Medicaid Demonstration Waivers:

Recent HHS Approvals Continue to Raise Cost and Oversight Concerns

GAO-08-87: Published: Jan 31, 2008. Publicly Released: Mar 3, 2008.

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Medicaid, a joint federal and state program, finances health care for 60 million low-income people. Section 1115 of the Social Security Act authorizes the Secretary of Health and Human Services to waive certain federal Medicaid requirements and allow demonstration projects that are likely to promote Medicaid objectives. Under federal policy, states must show that federal spending for proposed demonstrations will be no greater than if the state's existing Medicaid program were continued. GAO examined the extent to which HHS ensured that recent comprehensive 1115 demonstrations--affecting a broad range of services for beneficiaries statewide--will (1) be budget neutral to the federal government and (2) maintain Medicaid's fiscal integrity. For demonstrations approved in 2005 (Florida and Vermont), GAO obtained information from federal and state officials and also relied on past reviews of other demonstrations.

HHS did not adequately ensure that Florida's and Vermont's Medicaid demonstrations will be budget neutral to the federal government before approving them. HHS approved spending limits that were higher than the limits that would have been granted if HHS had held the states to limits based on benchmark growth rates, that is, the lower of the state's historical spending growth or nationwide estimates of Medicaid growth. Although HHS allows states to deviate from these benchmarks if states can show that using them would not provide accurate projections, HHS's basis for approving the higher spending limits was not fully supported by documentation. In Florida, HHS approved a $52.6 billion spending limit for the 5 year demonstration-- $6.9 billion more than the documentation supported. In Vermont, HHS approved a $4.7 billion spending limit--$246 million higher than supported. HHS also did not ensure that the two demonstrations maintain Medicaid's fiscal integrity. In Florida, HHS allowed the state to establish a spending limit using a historical spending base that included payments HHS had previously identified as problematic. In 2005, an HHS review found several problems with the payment arrangement--problems that potentially resulted in inflated and inaccurate payments. In Vermont, where the state proposed operating a managed care organization, HHS agreed to an administrative reimbursement rate higher than what the state received prior to the demonstration. Under this arrangement, the state can use excess revenues to pay for health-related programs that were previously funded by the state and that do not exclusively benefit Medicaid beneficiaries, such as a grant to the University of Vermont medical school. A July 2007 GAO letter to the Secretary discussed concerns about this approval's consistency with federal law and recommended that the Secretary reexamine Vermont's demonstration and, where appropriate, either modify its terms or seek statutory authority for it to continue in its current form. Concerns about HHS's demonstration approval process in this report are consistent with those GAO has raised in past reviews of other states' demonstration proposals. In 2002 and 2004, GAO recommended that HHS take steps to strengthen its fiscal oversight of Medicaid by improving the Medicaid demonstration review and approval process, in part by (1) clarifying criteria for reviewing and approving states' demonstration spending limits, (2) better ensuring that valid methods are used to demonstrate budget neutrality and (3) documenting and making public material explaining the basis for any approvals. HHS has not taken action on these recommendations and maintains that its process is sufficient. Because HHS continues to disagree with these recommendations and with the need to reexamine the Vermont demonstration, GAO is elevating these issues to the Congress for consideration.

Matters for Congressional Consideration

  1. Status: Open

    Comments: As of July 2015, no legislation on this topic had been passed, although at least one bill had been introduced in Congress that would make budget neutrality a statutory requirement for Medicaid demonstrations.The House Energy and Commerce Committee held a hearing in June 2015 examining HHS's approval of spending under Medicaid demonstrations. In addition, the House Oversight and Government Reform and House Energy and Commerce Committees had sent letters to the Administration inquiring as to how HHS was responding to GAO findings and recommendations to improve the process and methods used to set demonstration spending limits.

    Matter: Congress may wish to consider requiring increased attention to fiscal responsibility in the approval of section 1115 Medicaid demonstrations by requiring the Secretary of HHS to improve the demonstration review process through steps such as (1) clarifying criteria for reviewing and approving states' proposed spending limits, (2) better ensuring that valid methods are used to demonstrate budget neutrality, and (3) documenting and making public material explaining the basis for any approvals.

  2. Status: Open

    Comments: As of July 2015, Congress had not passed legislation in response to our matter for congressional consideration.

    Matter: Congress may wish to consider addressing whether demonstrations that allow states to operate public managed care organizations and retain excess revenue to support programs previously funded by the state--including the Vermont demonstration--are within the scope of the Secretary of HHS's authority under section 1115 of the Social Security Act.

Recommendation for Executive Action

  1. Status: Closed - Not Implemented

    Comments: In December 2011 CMS renewed Florida's demonstration for an additional three years. Under the renewal the state was approved to continue to supplemental payments at the same funding level.

    Recommendation: To help ensure that the Florida demonstration will maintain the fiscal integrity of the Medicaid program, the Secretary of HHS should ensure that the level of supplemental payments for which the state could have obtained federal Medicaid funds in the absence of the proposed demonstration is calculated using appropriate methods and accurate data sources, and adjust the approved spending limit appropriately.

    Agency Affected: Department of Health and Human Services


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