment growth rate we cite for South Carolina (table 2) is 
in error, because its records showed that South Carolina's historical 
average for enrollment growth was 1.0 percent. In verifying the state's 
historical enrollment rate, we noted that the rate had been "rounded 
up" to the next full percentage from the 0.7 percent actual historical 
rate. For consistency with other rates in the table, we did not round 
it.

[54] See GAO-02-817 and U.S. General Accounting Office, SCHIP: HHS 
Continues to Approve Waivers That Are Inconsistent with Program Goals, 
GAO-04-166R (Washington, D.C.: Jan. 5, 2004).

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