Medicaid is a critical health care program for tens of millions of low income and medically needy individuals, and is growing in size as new populations become eligible for the program as a result of the Patient Protection and Affordable Care Act. In 2014, Medicaid provided health care coverage to an estimated 65 million low-income individuals at an estimated total cost of $508 billion. On average, the federal share of Medicaid service expenditures is about 57 percent. By 2020, Medicaid expenditures are projected to total $725 billion, with federal expenditures alone totaling $436 billion. Medicaid is structured as a federal and state partnership where each partner bears a certain portion of program costs, according to a formula in law. It involves significant and growing expenditures for the federal government and states, and states have used various sources of funds to help finance their share of the program. The federal government matches each state’s Medicaid expenditures for services on the basis of the state’s federal medical assistance percentage.
States’ financing of the nonfederal share is subject to federal limits and requirements. For example, states must use state funds to finance at least 40 percent of the nonfederal share of total Medicaid expenditures each year. This limit is applied in the aggregate, that is, across each state’s entire Medicaid program, and not for individual payments. States have financed the nonfederal share of Medicaid payments in large part through state general funds, and have depended on other sources of funds—such as taxes on health care providers and funds from local government providers or local governments on behalf of providers—to finance the remainder. Provider taxes must be broad-based, must be uniformly imposed, and must not hold providers harmless; that is, they must not provide a direct or indirect guarantee that providers will receive all or a portion of tax payments back. Taxes that are at or below 6 percent of the individual provider’s net patient service revenues are considered not to have provided an indirect guarantee that providers will receive their tax payments back.
GAO’s prior work has found that flexibility in federal financing and payment requirements has enabled states to create various financing arrangements that may have the effect of shifting costs to the federal government. For example, GAO has found that states have established complex financing arrangements to make excessive payments to certain providers in order to maximize federal funds and rely less on state general funds. These arrangements often involved large Medicaid supplemental payments—payments that are separate from the regular payments states make, often on a lump-sum basis and not paid on the basis of health care claims—to providers that supplied funds to finance the nonfederal share of these payments. This enabled states to obtain billions of dollars in additional federal matching funds without a commensurate increase in state general funds.These types of arrangements may be permissible under certain conditions; however, the flexibility states have to require individual providers to finance the entire nonfederal share of payments may create incentives for states to overpay providers that contribute funds to finance the nonfederal share, in order to reduce state obligations.
While states generally administer the Medicaid program, they are subject to the oversight of the Centers for Medicare & Medicaid Services (CMS), an agency within the Department of Health and Human Services (HHS). Its responsibilities include ensuring that federal Medicaid matching funds are provided for eligible expenditures, the federal government and states share in the financing of the Medicaid program as established by law and that payments are economical and efficient, and beneficiaries have access to care. In some cases after identifying financing arrangements that have enabled states to shift large shares of Medicaid costs to health care providers and local governments, CMS has taken action to ensure the financing was appropriate, resulting in federal cost savings because states were no longer making excessive payments when required to contribute to the nonfederal share of the payments. In recent years a number of proposals have been made to curtail states’ ability to tax health care providers for purposes of financing the nonfederal share of Medicaid payments. The proposals, which estimated federal savings in the tens of billions of dollars, have sought to lower the tax rate threshold. If the threshold is lowered below the current 6 percent, states would have less provider tax revenue to finance their nonfederal share. If the states were unable to replace this funding with other eligible sources of its nonfederal share, then states would have fewer dollars to make Medicaid expenditures. The federal liability would be reduced because the federal government would be matching a lower amount of state Medicaid expenditures.
 Under the Patient Protection and Affordable Care Act, states may expand Medicaid eligibility to nonpregnant, nonelderly adults who are not eligible for Medicare and who meet certain income requirements.
 The federal medical assistance percentage is based on a formula established by law under which the federal share of a state’s Medicaid expenditures for services generally may range from 50 to 83 percent. States with lower per capita income receive a higher federal medical assistance percentage for services.
 State funds that may be used to meet the requirement that at least 40 percent of the nonfederal share of total annual Medicaid expenditures be derived from state funds include state general funds, health care provider taxes imposed by the state, provider donations received by the state, and intra-agency funds from non-Medicaid state agencies. The remaining 60 percent of the nonfederal share for total annual Medicaid expenditures can be derived from local governments, including funds from counties, cities, and local hospital districts, as well as directly from local-government-owned or –operated providers, such as county hospitals.
