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Report to the Chairman, Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

June 2006: 

Medicaid Financial Management: 

Steps Taken to Improve Federal Oversight but Other Actions Needed to 
Sustain Efforts: 

GAO-06-705: 

GAO Highlights: 

Highlights of GAO-06-705, a report to the Chairman, Committee on 
Finance, U.S. Senate 

Why GAO Did This Study: 

Medicaid—the federal-state health care financing program—covered over 
56 million people at a cost of $295 billion in fiscal year 2004, the 
latest fiscal year for which complete data are available. The Centers 
for Medicare & Medicaid Services (CMS) is the federal agency 
responsible for overseeing states’ Medicaid programs and ensuring the 
propriety of expenditures reported by states for federal reimbursement. 
In 2002, GAO reported on weaknesses in CMS’s oversight of Medicaid 
financial management and made recommendations to CMS to strengthen its 
oversight process. In fiscal year 2003, CMS started receiving funds 
from the Health Care Fraud and Abuse Control (HCFAC) program to help 
improve Medicaid financial management. GAO was asked to evaluate CMS’s 
financial management activities, including following up on prior 
recommendations. In this report, GAO examined (1) the extent to which 
CMS has improved its ability to identify and address emerging issues 
that put federal Medicaid dollars at risk and (2) how CMS used funds 
for Medicaid from the HCFAC account. 

What GAO Found: 

CMS has undertaken several steps to improve its Medicaid financial 
management activities, including its efforts to oversee state claims 
for federal reimbursement and to identify payment errors. CMS hired 
about 90 funding specialists, thus enhancing its ability to address 
high-risk state funding practices that inappropriately increase federal 
costs. CMS also created a new unit that centralized responsibility for 
approving state plan amendments related to reimbursement. CMS continued 
to identify billions of dollars in questionable federal reimbursement 
through focused financial reviews. CMS also set goals aimed at reducing 
questionable federal reimbursement and holding financial managers 
accountable and enhanced its internal processes for tracking results of 
its financial management activities. These and other efforts, such as 
CMS’s approach for measuring payment errors under the Improper Payments 
Information Act, represent improvements in the processes that CMS uses 
in its oversight of states. While these actions also address previously 
identified weaknesses and recommendations from our 2002 report, it is 
too soon to assess the impact they will have on improving overall 
financial management and addressing emerging issues that put federal 
Medicaid dollars at risk because some have just recently been initiated 
and results are not known yet. Further, there are a number of 
previously identified weaknesses that the agency has not yet addressed. 
Specifically, CMS has not instituted mechanisms to measure how the risk 
of inappropriate federal reimbursement has changed as a result of 
corrective actions taken. In addition, CMS has not incorporated the use 
of the Medicaid Statistical Information System database into its 
oversight of states’ claims or other systems projects intended to 
improve its analysis capabilities. Further, CMS has not developed 
profiles to document information on state fraud and abuse controls to 
use in its oversight of state claims. Finally, CMS has not developed a 
strategic plan specific to its Medicaid financial management 
activities. Because these issues are important to further improving and 
sustaining CMS’s oversight activities, we reiterate and build on our 
prior recommendations in these areas. 

During fiscal years 2003 through 2005, CMS received almost $46 million 
from the HCFAC account that it used to help fund programs related to 
its oversight of the Medicaid program, including about $12 million for 
the funding specialists for fiscal years 2004 and 2005. The funding 
specialist positions have been funded on an annual basis with 
appropriations from the HCFAC account. There is the chance that 
adequate funding might not be provided through the HCFAC process in any 
given year for the funding specialists; therefore, creating permanent 
funding specialist positions is important. CMS used the other $34 
million for other projects such as researching options for automating 
the Medicaid state plan process, and interagency agreements with the 
OIG to conduct audits of high-risk areas. GAO obtained documentation to 
support the use of HCFAC funds for these projects. 

