Witness Testimony
Mr. George Reeb
Assistant Inspector General for Centers for Medicare and Medicaid Audits
HHS Office of Inspector General
330 Independence Avenue, S.W.
Washington, DC, 20201
Inter-governmental Transfers: Violations of the Federal-State Medicaid Partnership or Legitimate State Budget Tool?"
Subcommittee on Health
March 18, 2004
09:30 AM
Good morning Mr. Chairman and Members of the Committee. I am here today to
discuss intergovernmental transfers of Medicaid funds. We have found that
current policies and practices severely limit the ability of the Congress, the
Department of Health and Human Services, and State and local governments to
manage, account for, and assess the benefits of Medicaid dollars. Some fund
transfers and financing mechanisms are designed solely to maximize Federal
reimbursements to States and serve to obfuscate the source and final use of both
Federal and State funds. Action by the Congress and the Centers for Medicare and
Medicaid Services (CMS), through issuance of revised regulations in 2001, has
helped to curb the effect of such practices, but significant vulnerabilities
remain.
First, I will describe the Federal/State Medicaid partnership and
accountability principles. Then, based on audits we have completed over the
years, I will summarize some serious problems we uncovered with respect to taxes
and donations, enhanced payments to certain health care providers, and
disproportionate share hospital payments. I will specifically describe how
States use intergovernmental transfers to divert funds away from their agreed
upon purpose once the Federal share is received. Finally, I will discuss some
newer concerns arising from our most recent work related to school based health
services, state-employed physicians, and hospital graduate medical education
payments.
THE MEDICAID FEDERAL/STATE PARTNERSHIP
The Social Security Act authorizes Federal grants to States for Medicaid
programs that provide medical assistance to needy persons. Since the inception
of the Medicaid program, the Federal Government, through CMS, and the States
have shared in the cost of the program. Each State Medicaid program is
administered by the State in accordance with an approved State plan. While the
States have considerable flexibility in designing their State plans and
operating their Medicaid programs, they must comply with broad Federal
requirements. States incur expenditures for medical assistance payments to
medical providers who furnish care and services to Medicaid-eligible
individuals. The Federal Government pays its share of medical assistance
expenditures to the States according to a defined formula, which yields the
Federal medical assistance percentage. This percentage ranges from 50 percent to
83 percent, depending on each State's relative per capita income. My testimony
deals with practices that distort these Federal/State matching requirements and
cause the Federal Government to pay disproportionately more, without a
corresponding benefit to the intended beneficiaries.
ACCOUNTABILITY OF MEDICAID FUNDS
Effective use of State and Federal Medicaid funds depends on the consistent
application of the following widely-accepted accountability principles:
· There should be assurance that the funds paid are actually used for the
intended purposes. For example, if disproportionate share payments (payments to
hospitals that provide care to large numbers of Medicaid and uninsured patients)
are made, they must be used to reimburse hospitals for their uncompensated care
costs.
· The management oversight structure should be adequate to ensure that
Medicaid funds are paid only for health care services and products that are
appropriate and necessary.
· There should be a clear trail of responsibility within the State as to who
is accountable for the proper expenditure of Medicaid funds.
· The State Medicaid agency must ensure that quality and timely healthcare
services are being delivered to properly eligible beneficiaries.
Our studies raise serious concerns that some or all of these aspects of
accountability are lacking in some State Medicaid programs.
STATE ABUSES OF MEDICAID PAYMENT SYSTEMS
The Office of Inspector General (OIG) has focused considerable audit
resources over the last several years on enhanced Medicaid payments made to
hospitals and nursing facilities. Although these have proven to be troublesome
areas, they are but a continuation of creative financing mechanisms that States
began to use extensively starting over 15 years ago.
States first used provider donation and tax programs to increase Federal
Medicaid matching funds while at the same time reducing the use of State
resources in the Medicaid program. States would either arrange for providers to
donate funds to the Medicaid program or certain provider groups would be levied
special taxes. States were allowed by Federal regulations to use these funding
sources as the State share of Medicaid expenditures. These collected funds were
then repaid to the providers by increasing the total Medicaid reimbursement. As
the reimbursements were raised, the providers recouped their donations or taxes,
and the State could then use the Federal matching funds for whatever purpose it
decided. The provider tax and donation programs were generally not about
increasing services to Medicaid beneficiaries, nor about improving the quality
of care provided to these beneficiaries. Rather, they were carefully crafted
financing techniques that allowed States to reduce their share of Medicaid costs
and force the Federal Government to pay significantly more.
