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Medicaid Program

This information appears as published in the 2013 High Risk Report.

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GAO designated Medicaid as a high-risk program due to its size, growth, diversity of programs, and concerns about the adequacy of fiscal oversight, which is necessary to prevent inappropriate program spending. This federal and state program covered acute health care, long-term care, and other services for about 70 million low-income people in fiscal year 2011; it is one of the largest sources of funding for medical and health-related services for America’s most vulnerable populations. Medicaid consists of more than 50 distinct state-based programs. The federal government matches state expenditures for most Medicaid services using the Federal Medical Assistance Percentage, a statutory formula based in part on each state’s per capita income. Medicaid is a significant expenditure for the federal government and the states, with total expenditures of $436 billion in 2011. The Centers for Medicare & Medicaid Services (CMS) in the Department of Health and Human Services (HHS) is responsible for overseeing the program at the federal level, while states administer their respective programs’ day-to-day operations.

Both Congress and the administration have demonstrated commitment and leadership to making Medicaid fiscal and program integrity a priority. In 2012, committees in Congress held hearings on reducing Medicaid improper payments and on improving oversight of the program. HHS continues to review and report on the rate of Medicaid improper payments, and continues to train and provide technical assistance to states on approaches to prevent improper payments. Among other actions, CMS issued guidance to states on removing providers from their Medicaid programs who have been terminated for committing fraud in other states’ Medicaid programs or in Medicare, and required improved reporting and independent audits of states’ Medicaid supplemental payments made to certain providers known as disproportionate share hospitals. However, stronger federal oversight of Medicaid is warranted as the program continues to grow in size and spending. For example, potential Medicaid expansions under the Patient Protection and Affordable Care Act (PPACA) are estimated to result in the enrollment of about 7 million additional individuals in 2014, growing to 11 million in 2022. The federal government is responsible for paying more than 90 percent of the increased costs associated with this expansion. CMS will need new tools and resources as the law is implemented, including more reliable data for assessing expenditures, measuring performance, and preventing improper payments. Medicaid remains high risk due to concerns about the adequacy of fiscal oversight of this large, diverse, and growing program. Areas where program oversight has been insufficient include the following:

  • Improper payments to Medicaid providers serving program beneficiaries. Improper payments to providers who submit inappropriate claims can result in substantial financial losses to states and the federal government. Medicaid payments can be improper for various reasons, such as if payments are made for people not eligible for Medicaid or made for services not provided. Effective program integrity processes at the state and federal level are critical to preventing improper payments. In its 2012 financial report, HHS estimated—on the basis of individual state error rates from a sample of 17 states reviewed on an annual rotating basis—a national improper payment rate for Medicaid of 7.1 percent (with the federal share estimated at $19.2 billion). While states have the first-line responsibility in preventing improper payments, CMS has an important role through its Medicaid Integrity Group in overseeing and supporting state efforts, including conducting various types of federal audits of states’ claims data (known as the national Medicaid audit program), and providing training and technical assistance to states.

    Positive steps toward improving the transparency and reducing improper payments have been taken in recent years. In May 2011, CMS issued guidance to states on processes to remove providers from their program when they have been terminated from another state’s Medicaid program or terminated from Medicare as required by PPACA. In addition, CMS has committed to (1) redesigning its national Medicaid audit program, which relied on data that were incomplete, not reliable, and not timely, and, as a result cost significantly more than the potential overpayments it identified, and (2) using its comprehensive reviews of state integrity program activities to better target audits toward states with significant weaknesses in their ability to detect overpayments. Separate from this initiative, CMS is also testing the cost-effectiveness and feasibility of establishing a fraud prevention system (prepayment edits) for Medicaid by April 1, 2015. Key challenges remain, including improving key data systems so that they provide reliable and complete data needed to implement effective programs to identify and prevent improper payments; eliminating duplication between CMS and state program integrity efforts; and refocusing national audit efforts on approaches that are cost-effective. While CMS actions are under way to address these and other issues, it is too soon to assess their effectiveness on reducing improper payments.
  • Financing methods that are inappropriate, and large supplemental payments that are not always transparent. Some states have established varied financing arrangements involving Medicaid supplemental payments that inappropriately increase federal Medicaid matching payments. Subject to certain requirements, states may make supplemental payments to Medicaid providers that are separate from and in addition to regular state Medicaid payments for services. The total amount of supplemental payments has increased in recent years. In fiscal year 2011, states reported spending at least $43 billion, up from $32 billion in fiscal year 2010 and $23 billion in fiscal year 2006. GAO and others have reported concerns with states’ Medicaid supplemental payments over the last decade, including the use of supplemental payment arrangements to increase federal funding without a commensurate increase in state funding, and concerns that the payments were not used for Medicaid purposes. Large increases in reported supplemental payments have been identified as a major factor that contributed to increased Medicaid spending on hospital services in 2010.

