Key Issues > Medicaid - High Risk Issue
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Medicaid - High Risk Issue

Medicaid plays an important role in providing health care coverage for about 70 million low-income individuals, including children, adults, and individuals who are aged or disabled. The program is jointly financed by the federal government and the states and costs more than $550 billion a year.

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The Centers for Medicare & Medicaid Services (CMS) is the agency within the Department of Health and Human Services (HHS) that oversees the program at the federal level. An overarching challenge for the Medicaid program is the lack of accurate, complete, and timely data that affects CMS’s ability to oversee states’ diverse Medicaid programs and to ensure proper payments and beneficiaries’ access to services.  Medicaid is high risk because of concerns about inadequate federal oversight of the large and growing program. Medicaid’s ongoing transformation— due to the aging of the population and other changes to state programs—highlights the importance of federal oversight, in particular with regards to transparency and oversight, program integrity, financing and operations, and access to quality care.

Transparency and oversight: The lack of complete and reliable data on states’ spending and financing of the nonfederal share of the program hinders federal oversight.

  • CMS does not have the data needed to understand payments states make to individual providers nor a standard process for assessing whether payments are economical and efficient as required by law. Most states have made Medicaid payments to hospitals that exceeded those hospitals’ costs of providing Medicaid services, and there have been cases where the state’s Medicaid payments exceeded the hospital’s total operating costs. States are not required to limit Medicaid payments to Medicaid costs, but payments that greatly exceed Medicaid costs raise questions about whether those payments are economical and efficient, and ultimately used for Medicaid purposes.
  • States have increasingly relied on funds from sources other than state general funds to finance the nonfederal share of their programs, such as health care provider taxes and funds transferred from local governments and local government health care providers. While states are permitted to finance up to 60 percent of the nonfederal share from local government funds, some states have restricted certain types of Medicaid payments to just those providers able to secure local funding, and have made these payments contingent on such funding. Arrangements that make Medicaid payments contingent on local funding of the nonfederal share are counter to CMS policy. Moreover, reliance on providers and local governments for Medicaid funding can create incentives that result in cost shifts to the federal government.

Figure: Example of How One State's Use of Non-State Sources to Fund Medicaid Payments to Nursing Facilities Shifted Medicaid Costs to the Federal Government in State Fiscal Year 2012

Example of How One State's Use of Non-State Sources to Fund Medicaid Payments to Nursing Facilities Shifted Medicaid Costs to the Federal Government in State Fiscal Year 2012

  • Improvements in the HHS criteria, policy, and process for approving states’ spending under  demonstrations—state projects that may test new ways to deliver or pay for care—are needed to potentially prevent billions of dollars in unnecessary federal spending. Medicaid expenditures on such demonstrations reached $165 billion in fiscal year 2015, which represents close to one-third of total Medicaid spending that year.

Program integrity: With estimated improper payments totaling more than $36 billion in federal dollars in fiscal year 2016, CMS needs to improve the effectiveness of its program integrity efforts to help identify and prevent improper payments, such as payments for non-covered services or services that were billed for but never provided.  

  • CMS has taken steps to improve Medicaid program integrity, including establishing requirements that all Medicaid managed care providers enroll with the state Medicaid agency, providing states with federal data to strengthen enrollment screening, and providing additional guidance to states on specific provider screening and reporting provisions in the 21st Century Cures Act. However, available federal data do not include all of the information necessary for states to effectively and efficiently process Medicaid provider applications. As a result, states and managed care plans rely on fragmented information from multiple and disparate databases to screen managed care providers, and often struggle to access and use these databases because of difficulties conducting provider matches across databases. 
  • CMS completed three checks for duplicate coverage and coverage gaps for individuals transitioning between Medicaid and health insurance exchange coverage in states with federally facilitated exchanges and intends to conduct checks twice per year. However, CMS has not developed a plan, including thresholds for the level of duplicate coverage it deems acceptable, to routinely monitor the effectiveness of those checks.
  • There are also gaps in CMS’s efforts to ensure that only eligible individuals are enrolled into Medicaid, and that Medicaid expenditures for enrollees, including enrollees newly eligible as a result of the Patient Protection and Affordable Care Act (PPACA) expansion, are matched appropriately by the federal government.
  • Five U.S. territories have seen temporary increases in federal Medicaid funding, but there is little assurance that Medicaid funds are protected from fraud, waste and abuse.  Federal and territory officials cited resource constraints and the territories’ smaller Medicaid expenditures as reasons for limited oversight efforts in the territories.