While both congressional and regulatory action has curtailed most of these
problems with taxes and donations, the new uses of intergovernmental transfers
in areas such as upper payment limits and disproportionate share hospital
payments have opened new venues for States to employ creative financing
mechanisms. States' use of intergovernmental transfers in certain ways has the
same consequences as the old taxes and donations schemes: a State's share of the
cost of its Medicaid program declines; Federal taxpayers in other States pay
more than their share of Medicaid; and the increased Federal Medicaid funding
derived from these financing mechanisms is often diverted to commingled
accounts, where it can be used for purposes unrelated to Medicaid.
I will discuss upper payment limits first.
Enhanced Payments Available under Upper Payment Limits.
The Medicaid regulations allow State Medicaid agencies to pay different rates
to the same class of providers as long as the payments, in aggregate, do not
exceed what Medicare would pay for the services. This is known as the
"upper payment limit." Federal regulations in effect before March 13,
2001, established two separate aggregate limits within a State applicable to
each group of health care facilities (i.e., nursing facilities, hospitals, and
intermediate care facilities for the mentally retarded). For each group, the
first limit applied to all providers in the State (private, State operated, and
city or county operated). The second limit applied to only State-operated
facilities. There was no separate aggregate limit that applied to
non-State-owned public providers, such as city- and county-owned facilities.
Therefore, State Medicaid agencies were able to calculate the total enhanced
payment (the difference between the regular Medicaid payment and the Medicare
payment amount for a similar service) amount to those providers on the basis of
all private, State operated, and city or county operated facilities. The entire
amount could then be distributed to only city- and county-owned facilities.
Based on audit results in six States, we found that:
· Payments were not related to costs. In general, enhanced payments to city-
and county-owned providers were not based on the actual cost of providing
services to Medicaid beneficiaries or were without a specific intent to increase
the quality of care provided by the public facilities that received the enhanced
payments.
· Facilities surrendered upper payment limit dollars to the State. City and
county nursing homes and hospitals did not always retain all the enhanced
payments that were intended for them. Instead, billions of Federal Medicaid
dollars were returned by these providers to the States through intergovernmental
transfers.
· Medicaid funds were used for non-Medicaid expenditures. Some of the money
sent back to the State governments through use of intergovernmental transfers
were deposited in the general fund or earmarked for use in health-related
service areas, but not necessarily for the Medicaid services approved in the
State plan.
· Federal funds were used for State matching payments. Those funds that were
used for Medicaid purposes were used as the States' share to match more Federal
funds. That is, Federal funds were diverted from their intended purpose to
generate still more Federal funds.
In short, the States' use of intergovernmental transfers as part of the
enhanced payment program was only a financing mechanism designed to maximize the
Federal share of Medicaid while effectively avoiding the Federal/State matching
requirements.
An example of how a State used the upper payment limit rules, in conjunction
with intergovernmental transfers, to their advantage is as follows:
The State creates a State-maintained funding pool to increase reimbursement
to county government-owned nursing homes. The State calculates the funding pool
by determining the difference between the upper payment limit (based on Medicare
payment principles) and the regular allowable Medicaid payments made to all
these facilities. The combined total of the differences for all facilities in
the State represents the funding pool. The initial source of the State's share
of the funding pool is the State's general fund. With the State's share
available, Federal matching funds are claimed. The funds in the pool, including
Federal and State share, are then transferred to the county providers as a
Medicaid enhanced payment. Within a short time frame, using intergovernmental
transfers, the nursing facilities return the majority of the enhanced payment to
the State.
Little or none of the funds are retained by the nursing facilities for the
benefit of their Medicaid residents. The gain from this financing mechanism
accrues to the State government, not the Medicaid facilities or beneficiaries.
The State commingles the Federal matching funds generated by these enhanced
payments with its general fund, in effect making them available for any purpose,
including the State share of payments needed to obtain additional Federal funds.
CMS's Actions to Curb Upper Payment Limit Abuses
In an effort to curb these abuses and ensure that State Medicaid payment
systems promote economy and efficiency, CMS issued a final rule in 2001 which
modified upper payment limit regulations in accordance with the Benefits
Improvement and Protection Act of 2000. The regulatory action created three
aggregate upper payment limits - one each for private, State, and non-State
government-operated facilities. The creation of a separate aggregate payment
limit for non-State government-owned facilities effectively reduces the amount
of funds that States can gain by requiring public providers to return Medicaid
payments through intergovernmental transfers. The new regulations will be
gradually phased in and become fully effective on October 1, 2008.