    A variety of federal legislative, regulatory, and CMS actions have helped curb inappropriate arrangements, but gaps remain. In 2003, CMS began an initiative to closely review state supplemental payments and required states to end those it found inappropriate; however, in 2008, GAO reported that CMS had not reviewed all supplemental payment arrangements to ensure payments were appropriate and for Medicaid purposes. Starting in 2010, CMS implemented new transparency and accountability requirements for certain Medicaid supplemental payments, known as Disproportionate Share Hospital (DSH) payments, including new reporting and auditing requirements for these payments. In 2012, GAO found that the new requirements improve CMS’s ability to oversee DSH payments by better assuring states comply with federal requirements, including accurate calculation of payment amounts to ensure payments are not excessive. However, similar standards for calculating, reporting, and auditing of other types of Medicaid supplemental payments—referred to here as non-DSH supplemental payments—have not been established even though these payments have increased significantly in recent years and exceeded DSH supplemental payments in total amounts. In its 2012 report, GAO found that establishing transparency and accountability requirements similar to those in place for DSH payments could improve CMS’s ability to oversee non-DSH supplemental payments. Using the limited available information from the new DSH reports, GAO found in 39 states a total of 505 hospitals received regular and non-DSH supplemental Medicaid payments in excess of their costs of providing services to Medicaid beneficiaries, by a total of about $2.7 billion. Although Medicaid payments are not limited to the costs of delivering Medicaid services, Medicaid payments that greatly exceed Medicaid costs raise questions about the purpose of the payments, how payments relate to Medicaid services, whether payments are consistent with economy and efficiency, and whether payments contribute to beneficiaries’ access to quality care.
  • Managed care rate setting and quality of data used to set such rates has not been consistently reviewed by CMS. Requirements for Medicaid managed care rates to be actuarially sound are key safeguards in efforts to ensure that federal spending is appropriate. In 2010, GAO reported that CMS had been inconsistent in ensuring that states are complying with the actuarial soundness requirements. Further, GAO found that CMS efforts were not sufficient to ensure the quality of the data used by states to set managed care rates. With limited information on data quality, CMS cannot ensure that states’ managed care rates are appropriate, which places billions of dollars at risk for misspending. GAO recommended that CMS implement a mechanism to track state compliance with actuarial soundness requirements, clarify federal guidance on rate-setting reviews, and make use of information on data quality in overseeing states’ rate setting. HHS agreed with the recommendations. As of December 2012, CMS was working on enhancing data systems to improve the oversight of managed care rate-setting.
  • Demonstrations that inappropriately increase federal costs. HHS has the authority to waive certain statutory provisions to allow states to implement demonstrations that test ideas for achieving program objectives. By policy, demonstrations should not increase federal costs. However, GAO reported in 2008 that HHS had approved two state demonstrations that could substantially increase the federal financial liability. At the time of GAO’s work in 2007, HHS disagreed with GAO’s recommendation to improve the demonstration review process through steps such as clarifying the criteria for reviewing and approving states’ proposed spending limits, and ensuring that valid methods were used to demonstrate budget neutrality. Consequently, GAO elevated this recommendation to Congress for consideration. HHS subsequently reported taking steps, such as monitoring the spending under ongoing approved demonstrations, to improve its oversight; however, as of December 2012, HHS had not planned any changes in the criteria and methods used to determine budget neutrality of demonstrations prior to approving them. Such actions are needed in order to ensure that only those proposed demonstrations that do not increase the federal financial liability are approved.

Congress, HHS, and CMS have taken steps to improve the fiscal integrity of Medicaid, and CMS has implemented certain GAO recommendations, such as improving the information collected on certain supplemental payments and issuing guidance to states to better prevent payment of improper claims. However, more federal oversight of Medicaid’s fiscal and program integrity is needed. For example, CMS oversight of program integrity has been challenged by data systems that do not provide reliable, complete, and timely data. States also have key roles in reducing improper payments to providers in developing, implementing, and evaluating the effectiveness of corrective plans to reduce improper payments.

CMS should also continue taking steps to improve oversight of Medicaid managed care payment rate-setting and Medicaid supplemental payments. In November 2012, GAO suggested that Congress require CMS to take certain steps to improve the transparency of and accountability for Medicaid non-DSH supplemental payments, including requiring improved reporting and independent audits of these payments. In addition, GAO’s suggestion that Congress require HHS to improve the criteria and methods used to ensure the budget neutrality of Medicaid demonstrations remains valid.

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Medicaid: Data Sets Provide Inconsistent Picture of Expenditures

GAO-13-47: Published: Oct 29, 2012. Publicly Released: Nov 29, 2012.