What GAO Recommends: 

GAO is making two recommendations to the CMS Administrator to create 
permanent funding specialist positions and determine what systems 
projects are needed to further enhance data analysis capabilities. CMS 
agreed with our findings and recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-705]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Linda Calbom at (202) 512-
8341 or calboml@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Steps Taken to Improve Oversight Activities but Some Previously 
Identified Weaknesses Remain: 

Use of HCFAC Funds to Enhance Medicaid Oversight Initiatives: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Status of Prior Recommendations: 

Appendix III: Comments from the Centers for Medicare & Medicaid 
Services: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Medicaid Spending in Fiscal Years 2003 and 2004: 

Table 2: Issues Consistently Planned for Focused Financial Reviews in 
Fiscal Years 2003 through 2006: 

Table 3: Issues To Be Audited by the OIG in Fiscal Years 2003 through 
2005: 

Table 4: Discretionary HCFAC Funds for CMS and CMSO's Allocation: 

Table 5: Medicaid Financial Management Projects and Their HCFAC 
Allocations for Fiscal Years 2003 through 2005: 

Table 6: Recommendations Made in GAO-02-300 - Medicaid Financial 
Management: Better Oversight of State Claims for Federal Reimbursement 
Needed (February 2002): 

Figure: 

Figure 1: CMS Organizational Chart: 

Abbreviations: 

CMS: Centers for Medicare & Medicaid Services: 
CMSO: Center for Medicaid and State Operations: 
DFM: Division of Financial Management: 
DRSF: Division of Reimbursement and State Financing: 
FMAR: Financial Management Activities Report: 
GPRA: Government Performance and Results Act: 
HCFAC: Health Care Fraud and Abuse Control: 
HHS: Department of Health and Human Services: 
MSIS: Medicaid Statistical Information System: 
OIG: Office of Inspector General: 
PERM: Payment Error Rate Measurement: 
SCHIP: State Children's Health Insurance Program: 

United States Government Accountability Office: 

Washington, DC 20548: 

June 22, 2006: 

The Honorable Charles E. Grassley: 
Chairman: 
Committee on Finance: 
United States Senate: 

Dear Mr. Chairman: 

Medicaid--the federal-state program financing health care for certain 
low-income children, families, and individuals who are aged or 
disabled--covered over 56 million people at an estimated cost of $295 
billion in fiscal year 2004. Within broad federal guidelines, states 
administer their Medicaid programs by paying qualified health providers 
for a range of covered services provided to eligible beneficiaries and 
then seeking reimbursement for the federal share of those payments. The 
Department of Health and Human Services' (HHS) Centers for Medicare & 
Medicaid Services (CMS) is the federal agency responsible for 
overseeing states' Medicaid programs and ensuring the propriety of 
expenditures reported by states for federal reimbursement. States can 
design and administer their Medicaid programs in a manner that helps 
them ensure that they receive the maximum allowable federal share of 
expenditures they incur for covered services provided to eligible 
beneficiaries under a CMS-approved state Medicaid plan, as long as they 
do so within the framework of federal law, regulation, and CMS policy. 

For more than a decade, we have reported concerns relating to actions 
by some states that result in excessive federal reimbursement. We have 
also reported concerns about CMS's oversight of states' claims for 
reimbursement and CMS's efforts to detect and reduce improper payments 
in the Medicaid program.[Footnote 1] In 2002, we made 13 
recommendations to CMS to strengthen oversight of states and certain 
activities to address fraud and abuse.[Footnote 2] In 2003, we added 
Medicaid to our list of high-risk federal programs[Footnote 3] because 
the challenges inherent in overseeing a program of Medicaid's size, 
growth, and diversity put the program at high risk for waste, abuse, 
and exploitation. 

Congress and CMS have taken actions to (1) curtail certain abusive 
financing schemes that some states have used to generate excessive 
federal reimbursement and (2) strengthen Medicaid fraud and abuse 
control activities. Further, CMS received almost $46 million of Health 
Care Fraud and Abuse Control (HCFAC)[Footnote 4] funds during fiscal 
years 2003 through 2005 for programs related to its oversight of 
Medicaid, including hiring new staff to identify and review state 
practices related to funding their Medicaid programs. 

