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Health > 26. Medicaid Supplemental Payments

To improve the transparency of and accountability for certain high-risk Medicaid payments that annually total tens of billions of dollars, Congress should consider requiring the Centers for Medicare & Medicaid Services to take steps that would facilitate the agency’s ability to oversee these payments, including identifying payments that are not used for Medicaid purposes or are otherwise inconsistent with Medicaid payment principles, which could lead to cost savings. GAO’s analysis of providers for which data are available suggests that savings could be in the hundreds of millions, or billions, of dollars.

Why This Area Is Important

Medicaid—the joint federal-state program that finances health care for certain low-income individuals—cost the federal government and states an estimated $410 billion in 2011. States pay qualified health care providers for covered services delivered to Medicaid beneficiaries and obtain federal matching funds for the federal share of these payments. In addition to regular Medicaid payments for covered services, states also make and obtain federal matching funds for supplemental payments, for example, to offset uncompensated care costs for Medicaid patients. Such payments are a significant and growing component of Medicaid spending. States reported spending at least $43 billion on Medicaid supplemental payments in fiscal year 2011, up from $32 billion in fiscal year 2010 and $23 billion in fiscal year 2006. In November 2012, GAO reported that these amounts were likely understated because reporting of supplemental payments was incomplete.

States make two general types of Medicaid supplemental payments. First, under federal Medicaid law, states are required to make disproportionate share hospital (DSH) payments to certain hospitals. These payments are designed to help offset these hospitals’ uncompensated care costs for serving Medicaid and uninsured low-income patients. States’ Medicaid payment rates are not required to cover the full costs of providing care to Medicaid beneficiaries, and many providers also provide care to low-income patients without any insurance or ability to pay. Under federal law, DSH payments are capped at a facility-specific level and state level. Second, many states also make another type of Medicaid supplemental payment—referred to here as non-DSH supplemental payments—to hospitals and other providers, who, for example, serve high-cost Medicaid beneficiaries. Unlike DSH payments, non-DSH supplemental payments are not required under federal law, do not have a specified statutory or regulatory purpose, and are not subject to firm dollar limits at the facility or state level. Unlike regular Medicaid payments, which are paid on the basis of covered Medicaid services provided to Medicaid beneficiaries through an automated claims process, non-DSH supplemental payments are not necessarily made on the basis of claims for specific services to particular patients and can amount to tens or hundreds of millions of dollars to a single provider, annually. States make non-DSH supplemental payments under the flexibility of Medicaid’s upper payment limit, which allows states to obtain federal matching payments for payments up to the amount Medicare, the federal program covering individuals age 65 and older and certain others, would pay for the same group of services.[1] Non-DSH supplemental payments have increased significantly in recent years. They now exceed DSH payments in total payment amounts, with states reporting about $26 billion in non-DSH supplemental payments in fiscal year 2011, compared to over $17 billion in DSH payments.

For about two decades, GAO has raised concerns about supplemental payments and the adequacy of federal oversight. GAO has designated Medicaid a high-risk program, in part due to these concerns. For example, in February 2004, GAO reported that some states made relatively large non-DSH supplemental payments to relatively small numbers of government-owned providers and that these providers were then sometimes required to return these payments to the states, resulting in an inappropriate increase in federal matching funds. Since 2010, states have been required to submit annual facility-specific reports and annual independent certified audits on the first type of supplemental payments—DSH payments. In connection with the independent audit requirement, standard methods were established for calculating DSH payment amounts. In its March 2011 annual report on duplication, overlap, and fragmentation, GAO reported that improved oversight of Medicaid supplemental payments had the potential to generate cost savings. Specifically, GAO reported that the Centers for Medicare & Medicaid Services (CMS) should establish uniform guidance for states that sets acceptable methods for calculating non-DSH payment amounts; require facility specific reporting of non-DSH supplemental payments; and develop a strategy to ensure that all state supplemental payment arrangements have been reviewed by CMS. CMS’s progress to address this action can be found in GAO’s Action Tracker. GAO has also examined the oversight information available on non-DSH supplemental payments, including that from the DSH audits and facility-specific reports.

CMS, an agency within the Department of Health and Human Services, is responsible for overseeing state Medicaid programs at the federal level. CMS responsibilities include helping ensure that state Medicaid payments are for Medicaid-covered services and beneficiaries and comply with Medicaid payment principles, in particular, that payments to providers are consistent with economy, efficiency, and quality of care.

[1]Non-DSH supplemental payments are based on the difference between states’ regular Medicaid payments and the upper payment limit on what the federal government will pay as its share of Medicaid payments for different classes of covered services. The upper payment limit is based on what Medicare—the federal health program that covers individuals aged 65 and over, individuals with end-stage renal disease, and certain disabled individuals—would pay for comparable services. The upper payment limit is not a facility-specific limit but is applied to all providers within three ownership categories: local (nonstate) government-owned or local (nonstate) government-operated facilities, state-government-owned or state-government-operated facilities, and privately owned and operated facilities. As a result, states have some discretion in how they distribute non-DSH supplemental payments to individual providers. Separate upper payment limits exist for inpatient services provided by hospitals, nursing facilities, and intermediate care facilities for individuals with intellectual disabilities, and outpatient services provided by hospitals and clinics.

