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Health > 29. Medicaid Payments to Institutional Providers

The Centers for Medicare & Medicaid Services should take steps to improve the oversight of state Medicaid payments to institutional providers and better ensure that the federal government does not provide funds for excessive state payments made to certain providers, which could result in savings of hundreds of millions of dollars.

Why This Area Is Important

Medicaid is a joint federal-state program that is one of the largest sources of health care coverage and financing for tens of millions of low-income and medically needy individuals, with federal and state spending estimated at over $500 billion in fiscal year 2015.[1] A significant share of Medicaid program payments is made to institutional providers, such as hospitals. For example, Medicaid paid an estimated $194 billion to hospitals in 2015.[2]

States pay hospitals and other providers for covered services delivered to Medicaid beneficiaries, and the federal government shares in the cost of these payments. Under federal law, federal funding is available when payments (1) are made for covered Medicaid items and services; (2) are consistent with economy, efficiency, and quality of care; and (3) do not exceed the Medicaid upper payment limit (UPL), which is a reasonable estimate of what Medicare would pay for comparable services.[3] States administer their individual Medicaid programs, within broad federal requirements, under individual state Medicaid plans, under which, among other things, the states set payment rates that different providers are to receive for various covered services and pay providers for claims submitted for services rendered. States often make separate monthly, quarterly, or annual supplemental lump-sum payments to institutional providers, not based on claims, for which states also receive federal matching funds. GAO has designated Medicaid a high-risk program, in part due to concerns about excessively large payments to certain providers and gaps in federal oversight.

The Centers for Medicare & Medicaid Services (CMS), an agency within the Department of Health and Human Services (HHS), is responsible for overseeing state Medicaid programs at the federal level. CMS’s responsibilities include reviewing and approving state Medicaid plans to help ensure that state Medicaid payments are for Medicaid-covered services and beneficiaries and comply with Medicaid payment requirements, including, in particular, that payments to providers are consistent with economy and efficiency.

[1]Office of the Actuary, Centers for Medicare & Medicaid Services, United States Department of Health and Human Services: 2014 Actuarial Report on the Financial Outlook for Medicaid (Washington, D.C.: 2014).

[2]Office of the Actuary, Centers for Medicare & Medicaid Services, National Health Expenditures (NHE), Amounts by Type of Expenditure and Source of Funds: Calendar Years 1960-2024, accessed March 2016,

[3]Medicare is the federal health program that covers seniors aged 65 and over, individuals with end-stage renal disease, and certain disabled persons.

What GAO Found

In April 2015, GAO concluded that federal oversight of Medicaid payments is limited in part by insufficient federal information on payments and also by the lack of a policy and process for determining that payments are economical and efficient. As a result, excessive payments states make to individual providers may not be identified or examined by CMS. These findings were based on GAO’s review of CMS processes and policies for overseeing payments to individual providers and analysis of payments to individual inpatient hospitals in two states with large Medicaid programs.

GAO reported that Medicaid payments for hospital inpatient services ranged widely in 2011—the latest time frame for which data were available at the time of GAO’s review—with payments in excess of costs for some hospitals. Federal law does not limit Medicaid payments to the costs of providing services;[1] nevertheless, payments that greatly exceed costs raise questions about the appropriateness of these payments to individual institutional providers, as well as questions about CMS’s oversight of state Medicaid payments. GAO’s analysis of the 16 hospitals with the highest daily Medicaid payment in the two selected states showed that 10 of these hospitals had total Medicaid inpatient payments—regular plus supplemental—that exceeded those hospitals’ total costs of providing these services; the excess payments ranged from $273,000 to over $210 million in 2011.[2] GAO also reported that some hospitals’ total Medicaid payments exceeded the hospitals’ total operating costs—that is, costs for all hospital services provided to all patients the hospital served. For example, in one state, two of these hospitals received payments that were $75 million and $69 million, respectively, in excess of the hospitals’ total operating costs for the year. These two hospitals received a combined total of over $486 million in total Medicaid payments. According to CMS officials, CMS was unaware of the total amount of payments these two hospitals received and that the payments exceeded the hospitals’ costs. In the fall of 2014, CMS took action to reduce Medicaid payments to these two hospitals. Earlier GAO reports indicated that excessive provider payments may not be limited to a small number of selected states. For example, in November 2012, GAO reported that in 39 states, a total of 505 hospitals received total regular Medicaid and UPL supplemental payments that were in total about $2.7 billion in excess of the hospitals’ Medicaid costs in 2007.[3]