Because of your continued concern about the stewardship of federal 
Medicaid funds, you raised questions about CMS's oversight. The focus 
of this report is on CMS's financial management activities, including 
its efforts to oversee state claims for federal reimbursement and to 
identify payment errors. We also focus on how CMS has responded to our 
2002 recommendations to strengthen financial oversight and certain 
activities to address fraud and abuse. Specifically, in this report, we 
address the following questions: 

1. To what extent has CMS improved its oversight, including its ability 
to identify and address emerging issues that put federal Medicaid 
dollars at risk? 

2. How has CMS used funds provided through the HCFAC program that were 
specifically for Medicaid? 

To identify the extent to which CMS has improved its oversight, 
including its ability to identify and address emerging issues that put 
federal Medicaid dollars at risk, we performed work at CMS headquarters 
and two regional offices. We reviewed and assessed aspects of CMS's 
financial oversight processes, which include identifying high-risk 
areas in order to develop an annual regional office financial 
management workplan and conducting focused financial reviews of high- 
risk areas. We reviewed our prior reports, and reports by HHS's Office 
of Inspector General (OIG) and others. We also interviewed officials 
and staff at the CMS central office in Baltimore, Maryland, and two 
regional offices--New York and Chicago. 

To determine how CMS used funds from the HCFAC account for fiscal years 
2003 through 2005, we obtained from CMS a list of Medicaid projects 
that were funded from the HCFAC account during those 3 years. We 
obtained and examined documentation from CMS such as invoices; grant 
awards; interagency agreements; and accounting, budget, and payroll 
records that support the information provided by CMS on how it used 
HCFAC funds for that time frame. 

See appendix I for more details about our scope and methodology. We 
requested written comments on a draft of this report from the 
Administrator of CMS or his designee. His written comments are 
reprinted in appendix III. We conducted our review from February 2005 
to May 2006 in accordance with generally accepted government auditing 
standards. 

Results in Brief: 

CMS has undertaken several steps to improve its Medicaid financial 
management activities, including its efforts to oversee state claims 
for federal reimbursement and to identify payment errors. CMS hired 
about 90 funding specialists who are examining high-risk state funding 
practices and working with states to eliminate those practices that 
inappropriately increase federal costs. These new staff have enabled 
CMS to perform more in-depth reviews of high-risk issues. CMS also 
created a new unit, the Division of Reimbursement and State Financing 
(DRSF), that centralized responsibility for reviewing state plan 
amendments related to reimbursement. The activities of DRSF have 
improved CMS's ability to carry out more targeted oversight activities 
and have addressed some of our previously reported concerns related to 
deploying its resources and its organizational structure. CMS continued 
to analyze risks and use focused financial reviews and OIG audits to 
identify inappropriate state claims for federal reimbursement and 
recommend changes to states' internal control practices. Conducting 
focused reviews of issues that CMS identifies through its risk analysis 
has helped CMS identify billions of dollars of questionable federal 
reimbursement. CMS has also set goals aimed at reducing questionable 
federal reimbursement and holding financial managers accountable and 
has enhanced its internal processes for tracking results of its 
financial management activities. These and other recent efforts such as 
CMS's approach to measuring payment errors to comply with the Improper 
Payments Information Act of 2002 also address previously identified 
weaknesses and recommendations from our 2002 report. However, it is too 
soon to assess the impact they will have on improving overall financial 
management and addressing emerging issues that put federal Medicaid 
dollars at risk because some have just recently been initiated and 
results are not known yet. Further, there are other previously 
identified weaknesses that the agency has not yet addressed. 
Specifically, CMS has not instituted mechanisms to measure how the risk 
of inappropriate federal reimbursement has changed as a result of 
corrective actions taken. In addition, CMS has not incorporated the use 
of the Medicaid Statistical Information System (MSIS) database into its 
oversight of states' claims or other systems projects intended to 
improve its analysis capabilities. Further, CMS has not developed 
profiles to document information on state fraud and abuse controls to 
use in its oversight of state claims. Finally, CMS has not developed a 
strategic plan specific to its Medicaid financial management 
activities. Because these issues are important to further improving and 
sustaining CMS's oversight activities, we reiterate our prior 
recommendations in these areas. 

