Government seeks to end states’ questionable Medicaid financing

For many years, states strapped for sufficient funds for their Medicaid programs and for all other state activities have looked for creative legal ways to obtain additional support from the federal government. Among the techniques that have been used are excessive payments to state-owned health facilities, provider taxes and donations, excessive disproportionate share payments to hospitals, and adjustments to upper payment limits.

As ways have been found and exploited, the feds see what’s going on and close what federal officials see as loopholes. And the state officials begin their search for another way to draw down additional much-needed federal money. The latest iteration in this choreography is the flap over intergovernmental transfers.

In March, the General Accounting Office (GAO), issued a report that concluded there is a problem with states making use of intergovernmental transfers to finance not only Medicaid but also state general fund budgets.

"Some states, for example, receive federal matching funds on the basis of large Medicaid payments to certain providers, such as nursing homes operated by local governments, which greatly exceed established Medicaid rates," the GAO report said. "In reality, the large payments are often temporary, since states can require the local government providers to return all or most of the money to the states. States can use these funds — which essentially make a round trip from the state to providers and back to the states — at their own discretion."

GAO sees at least three ways in which such financing arrangements threatens the federal-state Medicaid partnership, as well as the program’s fiscal integrity:

  1. Such arrangements effectively increase the federal matching rate established under federal law by increasing federal expenditures while state contributions remain unchanged or even decrease. GAO estimated that one state effectively increased the federal matching share of its total Medicaid expenditures from 59% to 68% in FY 2001 by obtaining additional federal funds and using them as the state’s share of other Medicaid expenditures.
  2. There is no assurance that increased federal matching payments are used for Medicaid services since states use funds returned to them at their own discretion. An examination of six states by GAO found that one state used the funds to help finance education programs and others deposited the money into either the state general fund or special accounts used for non-Medicaid purposes or to supplant the states’ share of other Medicaid expenditures.
  3. The arrangements allow states to pay a few providers amounts that will exceed the cost of services provided, which is inconsistent with statutory requirements that states ensure economical and efficient Medicaid payments. In one state, according to the GAO, its auditors found that the state’s proposed plan increased the daily federal payment per Medicaid resident from $53 to $670 in six nursing homes operated by local governments.

Although the Centers for Medicare & Medicaid Services (CMS) and Congress have taken steps to curtail states’ financing schemes, improved CMS oversight and additional congressional action could help address continuing concerns with such arrangements, GAO said.

States seek creative solutions

"Experience shows that some states are likely to continue looking for creative means to supplant state financing, making a compelling case for the Congress and CMS to sustain vigilance over federal Medicaid payments," GAO concluded. "Understandably, states that have relied on federal funding as a staple for their own share of Medicaid spending are feeling the budgetary pressure from the actual or potential loss of these funds. The continuing challenge remains to find the proper balance between states’ flexibility to administer their Medicaid programs and the shared federal-state fiduciary responsibility to manage program finances efficiently and economically in a way that ensures the program’s fiscal integrity."

That challenge has been picked up by federal Medicaid administrator Dennis Smith, who testified in April before the House Energy and Commerce Health Subcommittee on legislation the administration wants Congress to adopt to keep states from inappropriately drawing down money through intergovernmental transfers.

"The administration proposes to further improve the integrity of the Medicaid matching rate system through steps to curb intergovernmental transfers that are in place solely to avoid the legally determined state financing," Mr. Smith said. "To be clear, CMS always considers legitimate intergovernmental transfers permissible sources of state funding of Medicaid costs, which are meant to allow units of local governments, including government health care providers, to share in the cost of the state Medicaid program."

Cap transfers at true net cost

Under the new proposal, the federal government, when matching a claimed state expenditure for a service provided by a public provider, would only provide matching payments on the basis of the state’s true net expenditure. Mr. Smith said the administration proposes to restrict federal reimbursement for Medicaid payments to individual government providers to no more than the net cost of providing services to Medicaid beneficiaries. "Limiting federal reimbursement to no more than net cost would curb excessive payments while preserving a state’s ability to pay reasonable rates to such providers," he testified.

