Medicaid:

Improved Federal Oversight of State Financing Schemes Is Needed

GAO-04-228: Published: Feb 13, 2004. Publicly Released: Mar 16, 2004.

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For years, some states have taken advantage of a loophole in Medicaid law that allows them to claim billions of dollars in excessive federal matching funds by exploiting the "upper payment limit" (UPL), which is intended to be a ceiling on federal cost sharing. Congress and the Centers for Medicare & Medicaid Services (CMS) acted to curtail UPL financing schemes through law in 2000 and regulation in 2001. CMS recognized that some states had developed a long-standing reliance on UPL funds. The law and regulation authorized transition periods of up to 8 years for states to phase out excessive UPL claims. GAO was asked to examine CMS's oversight of nursing home UPL arrangements, including the status of and the basis for transition period decisions.

CMS has granted transition periods to 18 states for phasing out excessive claims for federal Medicaid funds obtained through UPL financing schemes. Eight states were granted 1- or 2-year transition periods, seven were granted 5-year transitions, and three states--Nebraska, Pennsylvania, and Wisconsin--were granted the maximum of 8 years. The law permits 8-year transition periods for qualifying states with UPL financing schemes relating to a payment provision established on or before October 1, 1992. Although permissible under the law, CMS's decisions to grant 8-year transition periods to two of the three states were not consistent with the agency's stated purpose for the UPL regulation and transition policy, which targeted arrangements with problematic characteristics and states with a long-standing budgetary reliance on excessive federal funds. Neither Nebraska nor Wisconsin had such arrangements or budgetary reliance until after 1997 and 2000, respectively. Under their 8-year transition periods, these states can claim about $633 million more in federal matching funds than they could have claimed under shorter transition periods consistent with the stated purpose of CMS's regulation and transition policy. CMS has strengthened its oversight of state UPL schemes, including forming a team to coordinate its reviews, drafting internal guidelines for reviewing state methods, and conducting financial reviews that have identified hundreds of millions of dollars in improper claims. CMS has not focused its reviews on the states with the largest arrangements, however, or instructed states on appropriate methods for calculating their UPLs. GAO's analysis of six states' UPL methods found variations and concerns suggesting that states may be overstating their UPL claims. Although efforts by Congress and CMS have narrowed the UPL loophole, it has not been eliminated. States can and do continue to claim excessive federal matching funds through UPL arrangements, using them for non-Medicaid purposes or to inappropriately increase the federal share of Medicaid program expenditures.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Transition periods have ended.

    Matter: Congress may wish to continue its efforts to close the UPL loophole and prevent further claims from arrangements that undermine the fiscal integrity of the Medicaid program. In addition to reiterating our previous recommendation to Congress to limit Medicaid payments to providers' costs, we believe action is required to address the impact of CMS's transition policy and decisions on program integrity. Congress may wish to consider ending the 8-year transition periods for states with excessive nursing home UPL arrangements, with a consideration for any state that has demonstrated a long-standing budgetary reliance on the federal funds.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: Agency disagrees with the recommendation. Most transition periods have ended.

    Recommendation: To protect the fiscal integrity of the Medicaid program, the Administrator of CMS should establish criteria for making transition period decisions that are consistent with the objectives described in CMS's January 2001 UPL regulation.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

  2. Status: Closed - Not Implemented

    Comments: Agency disagrees with the recommendation. Most transition periods have ended as of August 2007.

    Recommendation: To protect the fiscal integrity of the Medicaid program, the Administrator of CMS should reconsider the agency's initial decisions to grant Nebraska and Wisconsin 8-year transition periods.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

  3. Status: Closed - Implemented

    Comments: In March 2013, CMS issued a State Medicaid Director letter which included guidance materials and instructions for states on calculating the upper payment limit (UPL) and reporting UPL information. The State Medicaid Director letter requires states to annually report facility-specific information on UPL demonstrations beginning in 2013 for inpatient hospital services, outpatient hospital services, and nursing facilities and beginning in 2014 for these services and for clinics, physician services (for states that reimburse targeted physician supplemental payments), intermediate care facilities for the developmentally disabled, private residential treatment facilities, and institutes for mental disease.

    Recommendation: To further improve UPL oversight, the Administrator of CMS should establish uniform guidance for states, which would set forth acceptable methods to calculate UPLs.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

  4. Status: Closed - Implemented

    Comments: In August 2003, CMS began an oversight initiative to review in detail state Medicaid plan amendments involving provider payments. Through this effort CMS has reviewed the appropriateness of UPL payments in most states, including all of the state nursing home UPL payments with 5 and 8 year transition periods that were listed in our report.

    Recommendation: To further improve UPL oversight, the Administrator of CMS should expedite the financial management reviews of states with UPL arrangements, assigning high priority to reviews of states with 5- and 8- year transition periods, including those we identified as having methodological problems.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

  5. Status: Closed - Implemented

    Comments: In March 2013, CMS issued a State Medicaid Director letter requiring states to annually report facility-specific information on UPL demonstrations beginning in 2013 for inpatient hospital services, outpatient hospital services, and nursing facilities and beginning in 2014 for these services and for clinics, physician services (for states that reimburse targeted physician supplemental payments), intermediate care facilities for the developmentally disabled, private residential treatment facilities, and institutes for mental disease.

    Recommendation: To further improve UPL oversight, the Administrator of CMS should improve state reporting on UPL arrangements, such as implementing the current requirement for states with transition periods to report payments on a facility-specific basis, and requiring such reports for all states with a UPL arrangement.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

 

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