What GAO Found

In November 2012, GAO reported its analysis of non-DSH supplemental payments, which demonstrated how improved transparency of and accountability for these payments could help CMS ensure payments are used for Medicaid purposes and are consistent with Medicaid payment principles. In its report, GAO analyzed data on total regular Medicaid and non-DSH supplemental payments and compared these payments, for individual providers, to each provider’s actual Medicaid costs that are captured in cost reports and summarized for certain facilities in the recently implemented facility-specific DSH reports.[1] GAO’s analysis of the available information suggests many states are making Medicaid payments to many providers that are far in excess of those providers’ costs of providing Medicaid services. GAO found that at least one hospital in each of 39 states submitting a DSH report received total regular Medicaid and non-DSH supplemental payments in excess of Medicaid costs. Specifically, in these 39 states, a total of 505 DSH hospitals received total regular Medicaid and non-DSH supplemental payments in excess of Medicaid costs by a total of about $2.7 billion. In some cases, payments greatly exceeded costs; for example, one hospital received almost $320 million in non-DSH payments and $331 million in regular Medicaid payments, which exceeded the $410 million in costs reported for the hospital for providing Medicaid services by about $241 million.

Medicaid payments that greatly exceed Medicaid costs raise questions about the purpose of the payments. Transparency regarding these payments could help CMS understand how payments relate to Medicaid services, whether payments are consistent with economy and efficiency, and whether payments contribute to beneficiaries’ access to quality care. Having annual facility-specific information on non-DSH payments, guidance on acceptable methods for calculating non-DSH payments, and annual independent audits of these payments could improve CMS’s oversight by enabling the agency to assess the relationship of Medicaid payments to Medicaid costs for each facility and identify payments that are not appropriate.[2] Such requirements do not currently exist for non-DSH payments. Improved CMS oversight could lead to corrective actions to reduce inappropriate payments in the future, which could potentially provide cost savings. GAO has previously recommended that CMS take actions to improve its oversight of non-DSH supplemental payments, including recommendations in February 2004 to require facility-specific reporting of non-DSH supplemental payment information and to clarify guidance on permissible methods for calculating these payments. As of November 2012, CMS had no plans to require states to report information on non-DSH payments made to individual providers, clarify permissible methods for calculating non-DSH payments, or require annual independent audits of states’ non-DSH payments, because in its view legislation has been crucial to implementing similar requirements for DSH payments.

[1]The information available on non-DSH supplemental payments is limited, in that only the non-DSH payments received by hospitals that receive DSH payments can be found in the annual DSH reports that states must submit, so that any non-DSH payments received by other hospitals or facilities, such as nursing homes, are not reported. Payments to these other facilities can be significant; for example, non-DSH supplemental payments to these other facilities were at least $1.6 billion in fiscal year 2010.

[2]GAO found that initial DSH audits—for which CMS will not take action during a certain transition period allowing states to correct identified problems—had identified many areas where state DSH payments were not compliant with DSH payment requirements. States will need to take corrective actions during the transition period in order to avoid potential loss of federal funds or having to redistribute payments to other hospitals that are qualified to receive DSH payments. The audits also examined and reported on the data sources and methods used for calculating DSH payments.

Actions Needed

To improve the oversight of non-DSH supplemental payments, GAO suggested in November 2012 that Congress should consider requiring the Administrator of CMS to take the following three actions:

  • improve state reporting of non-DSH supplemental payments, including requiring annual reporting of payments made to individual facilities and other information that the agency determines is necessary to oversee non-DSH payments;


  • clarify permissible methods of calculating non-DSH supplemental payments; and


  • require states to submit an annual independent certified audit verifying state compliance with permissible methods for calculating non-DSH supplemental payments.

Estimating the extent of potential cost saving is difficult because of the discretion states have in setting Medicaid payment rates. For example, GAO’s analysis of providers for which data are available suggests that savings could be in the hundreds of millions, or billions, of dollars. However, CMS lacks the information to determine the extent and appropriateness of these payments, which would be necessary in order to estimate cost savings. The three actions are intended to improve CMS’s ability to identify and then assess the appropriateness of payments that greatly exceed provider costs and to subject these payments to independent audit.

How GAO Conducted Its Work

The information contained in this analysis is based on findings from the products in the related GAO products section. To determine the information that existed to oversee non-DSH supplemental payments, GAO reviewed relevant federal laws, regulations, and guidance. In addition, GAO analyzed data on non-DSH supplemental payments, Medicaid payments, and Medicaid costs that were reported for DSH hospitals in states’ 2010 DSH reports of 2007 Medicaid payments. Specifically, for each DSH hospital GAO compared total Medicaid payments (regular Medicaid and non-DSH supplemental payments) to Medicaid costs and identified DSH hospitals in which payments exceeded costs. In reviewing the DSH report data, GAO removed hospitals with incomplete information or for which independent auditors had raised questions about data reliability or the hospital’s qualifications for receiving a DSH payment. GAO also conducted interviews with CMS officials. Determining the appropriateness of individual payments was beyond the scope of GAO’s current work. Table 19 in appendix IV lists the program GAO identified that might have opportunities for cost savings or revenue enhancement.

Agency Comments & GAO Contact

In commenting on a draft of the November 2012 report on which this analysis is based, the Department of Health and Human Services, agreed that improved reporting and oversight of non-DSH supplemental payments was needed. The Department of Health and Human Services also noted that some efforts were under way to do so, including a comprehensive review of state supplemental payment methodologies to ensure that payments are compliant with Medicaid statute and federal regulation.

GAO provided a draft of this report section to the Department of Health and Human Services for review and comment. The Department of Health and Human Services did not provide comments on this report section.

For additional information about this area, contact Katherine Iritani at (202) 512-7114 or

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