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

Medicaid—a joint federal-state program—plays an important role in providing health care coverage for low-income, medically needy individuals. Because Medicaid is large, growing, and complex, oversight can be particularly challenging.

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The Medicaid program covered an estimated 74 million people and $592 billion in estimated expenditures in fiscal year 2017. The Centers for Medicare & Medicaid Services (CMS) is the agency within the Department of Health and Human Services (HHS) that oversees the Medicaid program at the federal level.
Getting accurate, complete, and timely data on the Medicaid program is an ongoing challenge that can affect CMS’s ability to

  • oversee states' diverse programs,
  • reduce payment errors, and
  • ensure that the people who rely on Medicaid can get adequate care. 

Medicaid is High Risk because of concerns about federal oversight. The program’s ongoing transformation—due to the aging of the population, increased spending per enrollee, and expansion of state programs—highlights the need for improved oversight and quality data.

Program oversight: With estimated improper payments totaling more than $37 billion in federal dollars in fiscal year 2017, CMS needs to improve the effectiveness of its program oversight efforts to help identify and prevent improper payments and program integrity risks, including those related to payments for services provided under managed care, non-covered services, or services that were billed for but never provided. 

  • Increased enrollment and spending for Medicaid managed care make effective oversight critical. 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, underscoring the importance of the oversight of these services for ensuring quality of care. 

    Figure: Growth in Comprehensive Risk-Based Managed Care as a Share of Total Medicaid Expenditures, Fiscal Years 2005 through 2017

    Growth in Comprehensive Risk-Based Managed Care as a Share of Total Medicaid Expenditures, Fiscal Years 2005 through 2017
  • Used effectively, managed care can help states reduce Medicaid costs. However, states also risk making incorrect payments—such as duplicate payments or those for ineligible patients—to managed care organizations (MCO). CMS needs to expedite issuing planned guidance on Medicaid managed care program integrity, address impediments to state managed care audits, and ensure states account for overpayments in setting future managed care payment rates.
  • To develop the Medicaid improper payment rate, CMS uses the Payment Error Rate Measurement (PERM), computing the rate as the weighted average of states’ improper payment rate estimates for three key components of the Medicaid program—fee-for-service (FFS), managed care, and eligibility determinations. However, the managed care component of the PERM does not, for example, include any medical reviews of services delivered to enrollees, and thus likely understates the error rate for managed care. For example, of 27 audits and investigations issued between January 2012 and September 2017 regarding managed care payments for services delivered to enrollees, which involved a small fraction of the more than 270 MCOs operating nationwide, there were about $68 million in overpayments and unallowable MCO costs. To the extent that overpayments and unallowable costs are unidentified and not removed from the cost data used to set capitation rates, they may allow inflated MCO payments and minimize the appearance of program risks in Medicaid managed care.

    Figure: Effect of Unidentified Overpayments and Unallowable Managed Care Organization Costs on Future Years’ Capitation Rates

    Effect of Unidentified Overpayments and Unallowable Managed Care Organization Costs on Future Years’ Capitation Rates
  • 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.
  • 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 the 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.

Improving data quality: CMS needs to make sustained efforts to ensure that the data collected from each state through the Transformed Medicaid Statistical Information System (T-MSIS) are timely, complete, comparable, and useful for program oversight. Reliable data are also needed for oversight of supplemental payments and ensuring that demonstrations are meeting their stated goals.

  • As of June 2018, CMS reported that all states, the District of Columbia, and Puerto Rico were submitting T-MSIS data; however, the agency’s efforts to ensure T-MSIS data comparability and quality are still evolving. Further, the agency has yet to articulate a specific plan and specific time frames for using these data for program oversight. The need for improved data is particularly relevant to managed care due to its increasing share in terms of enrollment and spending.
  • CMS has neither the data needed to understand the 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.

    Figure: Medicaid Payments Compared to Medicaid Costs for Inpatient Hospital Services for Selected Illinois Hospitals with the Highest Daily Payments, State Fiscal Year 2011
    Medicaid Payments Compared to Medicaid Costs for Inpatient Hospital Services for Selected Illinois Hospitals with the Highest Daily Payments, State Fiscal Year 2011
  • States have increasingly relied on funds from sources other than state general funds to finance the nonfederal share of their Medicaid programs, such as health care provider taxes and funds transferred from local governments and local government health care providers. States are permitted to finance up to 60 percent of the nonfederal share from local government funds, but 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.
  • Improvements in the HHS criteria, policy, and process for approving states’ spending under Medicaid demonstrations—state projects that 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 the total Medicaid spending that year.
    • HHS’s criteria and approval documents have not always been clear, and demonstration approvals have sometimes lacked assurances that demonstration spending would not duplicate other federal funds received by states.
    • Federal spending on Medicaid demonstrations could be reduced by billions of dollars if HHS were required to improve the process for reviewing, approving, and making transparent the basis for spending limits approved for Medicaid demonstrations.
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