Mr. Smith also described a controversial policy the administration has begun to crack down on: inappropriate intergovernmental transfers. Since August 2003, federal Medicaid officials have held off approving amendments filed by states to their Medicaid plans "until such time that states have agreed to terminate any financing practices that contradict the intent of the federal-state partnership. Since we have begun our in-depth review of state plan amendments that deal with reimbursement last summer, 82 have been approved, four have been disapproved, and five have been withdrawn entirely by states. Thirty-nine state plan amendments have been temporarily withdrawn by states as a result of our requests for additional information. Another 153 state plan amendments are under review at CMS."

Rep. Sherrod Brown (D-OH) charged CMS "has also been withholding payments in an attempt to convince states to block-grant their Medicaid programs in line with administration plans. This isn’t a game. The administration doesn’t win if they figure out new and different ways to starve Medicaid."

According to Rep. Brown, while fraud and abuse should be stopped, "That does not mean we should reduce the net funding available to state Medicaid programs. If we cut dollars from Medicaid, we should replace those dollars. It doesn’t matter whether the states divert dollars from Medicaid into road construction, or the president diverts dollars from Medicaid into tax cuts."

Governors like the status quo

Also at that same hearing, the deputy director of Ohio’s Medicaid program, Barbara Edwards, testified on behalf of the National Governors Association that without the benefit of intergovernmental transfers, large county-based states such as New York, California, Wisconsin, and North Carolina "would literally be unable to finance their Medicaid programs, destroying the safety net in many parts of the country and drastically increasing the numbers of the uninsured.

"Therefore, attacks on the very existence of intergovernmental transfers threaten the decentralized form of government that these states have chosen and would represent an attempt by the federal government to statutorily favor state governments that are centralized and do not rely on the ability of counties to raise revenue."

If there continue to be concerns about how states finance Medicaid, Ms. Edwards said, there should be discussions that are open, exhaustive, and include all stakeholders who would be affected. These discussions, she said, should at least acknowledge that not only are the state actions being questioned legal, but they have been approved by the Department of Health and Human Services (HHS) and, in many cases in the past, have been encouraged by the department.

"Regardless of what Congress may consider, it is critical that the financing rules of Medicaid not be changed midstream," she testified. "States have acted within the parameters of the law and the regulations when negotiating budgets, and all financing mechanisms are both legal and approved by HHS. For these rules to be changed midstream, without notification or congressional directive, would be a presumption of guilt that is inappropriate in a state-federal partnership. In addition, such changes may well constitute an illegal impoundment of funds and violate other bedrock provisions of the Medicaid program."

Ms. Edwards noted that states are spending significantly more money on the Medicaid program now than they were 10 years ago, despite increased financing through the upper payment limit mechanisms. The state share of Medicaid was $94 billion in 2000, she said, compared with $50 billion in 1992 and $70 billion in 1997. "This demonstrates state commitment to funding the program and proves that increases in the Medicaid budgets are not being financed overwhelmingly by federal funds," she declared.

Ms. Edwards also cautioned that temporary state fiscal relief approved by the federal government ends this fiscal year, and as a result of that shift and the continued growth of Medicaid overall, the total amount of state dollars in Medicaid will increase by 15% to 20% from FY 2004 to FY 2005, creating a fiscal situation ill-suited to absorb additional reductions in the federal commitment to Medicaid funds.

"The governors oppose any reductions in Medicaid spending as well as changes to the current policy that would jeopardize funding for underserved populations," Ms. Edwards concluded. "The current policy represents a well-thought-out balance that seeks both accountability and sufficient funding for the health care safety net. Changing the policy now could have disastrous consequences for public hospitals and the individuals they serve."

(To see the March 18 GAO report, go to For the testimony of Mr. Smith and Ms. Edwards, go to and