GAO Sees Oversight Gaps in States' Medicaid Funding

The Government Accountability Office reports that states are finding ways to pay for Medicaid that involve cost-shifting schemes that leave the federal government stuck with the tab.

Have you ever wondered where your state finds the money to pay for its share of the federal Medicaid program?

You're not alone.

The Government Accountability Office told Congress this week that states are finding creative new ways to pay for the program that involve cost-shifting, back-scratching schemes with local governments and providers that leave the federal government stuck with the tab.

For example, in Illinois, a $220 million payment increase for nursing homes in 2012 was paid for with a tax on those nursing homes. GAO said the ploy brought back a $110 million increase in federal matching funds with no increase for Illinois' general fund, and a net payment increase of $105 million to the nursing homes after paying the taxes.

It would be hard to find a comparative revenue-generating tactic in the real world that doesn't involve spam emails soliciting "winning" Bulgarian lotto tickets or a dearly departed and long-lost uncle from Mombasa who's left you in his will.

In effect, GAO says states are making large supplemental payments, apart from payments made for medical services, "to providers that supplied funds to finance the nonfederal share of the payments, for purposes of obtaining billions of dollars in additional federal matching funds without a commensurate increase in state funds used to finance the nonfederal share of these Medicaid expenditures."

"Such arrangements have the effect of shifting costs to the federal government because the federal government then pays its share of the new payments," GAO said in its report. "We and others have raised concerns about these financing arrangements and whether data reported by states are sufficient for (Centers for Medicare & Medicaid Services) to determine that these arrangements are in compliance with applicable federal requirements."

Medicaid covered 58 million low-income people in 2012, at a cost of $432 billion, for which the federal government footed about 57% of the cost. In 2012, states financed 26% of the nonfederal share of expenditures, about $46 billion, with funds from providers and local governments. That number was $32 billion in 2010 and $23 billion in 2006.

"Because supplemental payments are typically not paid through states' Medicaid claims systems, the payments are not captured in federal data systems and therefore lack transparency for oversight purposes," GAO says.

It is highly likely that states are fully aware that these supplemental payments are hard to identify, quantify, and track. That would explain their growing popularity.

Keep in mind that these numbers predate the expansion of Medicaid under the Patient Protection and Affordable Care Act. Before we simply blame the Obama administration, we should note that the GAO since 2003 has considered Medicaid a "high-risk" program, both because of its explosive growth and because of the unaccountable "gaps" in federal oversight of these various funding schemes that states are using to pay for their part.

Unlike the Medicaid expansion, this cost shifting can't be attributed to Red State/Blue State politics. States that rely on cost-shifting to local governments and providers to generate up to half of their Medicaid spend include California, Florida, Vermont, Tennessee, New York, Colorado. Michigan, Mississippi, Alabama and Wisconsin. Missouri alone used cost-shifting to fund more than half of its Medicaid spend.

Matt Salo, executive director National Association of Medicaid Directors, looked through the GAO's findings and said "there's not really much to report here, as far as I can see."

"Everybody who knows Medicaid knows that financing is very complicated (labyrinthine?), and that it has been this way for a very long time," Salo said in an email exchange with me.

"States endeavor to be sure that all provider taxes, intergovernmental transfers, and other financing arrangements fully comport with federal law and regulations—CMS does approve them, after all. Sometimes members of Congress (or the Administration) find that the current state of the law and regulations are too permissive, and attempts are made to further restrict how they work."

"That of course is their prerogative, but we would just want to be sure that they don't throw the baby out with the bathwater. Medicaid never has enough money to full meet all the demands that the healthcare system places on it. Further restricting long-standing arrangements will only lead to even fewer dollars being available for patient care."

Salo raises legitimate points. Regardless of the motives, it's clear that states have been gaming the system and the feds have been on to it for a while.

The GAO report was compiled from data collected from 2008–2012 in the midst of the worst economic downturn since the Great Depression. So, we could infer that cash-strapped states were desperate for revenues and created these shadowy funding schemes in an attempt to maintain critical services for their most vulnerable citizens.

However, many of these cost-shifting schemes predate the recession, and there are indications that they are continuing today, even as many states are collecting more tax revenues. The Department of Health and Human Services' Office of the Inspector General identified an improper Medicaid payment rate of 5.8% in 2013, which represents $14.4 billion in federal matching funds.

This will not be allowed to continue, especially because the Medicaid expansion has become a toxic political issue. CMS will be under even more pressure to demonstrate the integrity and cost-effectiveness of the program. Look for federal oversight to stiffen and more audits challenging supplemental payments.

For that reason, providers need to know how their states are generating their portion of the Medicaid spend, and more importantly, who will cover the costs of the Medicaid spend if these opaque funding mechanisms are dismantled.