Medicaid and SCHIP:

Recent HHS Approvals of Demonstration Waiver Projects Raise Concerns

GAO-02-817: Published: Jul 12, 2002. Publicly Released: Aug 7, 2002.

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States provide health care coverage to about 40 million uninsured, low-income adults and children under two federal-state programs--Medicaid and the State Children's Health Insurance Program (SCHIP). To receive federal funding, states must meet statutory requirements, including providing certain levels of benefits to specified populations. Under section 1115 of the Social Security Act, the Secretary of Health and Human Services (HHS) can waive many of the statutory requirements in the case of experimental, pilot, or demonstration projects likely to promote program objectives. Since August 2001, HHS has approved four of 13 waiver proposals from states to either expand health insurance to uninsured populations or extend pharmacy coverage to low-income seniors, consistent with the new goals. Of the nine proposals still under review, five seek to expand coverage to uninsured populations, while four would provide pharmacy benefits for low-income seniors. GAO has both legal and policy concerns about the extent to which the approved waivers are consistent with the goals and fiscal integrity of Medicaid and SCHIP. The legal concern is that HHS has allowed Arizona to use unspent SCHIP funding to cover adults without children, despite SCHIP's objective of expanding health coverage to low-income children. GAO found that HHS' approval of the waiver to cover childless adults is not consistent with this objective, and it is not authorized. A related policy concern is that HHS used its waiver authority to allow Arizona and California to use SCHIP funds to cover parents of SCHIP and Medicare-eligible children with no regard to cost effectiveness when the statute provides that family coverage may be provided only if it is cost-effective to do so--that is, with no additional costs beyond covering the child. An opportunity for the public to learn about and comment on pending waivers has not been consistently provided in accordance with policy adopted by HHS in 1994. At the federal level, since 1988 HHS has not followed established procedures to publish notification of new and pending section 1115 waiver applications in the Federal Register with a 30-day comment period.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: Congress may wish to consider requiring the Secretary of Health and Human Services to improve the public notification and input process at the federal level to ensure that beneficiaries and groups affected by Medicaid and SCHIP section 1115 demonstration waiver proposals receive opportunity to review and comment on proposals before they are approved.

    Status: Closed - Implemented

    Comments: In March 2010, the Patient Protection and Affordable Care Act was passed into law. As part of this act, Congress required the Secretary of HHS to develop regulations governing the review and approval of proposed Medicaid section 1115 demonstrations, as well as the renewal of ongoing demonstrations. Congress instructed the Secretary to ensure that these new regulations provide for a meaningful level of public input at both state and federal levels. On September 2, 2010, CMS officials told us they expect to publish the new regulations to the Federal Register on September 17, 2010. CMS officials also told us they structured the regulations to be responsive to GAO's longstanding concerns about the level of public input to the demonstration review process. CMS subsequently issued the new regulations and in the preamble, discussed GAO's reports and concerns.

    Matter: Congress may wish to consider amending Title XXI of the Social Security Act to specify that SCHIP funds are not available to provide health insurance for childless adults. In addition, Congress may wish to establish, for parents or guardians of SCHIP-eligible children, which statutory objectives should take precedence--those of Title XXI, which allow for family coverage only to the extent it does not exceed the cost of insuring eligible children, or section 1115 authority, which allows certain statutory provisions--such as cost-effectiveness tests--to be set aside.

    Status: Closed - Implemented

    Comments: In February 2006, Congress enacted the Deficit Reduction Act of 2005, which contained a provision prohibiting the use of SCHIP funds for adults without children.

    Recommendations for Executive Action

    Recommendation: To meet its fiduciary responsibility of ensuring that section 1115 waivers are budget neutral, the Secretary of Health and Human services should reconsider Utah and Illinois's budget neutrality justifications, in light of GAO's conclusions that certain costs were inappropriate or impermissible and, to the extent appropriate, adjust the limit on the federal government's financial obligation for these waivers.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Not Implemented

    Comments: The agency disagrees with the recommendation.

    Recommendation: To meet its fiduciary responsibility of ensuring that section 1115 waivers are budget neutral, the Secretary of Health and Human services should better ensure that valid methods are used to demonstrate budget neutrality, by developing and implementing consistent criteria for consideration of section 1115 demonstration waiver proposals.

    Agency Affected: Department of Health and Human Services

    Status: Open

    Comments: In March 2010, the Patient Protection and Affordable Care Act was passed into law. As part of this act, Congress required the Secretary of HHS to develop regulations governing the review and approval of proposed Medicaid section 1115 demonstrations, as well as the renewal of ongoing demonstrations. In February 2012, HHS issued a final rule that established requirements for public input into proposed waivers at the state and federal level. The rule did not establish requirements establishing consistent criteria for determining budget neutrality.

    Recommendation: To ensure that SCHIP funds are spent only for authorized purposes, the Secretary of Health and Human Services should deny any pending or future state proposals to spend SCHIP funds for this purpose.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Not Implemented

    Comments: The agency disagrees with the recommendation.

    Recommendation: To ensure that SCHIP funds are spent only for authorized purposes, the Secretary of Health and Human Services should amend the approval of Arizona's Health Insurance Flexibility and Accountability waiver to prevent future use of SCHIP funds on childless adults.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Not Implemented

    Comments: The agency disagrees with the recommendation.

    Recommendation: To improve the opportunity for public input into HHS consideration of state Medicaid and SCHIP program proposals that waive statutory requirements, the Secretary of Health and Human Services should provide for a federal public input process that includes, at a minimum, notice of pending section 1115 waiver proposals in the Federal Register and a 30-day comment period in line with HHS's 1994 policy.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Not Implemented

    Comments: The agency has taken some action to improve the opportunity for public input into HHS consideration of waiver proposals, such as putting waiver proposals on its website. However, the HHS disagrees with the recommendation that it follow its written policy to provide notice of pending section 1115 waiver proposals in the federal register.

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