During fiscal years 2003 through 2005, CMS received almost $46 million 
from the HCFAC account that it has used to help fund programs related 
to its oversight of the Medicaid program, including about $12 million 
for the funding specialists for fiscal years 2004 and 2005. The funding 
specialists are currently funded on an annual basis with appropriations 
from the HCFAC account. Because CMS competes with other agencies 
annually for HCFAC funds, there is the chance that adequate funding 
might not be provided through the HCFAC process in any given year for 
the funding specialists, and CMS would therefore have to identify 
another means to support the funding specialist positions. Creating 
permanent funding specialist positions is important, given how CMS has 
been using them in performing reviews of high-risk issues. CMS used the 
other $34 million of HCFAC funds for other projects such as developing 
and enhancing an integrated financial management tool, researching 
options for automating the Medicaid state plan process, and interagency 
agreements with the OIG to conduct audits of high-risk areas. 

In addition to reiterating several recommendations to CMS from our 2002 
report, we are making two additional recommendations to CMS to further 
improve and sustain its oversight of state claims. Specifically, we 
recommend that the Administrator of CMS (1) create permanent funding 
specialist positions and (2) determine what systems projects are needed 
to further enhance data analysis capabilities. 

In written comments on a draft of this report, CMS agreed with our 
findings and recommendations and stated that it will continue examining 
issues raised in this report, including prior recommendations from our 
2002 report that are still outstanding. CMS also stated that it will 
work to implement the two recommendations made in this report. 
Additional details on CMS's comments and our assessment of them appear 
in the Agency Comments and Our Evaluation section near the end of this 
report. 

Background: 

Medicaid is the third largest social program in the federal budget and 
one of the largest components of state budgets. States and CMS share 
responsibility for instituting financial practices for the Medicaid 
program that are in compliance with applicable rules, laws, and 
regulations. In general, the federal government matches state Medicaid 
spending for medical assistance according to a formula based on each 
state's per capita income. The federal contribution ranged from 50 to 
77 cents of every state dollar spent on medical assistance in fiscal 
year 2004. For most state Medicaid administrative costs, the federal 
match rate is 50 percent. For skilled professional medical personnel, 
75 percent federal matching is available. States are responsible for 
providing the state share of Medicaid funding and submitting plans, 
budgets, and expenditure reports to CMS that accurately report on the 
administration of their Medicaid programs and how they expend Medicaid 
funds. CMS is responsible for reviewing the states' plans, budgets, 
expenditures, and operations to ensure compliance with all applicable 
laws and regulations. Each state develops its own administrative 
structure and establishes its own eligibility standards, scope of 
covered services, and payment rates in accordance with Medicaid statute 
and within broad federal guidelines. States are required to describe 
the nature and scope of their programs in a comprehensive plan 
submitted to CMS, with federal funding depending on CMS's approval of 
the plan. State Medicaid plans specify the services to be provided and 
how the state will establish the amount it will pay for those covered 
services. Amendments to states' plans are also subject to approval by 
CMS. Table 1 shows the amount of state and federal expenditures for 
Medicaid for fiscal years 2003 and 2004, the most recent years for 
which data are available. 

Table 1: Medicaid Spending in Fiscal Years 2003 and 2004: 

Dollars in billions. 

State; 
FY 2003: $115; 
Percent: 41.7; 
FY 2004: $121; 
Percent: 41.0. 

Federal;  
FY 2003: $161; 
Percent: 58.3; 
FY 2004: $174; 
Percent: 59.0. 

Total;  
FY 2003: $276; 
Percent: 100; 
FY 2004: $295; 
Percent: 100. 

Source: GAO analysis of CMS data. 