 For example, proposals were made in the President’s budget in 2013, the National Commission on Fiscal Responsibility and Reform in 2010, and the Congressional Budget Office in 2008.
In July 2014, GAO found that states’ reliance on funds from providers and local governments to finance the nonfederal share of Medicaid payments was significant and increasing, according to an analysis of trends in sources of funds used to finance the nonfederal share as reported by states. In state fiscal year 2012, states nationwide financed on average 26 percent, or over $46 billion of the approximately $180 billion in the nonfederal share of total Medicaid payments—both regular and supplemental—with funds from health care providers and local governments. Among states, the reliance on providers and local governments to finance the nonfederal share of Medicaid payments varied widely. In the 48 states that reported using these sources, the percentage of funds from providers and local governments ranged from less than 1 percent to 53 percent. Nationwide, the reliance on these sources increased by over 21 percent from state fiscal year 2008 through state fiscal year 2012.
These sources were used to fund Medicaid supplemental payments to a greater extent than other types of payments, and this reliance is growing. For Medicaid supplemental payments, the percentage of the nonfederal share financed with funds from providers and local governments increased from 57 percent (or $8.1 billion) in state fiscal year 2008 to 70 percent (or $13.6 billion) in state fiscal year 2012. Several states relied on health care providers and local governments for the entire nonfederal share of supplemental payments in 2012.
Also in July 2014, GAO’s analysis of arrangements involving financing of the nonfederal share of Medicaid payments with funds from provider taxes or local governments in three selected states illustrated how Medicaid costs can be shifted from the state to the federal government and, to a lesser extent, to health care providers and local governments. The use of funds from providers and local governments is, as previously described, allowable under federal rules, but it can also have implications for federal costs. By increasing providers’ Medicaid payments, and requiring providers receiving the payments to supply all or most of the nonfederal share, states claimed an increase in federal matching funds without a commensurate increase in state general funds. For example, GAO found that one state increased Medicaid payments to nursing facilities by $220 million and financed the nonfederal share of the payment increase with a provider tax on nursing facilities. The payment increase and provider tax resulted in an estimated $110 million increase in federal matching funds and no increase in state general funds. The net payment increase to the facilities, after paying the taxes, was $105 million.
GAO has also found that CMS has not ensured that its data on sources of funds states used to finance Medicaid are accurate and complete. States have been required to report the amount of funds collected from health care provider taxes and provider donations since 1992. CMS has not assessed the accuracy and completeness of the data it collects from states on the amount of health care provider taxes and provider donations states use to finance the nonfederal share of Medicaid payments. CMS officials said in March 2014 that the agency could not attest to the accuracy of the data that states reported on their use of provider taxes and donations, but that states were likely underreporting their use of these sources of funds.
When GAO compared the provider tax data reported to CMS in 2012 with state responses to a GAO questionnaire, it found evidence of incomplete reporting. Specifically, 6 of the 47 states that reported in the questionnaire that they had at least one health care provider tax or provider donation in effect that year did not report a tax or donation to CMS in 2012. CMS also does not collect complete data from all states on the amount of local government funds used to finance the nonfederal share of total annual Medicaid expenditures. Although federal requirements limit the percentage of the nonfederal share that states may finance with funds from local governments, states are not required to submit data on the amount of funds from these sources.
To oversee the Medicaid program and assess the need for and make changes to the program, CMS, federal policymakers, and other stakeholders need accurate and complete information on provider payments and sources of funds to finance the nonfederal share. Without such information, it is difficult to track trends in financing the nonfederal share, to ensure compliance with current limits and requirements on financing the nonfederal share, and to examine the extent to which the federal government’s increased spending is commensurate with an increase in net payments realized by providers for the delivery of health care services to Medicaid beneficiaries. Without a better understanding of the scope and implication of state financing arrangements, policymakers do not know the extent to which states’ financing arrangements may be shifting Medicaid costs to the federal government or providers.
