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Medicaid Demonstration Waivers: Approval Process Raises Cost Concerns and Lacks Transparency

GAO-13-384 Published: Jun 25, 2013. Publicly Released: Jul 18, 2013.
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What GAO Found

The 10 new demonstrations GAO examined expanded states' use of federal funds and implemented new coverage strategies. Arizona and Texas established funding pools to make new supplemental payments beyond what they could have made under traditional Medicaid requirements and receive federal matching funds for the payments. All 10 demonstrations were approved to use different coverage strategies or impose new cost sharing requirements, including limiting benefits or imposing deductibles for certain populations.

The Department of Health and Human Services' (HHS) budget neutrality policy and process did not provide assurances that all recently approved demonstrations will be budget neutral. For 4 of 10 demonstrations GAO reviewed, HHS approved spending limits that were based on assumptions of cost growth that were higher than its benchmark rates, and that, in some cases, included costs states never incurred in their base year spending. HHS's benchmark growth rates are the lower of the state's recent growth rates or projections for Medicaid program growth nationwide. For example, HHS approved a spending limit for Arizona's demonstration using outdated information on spending--1982 data that was projected forward--that reflected significantly higher spending than what the state's Medicaid program had actually cost. For Texas, HHS approved a spending limit using a base year that included billions in costs the state had not incurred. GAO found limited support and documentation for the higher-than-benchmark limits HHS approved. If HHS had held the 4 demonstrations' spending to levels suggested by its policy, the 5-year spending limits would have been an estimated $32 billion lower than what was approved; the estimated federal share of this reduction would be about $21 billion.

For 6 other demonstrations, the approved spending limits reflected the states' actual historical costs or criteria that were specified in law, which HHS followed. In examining HHS's current written budget neutrality policy, GAO found that the policy is outdated and does not include a process for assuring the reliability of the data used to set spending limits. GAO has previously suggested that Congress require HHS to improve its budget neutrality process, in part, by improving the review criteria and methods, and by documenting and making clear the basis for approved limits. In addition to these suggestions, GAO believes HHS needs to take further actions to address the findings in this report.

Why GAO Did This Study

Medicaid, a $436 billion federal and state health care program for low-income individuals and families, is a significant and growing expenditure. Section 1115 of the Social Security Act authorizes the Secretary of Health and Human Services to waive certain Medicaid requirements and allow otherwise uncovered costs for demonstration projects that are likely to promote Medicaid objectives. By HHS policy, these demonstrations should be budget neutral, that is, not increase federal spending over what it would have been if the state's existing program had continued. States estimate what their spending would have been without the demonstration, and HHS approves a spending based on projected spending.

GAO was asked to review HHS approval of recent Medicaid section 1115 demonstrations. GAO examined (1) the purpose of new demonstrations, and (2) the extent to which HHS's policy and process for reviewing proposed demonstration spending provide assurances that federal costs will not increase. For 10 new comprehensive demonstrations approved from January 2007 through May 2012, GAO reviewed application, approval, and budget neutrality documents provided by HHS; calculated estimated spending limits; and interviewed HHS officials.


GAO recommends that HHS update its budget neutrality policy and reexamine spending limits for the Arizona and Texas demonstrations. HHS disagreed with GAO's recommendations. GAO believes these steps are needed to improve the budget neutrality process.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Health and Human Services
Priority Rec.
To improve the transparency of the process for reviewing and approving spending limits for comprehensive section 1115 demonstrations, the Secretary of Health and Human Services should update the agency's written budget neutrality policy to reflect actual criteria and processes used to develop and approve demonstration spending limits, and ensure the policy is readily available to state Medicaid directors and others.
Closed – Implemented
In August 2018, the Centers for Medicare & Medicaid Services issued written guidance on the process and criteria the agency uses to develop and approve Section 1115 demonstrations. The guidance was communicated as a State Medicaid Directors Letter and is available on the CMS website. The State Medicaid Director Letter addresses the recommendation by describing the process and documenting methods the agency revised in 2016 to curtail some problematic methods. The earlier policy had not been issued and documented as State Medicaid Director Letter. We have closed this recommendation as implemented, and will continue to track how CMS applies this guidance.
Department of Health and Human Services To improve the transparency of the process for reviewing and approving spending limits for comprehensive section 1115 demonstrations, the Secretary of Health and Human Services should reconsider adjustments and costs used in setting the spending limits for the Arizona and Texas demonstrations, and make appropriate adjustments to spending limits for the remaining years of each demonstration.
Open – Partially Addressed
As of February 2024, the Department of Health and Human Services (HHS) had taken steps to address GAO's 2013 recommendation, but more actions are needed for GAO to consider this recommendation implemented. In May 2016, the Centers for Medicare & Medicaid Services (CMS) announced changes to its budget neutrality policies, which it formalized in a Letter to State Medicaid Directors in 2018. CMS applied the first of its policy changes: limiting the extent to which states can accrue unused demonstration spending authority. This initial policy change has been implemented for all section 1115 demonstration renewals, including the two states (Arizona and Texas) for which GAO recommended adjustments. CMS has partially implemented another policy under which spending limits will be updated to reflect more recent cost data. As of December 2023, CMS had applied this policy to 13 states' demonstration renewals, including Arizona, which addresses GAO's concern with the state's previous methodology. However, other actions are needed for GAO to consider this recommendation implemented. In particular, CMS continues to allow states to include hypothetical costs when determining demonstration spending limits, an action GAO identified as a concern in Texas' demonstration.

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