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The costs of Medicaid--the federal-state program financing health care for about 60 million low-income people--totaled about $317 billion in fiscal year 2005. Increasing budgetary pressures have created tension between the states and the federal government, in part because some states have used inappropriate financing arrangements to collect federal matching funds when payments were not retained by the providers. In August 2003, the federal Centers for Medicare & Medicaid Services (CMS) began an initiative to end inappropriate arrangements. GAO was asked to examine the (1) number, and fiscal effects, of states ending particular financing arrangements; (2) extent to which CMS's initiative represents a change in agency approach or policy; and (3) transparency and consistency of the initiative. For states ending arrangements, GAO surveyed state officials, reviewed CMS documents, and interviewed CMS and state officials.

From August 2003 through August 2006, 29 states ended certain financing arrangements as a result of CMS's oversight initiative. The ended arrangements involved supplemental payments--those separate from and in addition to the states' standard Medicaid payments--made to government health care providers, most often government nursing homes and hospitals. According to CMS, the arrangements had to be ended because the providers did not retain all the payments made to them but returned all or a portion to the states. The fiscal effects on the states and on the federal government of ending specific arrangements were uncertain, as nearly two-thirds of states ending arrangements were seeking to continue obtaining federal reimbursements for the related supplemental payments by using different financing arrangements from those they were required to end. CMS's initiative departs from the agency's past approach and is consistent with Medicaid payment principles--for example, that payment for services must be consistent with efficiency, economy, and quality of care. In the past, CMS limited states' inappropriate financing arrangements through means other than examining whether providers were retaining supplemental payments. Twenty-four of 29 states reported the view that CMS had changed its policy. One state has challenged CMS's disapproval of its state plan amendment, in part on the grounds that CMS changed its policy and should have gone through rule making beforehand. In another case, unrelated to the initiative, in which a state challenged a CMS disapproval, a 2005 federal court ruling upheld CMS's determination that the state's arrangement, in which providers did not fully retain payments, was inconsistent with Medicaid payment principles. CMS has not implemented its initiative transparently, contributing to concerns about the consistency of its reviews of state financing arrangements. CMS's initiative has lacked transparency in two ways. First, in implementing its initiative, CMS did not issue written guidance about the specific approval standards for state financing arrangements, although a proposed regulation published in the Federal Register on January 18, 2007, when finalized, could provide such guidance. Second, CMS has not always provided states with clear, written explanations of its determinations. GAO's review of CMS documentation related to the financing arrangements ended in 29 states found that for only one-fourth of the financing arrangements did CMS explain to the affected states in writing the specific basis for determining that their financing arrangements were inconsistent with one or more Medicaid payment principles. This lack of transparency has raised questions for some states about the consistency with which states have been treated and precluded GAO from determining whether CMS has treated states consistently.

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Recommendations for Executive Action

Agency Affected Recommendation Status
Centers for Medicare and Medicaid Services 1. To enhance the transparency of CMS oversight and clarify and communicate the types of allowable state financing arrangements, the Administrator of CMS should issue guidance to clarify allowable financing arrangements, consistent with Medicaid payment principles.
Closed - Not Implemented
CMS has not issued written guidance on the allowable sources and methods of funding the nonfederal share and on provider retention of payments they receive.
Centers for Medicare and Medicaid Services 2. To enhance the transparency of CMS oversight and clarify and communicate the types of allowable state financing arrangements, the Administrator of CMS should provide each state CMS reviews under its initiative with specific and written explanations regarding agency determinations on the allowability of various arrangements for financing the nonfederal share of Medicaid payments and make these determinations available to all states and interested parties.
CMS has taken steps to provide states with specific and written explanations regarding agency determinations on whether various arrangements for financing the nonfederal share of Medicaid payments are allowable and making those determinations available to states and interested parties. In November 2019, CMS issued a proposed rule that the agency said would promote state accountability, improve federal oversight, and strengthen fiscal integrity of the Medicaid program. The proposed rule would establish new policies and codify existing policies related to the sources of funds that states use to finance the nonfederal share of Medicaid payments. For example, the rule is intended to provide CMS and states with better information and guidance to identify existing and emerging state financing issues, provide more clarity on allowable financing arrangements and promote state accountability. GAO will continue to monitor the status of the proposed rule, as well as review a final rule, if one is issued, to determine the extent to which it addresses the recommendation.

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