 Federal law requires that no more than 60 percent of the nonfederal share is financed by local governments, and the remaining 40 percent can include state general funds and health care provider taxes imposed by the state. This requirement is applied on the basis of total annual Medicaid program spending and not on individual payments or types of payments. Assessing whether states were compliant with federal limits and requirements related to nonfederal sources of funds for Medicaid payments was not within the scope of this review.
 The three selected states were California, Illinois, and New York. States were chosen based on the size of the state’s Medicaid program and whether the state had made changes in sources of funds to finance the nonfederal share, among other things.
 Six states—Arizona, the District of Columbia, New Jersey, South Dakota, Utah, and Virginia—did not report to CMS any health care provider taxes and provider donations as the nonfederal share of Medicaid expenditures. However, these states reported to GAO that they levied provider taxes in state fiscal year 2012.
 Four states—Alaska, Delaware, Hawaii, and New Mexico—reported in the GAO questionnaire that they did not have any health care provider tax, fee, and/or assessment or provider donation in effect during state fiscal year 2012 and therefore would not have reported information about these sources of the nonfederal share to CMS.
To better oversee federal limits and requirements on financing the nonfederal share, and to examine the extent to which the federal government’s increased spending is commensurate with increased payments to providers for health care services, GAO recommended in July 2014 that the Administrator of CMS
This action could result in potential savings by ensuring CMS has the data necessary to identify potential noncompliance with and better enforce federal limits and requirements on financing the nonfederal share. In addition, through a better understanding of the scope and implications of state financing arrangements, Congress could better identify the need for any policy changes, for example to reduce cost shifting in the program and incentives to overpay providers that are financing the nonfederal share of Medicaid payments, and to ensure proper use of federal Medicaid funds. Estimating the potential savings that could be realized from developing a data collection strategy is difficult because the lack of data on Medicaid financing precludes the ability to oversee compliance with current limits and requirements on financing the nonfederal share and because of uncertainty regarding changes in federal Medicaid policy that could result. However, the savings could be in the hundreds of millions of dollars, based on the expected growth in program spending and the ability of states to rely on sources of funds other than state general funds.
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 states have relied on funds from health care providers and local governments to finance the nonfederal share of Medicaid payments, GAO sent a questionnaire to all states and the District of Columbia and received responses from all of them. The questionnaire collected information on each state’s use of funds from health care providers and local governments, state general funds, and other sources to finance the nonfederal share of Medicaid payments from state fiscal year 2008 through state fiscal year 2012, and the type of Medicaid payments—for example, regular or supplemental—to which the funds were applied. GAO did not independently verify the data reported by states in the questionnaire; however, it reviewed published data submitted by state Medicaid programs to CMS and to outside researchers to assess the reasonableness of the data reported.
To analyze financing arrangements involving financing of the nonfederal share with funds from provider taxes or funds from local governments, GAO selected three states—California, Illinois, and New York—based on the size of the state’s Medicaid program and whether the state had made changes in sources of funds to finance the nonfederal share (among other things), and then selected one financing arrangement in each of the three states. Findings from these three states are not generalizable to other states. In these three states, GAO obtained and analyzed Medicaid payment data from before and after an increase in funds from health care providers or local governments that occurred during state fiscal years 2008 through 2012 to determine the effect of the change on the amounts of Medicaid payments states made to providers and on the amounts of state general funds, funds from local governments, and federal funds used to finance these payments. To determine the extent to which CMS collects data to oversee states’ use of various sources of funds, GAO asked CMS officials about the data they collect, the reliability of the data, and their oversight of state financing of the nonfederal share. GAO also reviewed relevant federal laws, regulations, and guidance.
Table 15 in appendix V lists the programs GAO identified that might have opportunities for cost savings or revenue enhancement.
In commenting on a draft of the July 2014 report on which this analysis is based, HHS stated that it is working to identify needs for improvement in current payment and financing review processes. HHS’s acknowledgment is consistent with GAO’s recommendation to develop a data collection strategy that ensures states report accurate and complete data on all sources of funds used to finance the nonfederal share of Medicaid payments.
GAO provided a draft of this report section to HHS for review and comment. In an email received on March 11, 2015, HHS reiterated its comments from a draft of the July 2014 report. HHS also provided technical comments, which were incorporated as appropriate.
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