[End of table] 

CMS's Center for Medicaid and State Operations (CMSO) shares Medicaid 
program administration and financial management responsibilities with 
the 10 CMS regional offices. Two divisions in CMSO's Finance, Systems, 
and Budget Group--the Division of Financial Management (DFM) and DRSF-
-have primary responsibility for Medicaid financial management. Figure 
1 outlines CMS's organizational structure related to Medicaid. 

Figure 1: CMS Organizational Chart: 

[See PDF for image] 

Source: CMS. 

[End of figure] 

DFM's mission includes effectively administering the Medicaid program 
budget and grants, financial management policy, and administrative cost 
policy processes. Among other things, DFM staff in the central office 
are responsible for (1) determining and issuing state grant awards 
based on regional decision reports resulting from reviews of budget and 
expenditure reports, (2) reconciling state expenditure and budget 
reports, (3) reviewing and approving draft focused financial review 
reports, and (4) preparing annual financial management workplans based 
on input from regional offices. 

DRSF's responsibilities include, but are not limited to (1) reviewing 
state plan amendments that involve reimbursement, (2) providing 
training to and coordinating the work of the funding specialists, (3) 
providing technical assistance to states on institutional and 
noninstitutional reimbursement, and (4) identifying and addressing 
state financing practices that could inappropriately increase federal 
Medicaid costs. 

CMS has approximately 65 regional financial analysts who are 
responsible for performing activities such as (1) reviewing state 
quarterly budget estimates and expenditure reports, (2) preparing 
decision reports that document approvals for federal reimbursement or 
deferrals or disallowances of claims for federal reimbursement, (3) 
assisting in assessing issues that put federal Medicaid dollars at risk 
and determining which issues to review in a fiscal year, (4) performing 
focused financial reviews, (5) providing technical assistance to the 
states on financial matters, and (6) serving as liaison to the states 
and audit entities. 

CMS has about 90 funding specialists who are responsible for, among 
other things, (1) gaining an understanding of their assigned state's 
organizational structure, program structure, and budget process related 
to the state's Medicaid program; (2) assisting in reviews of state plan 
amendments; (3) conducting reviews of state financing practices; and 
(4) providing technical assistance to the states. 

States submit quarterly budget and expenditure reports to CMS. The 
financial analysts in the 10 regional offices have traditionally 
reviewed these reports and prepared a Regional Office Decision 
memorandum which they submit to DFM in the central office. In some 
regions, the new funding specialists now have responsibility for 
reviews of state budget reports. Also, in some cases, the funding 
specialists assist financial analysts with reviews of state expenditure 
reports. 

Steps Taken to Improve Oversight Activities but Some Previously 
Identified Weaknesses Remain: 

CMS has undertaken several steps to improve its Medicaid financial 
management activities including its efforts to oversee state claims for 
federal reimbursement and to identify payment errors. CMS hired about 
90 funding specialists who are examining high-risk state funding 
practices and working with states to eliminate those practices that 
inappropriately increase federal costs. CMS also created a new unit, 
DRSF, which reviews state plan amendments for reimbursement to identify 
and work with states to eliminate payment methodologies that could 
result in higher federal costs. CMS has continued to use focused 
financial reviews and OIG audits to identify inappropriate state claims 
for federal reimbursement and recommend changes to states' internal 
control practices. In addition, CMS recently established a new 
performance goal for its Medicaid financial management staff to reduce 
cumulative questionable federal reimbursement by 10 percent in fiscal 
year 2006. These and other recent efforts represent improvement in 
CMS's oversight activities and address weaknesses and recommendations 
we identified in our 2002 report. However, it is too soon to assess the 
impact they will have on improving overall financial management and 
addressing emerging issues that put federal Medicaid dollars at risk 
because some have just recently been initiated, and results are not 
known yet. Further, there are other previously identified weaknesses 
that the agency has not addressed. CMS has not instituted mechanisms to 
measure how the risk of inappropriate federal reimbursement has changed 
as a result of corrective actions taken. CMS also has not incorporated 
the use of the MSIS in its oversight of state claims or other systems 
projects intended to help improve its analysis capabilities. Further, 
CMS has not developed profiles to document information on state fraud 
and abuse controls to use in its oversight of state claims. Finally, 
CMS has not developed a strategic plan to guide its financial 
management activities. Because these issues are important to further 
improving and sustaining CMS's oversight activities, we reiterate our 
prior recommendations in these areas. 