Financing and operations:

  • The federal government and states share in the financing of the Medicaid program, with the federal government matching most state expenditures for Medicaid services based on the Federal Medical Assistance Percentage (FMAP) formula, which uses per capita income to calculate each state’s federal matching rate.
    • The current FMAP formula does not adequately address variation in the demand for services in each state, geographic cost differences, and state resources. There are multiple alternative data sources that could be used to develop measures of these state characteristics. Those measures could be combined in various ways to better align federal funding with states’ needs, offering them greater fiscal stability.
    • Also, past efforts to provide states with temporary increases in federal assistance during national economic downturns were not as responsive to states’ economic conditions as they could have been. There are opportunities to improve the timing, amount, and duration of assistance provided to states, such as by using an automatic mechanism to trigger federal assistance and by better targeting assistance based on each state’s level of need. In designing an approach to providing assistance, policymakers could adjust the level of funding and other elements—such as when and how to start, end, and target the assistance—depending on circumstances such as competing budget demands and other state fiscal needs beyond Medicaid. One such option for providing automatic, timely, and targeted assistance during downturns is shown in the figure below. This option relies on economic data (e.g., the monthly employment-to-population ratio or EPOP) to begin assistance.

 Figure: Prototype Formula for Temporary Increased FMAP Assistance to States

Prototype Formula for Temporary Increased FMAP Assistance to States

  • Federal spending for Medicaid managed care increased from $27 billion in fiscal year 2004 to $107 billion in fiscal year 2014, and represented 38 percent of total federal Medicaid spending in fiscal year 2014—the most recent year for which these data are available. State payments to Medicaid managed care organizations (MCO) in 2014 varied widely across and within certain states reviewed, as did the average annual MCO payment per beneficiary, which ranged from $2,784 in one state to $5,180 in another state.   As of 2014, more than three-fourths of Medicaid beneficiaries received some of their services in a managed care delivery system. 

Figure: Comprehensive Risk-Based Managed Care Penetration in Medicaid by State, as of July 1, 2013
Comprehensive Risk-Based Managed Care Penetration in Medicaid by State, as of July 1, 2013

  • Increased enrollment and spending for Medicaid managed care make effective oversight critical; however, states’ oversight of Medicaid managed care varies. For example,
    • five of eight states reviewed in 2015 required managed care organizations to annually meet minimum medical loss ratio (MLR) percentages—standards that ensure a certain proportion of payments are for medical care;
    • state-reported encounter data—records on health care services for which MCOs pay—which federal law requires states to collect and submit to CMS, were either not available or were unreliable in 19 states reviewed in 2015; and
    • states vary in methods used to assign beneficiaries to managed care plans.
  • Medicaid’s growing expenditures for long-term care services and supports for aged and disabled beneficiaries—which were an estimated $152 billion in fiscal year 2016, or about one quarter of the program’s total annual expenditures that year—also warrant increased attention.  The demand for these services is expected to increase as the nation’s population ages and life expectancy increases.  Monitoring and oversight of these services is important for ensuring quality of care, as the individuals who rely on these services are among Medicaid’s most vulnerable.   

Access to quality care: The higher prevalence of some health conditions among Medicaid beneficiaries nationally that can be identified and managed by preventive services suggests that more can and should be done to ensure Medicaid beneficiaries receive these services. Additionally, Medicaid beneficiaries may experience challenges accessing other types of services as well as providers. For example,

  • States are required to provide preventive services for children through the Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) benefit.  However, national data collected by HHS suggest that Medicaid beneficiaries receive these services at rates below established goals.
  • State Medicaid programs have struggled to ensure that children receive appropriate oral health and mental health services when needed.  For example, children in Medicaid took psychotropic medications at a higher rate than those with private insurance, and may not be receiving needed mental health services, such as counseling and therapy.
  • Due to variation across states in the scope, functionality, and availability of resources on provider information, Medicaid beneficiaries in fee-for-service arrangements may face challenges in identifying available providers. 
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