We commend CMS for changing the upper payment limit regulations. The CMS
projected that these revisions would save $55 billion in Federal Medicaid funds
over a 10-year period. However, as part of the regulatory changes, CMS increased
the enhanced payments that States may pay public hospitals from 100 percent to
150 percent of the amount that would be paid under Medicare payment principles.
We had recommended that the payments continue to be limited to 100 percent, and
CMS subsequently took that action at an additional savings of $24.3 billion over
10 years.
These regulatory changes have been a positive step in controlling the States'
ability to use financing mechanisms that violate the Federal/State Medicaid
partnership agreement. When fully implemented, these changes will dramatically
limit, though not entirely eliminate, State manipulation of the Medicaid program
because the regulation still does not require that the enhanced funds be
retained by the targeted facilities to provide medical services to Medicaid
beneficiaries. Thus, Federal funds continue to be vulnerable to diversion,
especially through the use of intergovernmental transfers.
OIG's Additional Planned Work Involving Upper Payment Limits
We are continuing our work in the area of States' use of upper payment limit
regulations as a financing mechanism to increase Federal reimbursement. Our work
is focused on three areas:
· States' adherence to the transition periods under the new regulations.
· Application of the new aggregate limits by States that have just begun to
use the upper payment limit funding mechanisms.
· The possible impact on public nursing homes if the funds paid as part of
the upper payment limit regulations were left at the facilities rather than
being sent back to the States as part of an intergovernmental transfer
transaction.
For example, we are currently performing audit work at a county nursing
facility in a State that makes enhanced payments to public nursing facilities.
During our three-year audit period, $132 million in Medicaid payments was
directed to the nursing facility from the Federal Government, the county, and
the State, using the upper payment limit provision. The county and State
purported to contribute $66 million, generating a matching Federal share of $66
million (the State and Federal matching rate in 50%/50%).
Preliminary work indicates, however, that of the $132 million, the nursing
facility retained only $50 million. The remaining $82 million was returned to
the county and State through intergovernmental transfers for discretionary use.
GovernmentPayer TotalPayment toNursing Facility(A) Amount of Payment Returned
to Payer by Nursing Facility(B) Net Payment (A - B)
Federal $66 million $0 $66 million
County $50 million $46 million $ 4 million
State $16 million $36 million ($20 million) Gain
Total $132 million $82 million $50 million
As summarized in the table above, the Federal Government contributed $66
million and the County government contributed $4 million towards the care of
residents of the nursing facility, while the State was able to make a profit of
$20 million.
The nursing facility returned $82 million of the $132 million to the county
and State through the use of intergovernmental transfers, despite the fact that
during our audit period State surveyors had rated the nursing facility as in
immediate jeopardy for a pattern of deficiencies and substandard care that
constituted actual harm and required significant corrections. If the nursing
home had retained more of its upper payment limit funding, it might have
provided better quality of care.
We plan to review additional individual nursing homes as part of our
continuing work in the upper payment limit area.
Disproportionate Share Hospital Program
Another financial mechanism that can be the source of both benefit and abuse
is known as Medicaid disproportionate share hospital payments. Under this
program, enhanced payments are made to financially assist hospitals that provide
care to a large number of Medicaid beneficiaries and uninsured patients. These
payments are important because public "safety net" hospitals face
special circumstances and play a critical role in providing care to vulnerable
populations.
Our work has shown that the States can divert these funds in ways similar to
upper payment limit funds. Audits in two States show that public hospitals, that
received disproportionate share hospital payments, returned large portions (80
to 90 percent) of the payments back to State Medicaid agencies through
intergovernmental transfers. Here is an example of one of those States:
· During fiscal years 1999 and 2000, the State made disproportionate share
hospital payments of approximately $738 million to acute care hospitals.
· Approximately $632 million of the $738 million was transferred back to the
State.
· The result was that approximately 86 percent of the total disproportionate
share hospital payments were returned to the State via an intergovernmental
transfer.
Once payments were returned, the States were able to use the funds for any
purpose deemed appropriate. We believe the return of these funds contradicts the
stated purpose of assisting these public safety-net hospitals to pay for
uncompensated care costs.