Additional Staff and Creation of New Division Have Improved Oversight 
Activities: 

In late 2004, CMS began hiring for 100 new funding specialist 
positions.[Footnote 5] These new staff have enabled CMS to perform more 
in-depth reviews of high-risk issues. The funding specialists' 
positions were established to help CMS gain a better understanding of 
how states budget for and finance their portion of Medicaid 
expenditures and help CMS proactively identify state payment and 
funding practices that could result in inappropriate claims for federal 
reimbursement or increased federal costs. These new funding specialists 
augment the activities of approximately 65 financial analysts in 10 
regional offices who had previously performed many of the state 
financial oversight activities, including assisting the financial 
analysts with reviews of state budget and expenditure reports. In 
addition, the funding specialists performed activities that have 
enabled CMS to collect and summarize more information on states' 
Medicaid programs to help CMS target its oversight efforts to high-risk 
issues such as certain payment arrangements that have been problematic 
in the past. 

A major activity of the funding specialists during their first year was 
the completion of state funding profiles. These profiles document the 
states' Medicaid programs' organizational structure, programmatic 
structure, and budget process. For many years, states only needed to 
provide general information on their payment methodologies, so these 
newly created profiles provide more detail to help CMS in its review 
and oversight of states' financial issues. For example, the profiles: 

* describe the sources of each state's nonfederal share of Medicaid 
funds and state payment methodologies; and: 

* include a "watch list" section where the funding specialists can 
highlight significant funding-related concerns that may need to be 
addressed in the future. For example, one state profile identifies a 
concern about the state's lack of oversight of the certified public 
expenditures certification process for hospitals. This type of 
information can be helpful in ensuring proper review of future state 
plan amendments, among other things. 

CMS officials told us the state funding profiles have been made 
available to all CMS staff through CMS's intranet, and said the 
profiles will be updated annually to account for changes in state 
programs, thus allowing CMS to have current information. 

In addition to completing state funding profiles and reviewing state 
budgets and expenditures, the funding specialists carry out other 
oversight activities, including the following: 

* meeting with state Medicaid officials and monitoring state 
legislative activity, including hearings, budget sessions, and 
committee meetings related to states' Medicaid programs and proposed 
bills to proactively identify issues that need CMS attention; 

* reviewing state payment arrangements that CMS previously deemed 
problematic and that the states agreed to end to determine if the 
arrangements have in fact ended; 

* assisting in the resolution of OIG audit findings; 

* providing technical assistance to the states concerning funding and 
financial issues; and: 

* attending training and workshops to learn about and stay abreast of 
CMS policy and operations. 

Directing the activities of the new funding specialists is one of the 
efforts of the central office's DRSF, which was created in early 2005. 
CMS established DRSF to consolidate responsibility for all state 
Medicaid payment policy and funding issues. A role of DRSF is to ensure 
that state plan amendments for reimbursement of noninstitutional and 
institutional services are consistently reviewed and that CMS policy is 
consistently applied across the nation.[Footnote 6] The activities of 
DRSF have improved CMS's ability to effectively deploy its resources to 
carry out more targeted oversight activities. DRSF's National 
Institutional Reimbursement Team and the Non-Institutional Payment 
Team[Footnote 7] are part of CMS's effort to collect information on 
states' funding methodologies before approving state plan amendments, 
including high-risk payment methodologies that have been troublesome in 
the past. 

