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Some states have taken advantage of the flexibility that Congress built into the Medicaid program by devising schemes that inappropriately boost the federal share of program expenditures. These schemes were adding billions of dollars a year to federal Medicaid costs without the states paying their statutorily specified share of program costs. Moreover, some of the federal funds were being spent for non-Medicaid purposes. After hearing about these financing schemes, Congress passed the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). In response, the Health Care Financing Administration (HCFA) issued regulations in January 2001 to curtail financing schemes involving excessive payments to local government providers for which a separate upper payment limit did not exist. However, less than a month after the revised upper payment limit regulation became effective, HCFA decided to amend the regulation to shorten the time some states were allowed to comply with it. This reversal resulted in the approval of new financing schemes for several states that had pending proposals mimicking the schemes identified last year. The transition periods were of varying lengths, depending on how long a state had been receiving excessive federal payments from one of these schemes. Believing that states just starting to receive excessive federal payments did not need the two-year transition period established in the January regulation, HCFA decided to shorten the transition period to limit federal liability. Although the September regulation--which limited the length of time states can operate their newly approved excessive funding schemes--will reduce the drain on federal Medicaid funds, GAO questions HCFA's decision to approve additional financing schemes, given the explicit effort to curtail them.

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