In many States, the use of enhanced payments under the upper payment limit
regulations and disproportionate share program are combined to increase Federal
reimbursements. The financial relationship involves some States allowing
hospitals to retain upper payment limit funds but requiring the return of
disproportionate share hospital funds through intergovernmental transfers. In
other cases, the reverse occurs - hospitals retain disproportionate share
hospital funds but return upper payment limit funds.
EMERGING VULNERABILITIES
The concerns we have had with States' use of intergovernmental transfers
involving upper payment limit rules and disproportionate share payments extend
beyond these areas. We foresee the possibility that all public provider types
could be used by States to maximize Federal revenues without ensuring that the
integrity of the basic Federal/State sharing of Medicaid costs is met. We are
finding areas where States can manipulate Federal financing sources and neglect
accountability over the payment of Medicaid funds. One of these areas concerns
school based health services.
States are permitted to use their Medicaid programs to help pay for certain
health care services delivered to children in schools, such as physical and
speech therapy services. Schools may also receive Medicaid reimbursement for the
costs of administrative activities, such as Medicaid outreach activities,
application assistance, and coordination and monitoring of health services.
We have identified instances where States require the school districts to
return a portion of the Federal funds back to the State through
intergovernmental transfers, thus resulting in a net gain for the State
government.
In addition, we are beginning audit work involving States' potential use of
intergovernmental transfers in two additional areas: state-employed physicians
and hospital graduate medical education payments. Both of these provider types
could be paid an enhanced payment that could serve as a mechanism for inflating
the Federal share of payments for Medicaid services above the statutory Federal
matching percentage. The additional payment amount made to public providers
could then be returned to the State in a mechanism similar to what we have
observed in the upper payment limit process at hospitals and nursing homes. Our
concern is that any payment above a public provider's cost could become a part
of a financing mechanism that would not ensure that the funds were used for the
medical care to which they were intended. We have not yet issued any audit
reports on these payment areas, but increasingly we are focusing on them.
ENSURING THAT MEDICAID FUNDS ARE USED FOR MEDICAID SERVICES
We are continuing our work in the areas noted above and plan to provide CMS
with additional recommendations on how to help ensure that Medicaid expenditures
are in fact used for medical care to Medicaid beneficiaries.
The Administration's fiscal year 2005 proposed budget includes two actions
that should help improve the integrity of the Medicaid program. First, the
budget proposes to restrict the use of certain intergovernmental transfers that
are in place solely to undermine the statutorily determined Federal matching
rate. Second, the budget proposes to cap Medicaid payments to individual State
and local government providers to no more than the cost of providing services to
Medicaid beneficiaries. We have not yet had a chance to discuss these proposals
with the Department but welcome their efforts to ensure better control of the
benefit.
In addition, some recommendations from our prior work involving upper payment
limits and disproportionate share hospital payments have not yet been
implemented. We believe they should be. Here is a summary of them.
Upper payment limits. The following additional steps are important because
the total number of States now making enhanced payments as part of the upper
payment limit process has increased in recent years. We have and continue to
recommend that:
1. The transitions periods included in the final upper payment limit
regulation be shortened since the controls are not in place to ensure that these
added funds are actually used for Medicaid health care services.
2. Annual audits be performed of the States' upper payment limit calculations
to ensure compliance with the upper limits.
3. Facility-specific limits be used that are based on the cost of providing
services to Medicaid beneficiaries.
4. States be required to allow public facilities to retain upper payment
limit funding to provide health care services to Medicaid beneficiaries.
5. Medicaid payments returned by public providers to the State be declared a
refund of those payments and used to offset the Federal financial participation
generated by the original payment.
Disproportionate share hospital payments. We continue to recommend that steps
be taken to ensure that disproportionate share hospital funds remain at the
hospitals to provide care to vulnerable populations, rather than being returned
to the States through intergovernmental transfers. We believe that any Medicaid
payment returned by a provider to the State should be treated as a credit
applicable to the Medicaid program.
Disproportionate share hospital payments serve an important purpose in trying
to help hospitals cover their uncompensated care costs. But, without States
being required to leave the funds at the hospitals, there is no assurance that
the intended purposes of disproportionate share payments is being met.
CONCLUSION
Our overarching concern is to ensure that Federal matching payments are in
the proper proportion to States' shares and that the funds are used to provide
the intended health care services in the intended facility to the intended
beneficiaries. Changes are still needed to enable the Congress and the
Department to be responsible stewards of Federal funds and measure the true cost
and benefits of the Medicaid program.
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