DRSF reviews all institutional reimbursement state plan amendments 
before they are approved by the Director of CMSO, thus eliminating the 
decentralized approval process that had been in place at all 10 
regional offices.[Footnote 8] This has helped to clarify the lines of 
authority and responsibility for the state plan amendment process-- 
states still submit amendments to their respective region for review 
but they are approved by CMS's central office. DRSF also helped clarify 
responsibilities between central and regional office staff by using the 
10 central office funding specialists as liaisons to each of the 10 
regional offices. The DRSF funding specialists help to ensure that 
regional funding specialists are informed and kept up to date on 
funding policies and matters. The funding specialists also help in 
conducting a series of monthly calls that DRSF has instituted between 
the regions and central office financial management staff to improve 
communication and coordination. These calls help to ensure that all 
staff stay informed and up to date on matters that impact state 
claiming and the approval of state plan amendments. 

These activities, which we consider significantly underway, help 
improve CMS's ability to better target its oversight activities and 
specifically address the recommendation in our 2002 report to increase 
in-depth oversight of areas of higher risk as identified from the risk 
assessment efforts and apply fewer resources to lower risk areas. See 
appendix II for a complete listing of our prior recommendations and our 
assessment of whether or not each has been fully addressed by CMS's 
actions to improve its oversight activities. These activities also help 
address our overarching concerns that CMS's organizational structure 
created challenges to effective oversight because of unclear lines of 
authority and responsibility between the regions and the central 
office. 

Focused Financial Reviews and OIG Audits Continued to Identify Problems 
and Needed Corrective Actions: 

In 2001, CMS began a risk analysis process to identify Medicaid issues 
that put federal dollars at risk and address those issues by conducting 
focused financial reviews or referring the issues to the OIG for its 
review. Since then, at the beginning of each fiscal year, central 
office and regional office financial management staff work together to 
identify risks and plan focused financial reviews of the issues 
identified. CMS's financial management staff consider factors such as 
the amount of dollars involved, involvement of consultants, and time 
elapsed since last audit to identify risk areas. CMS's analyses provide 
insight into what some of the continuing problematic Medicaid issues 
and potential emerging issues are. Table 2 shows which areas have 
consistently been identified as needing in-depth review in fiscal years 
2003 through 2006. 

Table 2: Issues Consistently Planned[A] for Focused Financial Reviews 
in Fiscal Years 2003 through 2006: 

Issues: Home-and Community-based Services; 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Administrative Contracts/Claims; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Medicaid Management Information Systems; 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: [Empty]. 

Issues: Disproportionate Share Hospital payments; 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Family Planning Claims; 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Medical Transportation; 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Nurse Aide Training Costs; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Personal Care Services; 
FY 2003: check; 
FY 2004: [Empty]; 
FY 2005: check; 
FY 2006: check. 

Issues: State Children's Health Insurance Program (SCHIP); 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: [Empty]. 

Issues: School-based Services/Claims; 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Skilled Professional Medical Personnel; 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Targeted Case Management; 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Undocumented Aliens; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Upper Payment Limits; 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Inter-governmental Transfers; 
FY 2003: check; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Issues: Certified Public Expenditures; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: check; 
FY 2006: check. 

Source: GAO analysis of CMS's annual workplans. 

[A] "Consistently planned" means that the type of review was planned in 
at least 3 of the 4 years. 

Note: In addition to the issues shown, approximately 60 other issues 
were to be reviewed during the 4 fiscal years. 

[End of table] 

The focused financial reviews of the issues identified from the risk 
analyses have helped CMS identify billions of dollars in unallowable 
costs outside of those detected through the review of quarterly 
expenditure reports, as well as deficiencies in states' financial 
management practices. In fiscal years 2003 and 2004, focused financial 
reviews resulted in CMS questioning or disallowing about $1.3 billion 
and about $1 billion, respectively, of state claims for federal 
reimbursement, according to CMS. The value of these reviews lies not 
just in identifying disallowances but also in providing feedback on 
policy issues and programmatic vulnerabilities, and in elevating the 
attention of both states and federal staff.[Footnote 9] CMS conducted 
about 57 focused financial reviews each year from fiscal years 2003 
through 2005. Starting in fiscal year 2006, the number of planned 
focused financial reviews almost doubled from fiscal year 2005 due to 
the inclusion of planned reviews to be done by the funding specialists. 