CMS’s oversight of Medicaid payments is limited, in part, by insufficient information on provider-specific payments and by the lack of a policy and process for determining whether these payments are economical and efficient. GAO’s analysis of payments at the provider level in the two selected states illustrates the need for provider-specific payment data. However, CMS does not collect information on payments to individual providers in its two Medicaid payment data systems, CMS-64 and the Medicaid Statistical Information System (MSIS). CMS-64 is an expenditure data system that only provides aggregate information. MSIS is CMS’s national eligibility and claims system and is the agency’s only source of provider-specific payment data reported by the states. However, states are not required to report UPL supplemental payments that are not paid on claims in MSIS. Thus, CMS cannot identify and assess payments at the provider level.

GAO also reported in April 2015 that CMS does not have a policy that specifies criteria to use in determining when payments made to individual providers are economical and efficient, and it does not have a process to identify payments to individual providers that appear questionable. Instead, the agency ensures states aggregate payments for a group of providers are within the UPL and will follow up on payments that are identified as questionable by reviews conducted by oversight agencies, such as HHS’s Office of Inspector General. Without complete and accurate information on provider-specific payments, a policy specifying criteria to determine when payments to individual providers comply with statutory requirements that payments be economical and efficient, and a process for identifying and assessing payments at the provider level, CMS cannot ensure that payments to individual providers are economical and efficient. As a result, the federal government could be paying states hundreds of millions of dollars in federal matching funds for payments made to certain providers that are not consistent with federal requirements.

[1]The UPL regulations establish a ceiling on the amount of federal matching funds a state can claim. The UPL, which is based on the amount that Medicare would pay for comparable services, is an aggregate limit that applies to groups of providers based on category of service and provider ownership. The UPL does not limit the amount of payment a particular provider can receive as long as the aggregate payment amount to the group does not exceed the UPL.  See, e.g., 42 C.F.R. § 447.272.

[2]GAO compared hospitals’ estimated Medicaid payments received to hospitals’ Medicaid costs and operating costs in 16 hospitals.  GAO selected the three hospitals in each of the following  ownership groups—state government, local government, and private—that had the highest daily payments, for a total of 9 in one state and 7 in the other state, which only had one state government hospital.

[3]UPL supplemental payments are Medicaid payments that are above the regular Medicaid payments but within the UPL, defined as the estimated amount that Medicare would pay for comparable services. 

Actions Needed

To improve CMS’s oversight of Medicaid and better ensure that the federal government does not provide federal funds for excessive state payments made to certain providers, GAO recommended in its April 2015 report that the Administrator of CMS take the following three actions:

  • Take steps to ensure that states report accurate provider-specific payment data for all payments.
  • Develop a policy establishing criteria to determine when provider-specific payments are economical and efficient.
  • Once criteria are established, develop a process for identifying and reviewing payments to individual providers to determine if such payments meet the criteria.

Currently, it is not possible to estimate the potential cost savings that may result from ensuring that the federal government is not providing matching funds for Medicaid provider payments that exceed federal limits because CMS has neither the criteria nor a process to identify payment amounts that are excessive and should not be allowed. In addition, the agency does not have the data necessary to identify the amount of payments that would exceed the criteria once they are established. As a result, it is difficult to determine with specificity the potential cost savings. However, GAO reports suggest that curtailing excessive payments to individual providers could result in savings in the hundreds of millions of dollars.

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 extent to which CMS oversees Medicaid payments to government providers, GAO interviewed CMS officials, including representatives from the CMS regional offices, and obtained and reviewed documentation of CMS review and approval of state Medicaid payments, relevant federal laws, regulations, and guidance. To analyze payment and cost information for selected hospitals in two states, GAO obtained and analyzed state fiscal year 2011 information from the states, CMS’s national claims data, and Medicaid cost reports that the hospitals submit to the states.

Table 14 in appendix V 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 April 2015 report on which this analysis is based, HHS concurred with GAO’s recommendations and noted efforts to address them. HHS stated that it was evaluating ways to improve its oversight, including gathering information from states to better inform future policies. HHS noted that information being collected should better inform the agency’s efforts to establish criteria, policies, and procedures to evaluate whether payments at the provider level are economical and efficient. In March 2015, CMS officials stated that they are developing a proposed rule to improve the oversight of supplemental payments made to individual providers, and they plan to publish a proposed rule for comment in fall of 2016. 

GAO provided a draft of this report section to HHS. In commenting on this submission HHSprovided technical comments, which were incorporated, as appropriate.

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

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