We reviewed 35 of the 113 focused financial reviews performed by 
regional office financial analysts in fiscal years 2003 and 2004 to 
assess (1) the consistency with which the reviews were performed and 
reported on and (2) the extent to which states took actions to address 
the issues identified by CMS. We concluded that the 35 review reports 
were generally consistent across the regions. CMS also provided 
information to support that states are taking the recommended actions 
to address the issues identified. CMS issued reports to the states that 
contained recommendations requesting the states to (1) return federal 
reimbursement that CMS determined was not allowable (disallowances), 
(2) provide additional documents for CMS to determine the allowability 
of questionable claims (deferrals), or (3) improve certain state 
controls or processes. 

CMS gets additional coverage of risk areas from the reviews conducted 
by HHS's OIG. During fiscal years 2003 through 2005, CMS contracted 
with OIG using funds from the HCFAC account to conduct 20 or more 
audits each year of issues identified from the risk assessment process. 
We reviewed interagency agreements between CMS and OIG for fiscal years 
2003 through 2005 that provided over $3 million of HCFAC funds each 
year for OIG to do 20 or more audits each year relating to Medicaid 
issues. The interagency agreements supplemented OIG's overall efforts 
to monitor Medicaid. Table 3 shows the issues that OIG agreed to audit 
in selected states pursuant to the interagency agreements for fiscal 
years 2003 through 2005. 

Table 3: Issues To Be Audited by the OIG in Fiscal Years 2003 through 
2005: 

OIG audit issue: Upper Payment Limit Calculation; 
FY 2003: check; 
FY 2004: [Empty]
FY 2005: check. 

OIG audit issue: School-Based Administrative Costs; 
FY 2003: check; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: School-Based Services; 
FY 2003: check; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Home-and Community-based Services; 
FY 2003: check; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Medicaid Administrative Costs; 
FY 2003: check; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Adult Rehabilitation Services; 
FY 2003: check; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Waivers for Demonstration Projects; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Personal Care Services; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Home Health Services; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Medicaid/SCHIP Duplicate Payments; 
FY 2003: [Empty]; ; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Targeted Case Management; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Medicaid Management Information Systems Expenditures; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: check. 

OIG audit issue: Revenue Sharing; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Rehabilitation Services for People with Mental 
Illness; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Institutions for Mental Diseases; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Vaccines for Children; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Family Planning Services; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Skilled Professional Medical Personnel; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: check. 

OIG audit issue: Provider Overpayments; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: check. 

OIG audit issue: Provider Tax; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: [Empty]. 

OIG audit issue: Community Mental Health Center Administrative Costs; 
FY 2003: [Empty]; 
FY 2004: check; 
FY 2005: check. 

OIG audit issue: Graduate Medical Education; 
FY 2003: [Empty]; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Disproportionate Share Hospital Payments; 
FY 2003: [Empty]; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: County Administrative Case Management Services; 
FY 2003: [Empty]; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: County Administrative Services; 
FY 2003: [Empty]; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Medicaid Buy-In; 
FY 2003: [Empty]; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Physician Supplemental Payment Program; 
FY 2003: [Empty]; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Enhanced Funding for State Government Hospitals; 
FY 2003: [Empty]; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Personal Needs Allowance for Nursing Home Residents; 
FY 2003: [Empty]; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Additional Reimbursement for Nursing Facilities of 
Public Hospitals; 
FY 2003: [Empty]; 
FY 2004: [Empty]; 
FY 2005: check. 

OIG audit issue: Medicaid Expenditures for Nursing Facilities; 
FY 2003: [Empty]; 
FY 2004: [Empty]; 
FY 2005: check. 

Source: CMS. 

[End of table] 

We reviewed 21 audits done by OIG in fiscal year 2004 pursuant to the 
interagency agreement to assess (1) the extent of the additional 
coverage given to issues identified by CMS as high risk and (2) the 
extent to which states took actions to address the issues identified by 
OIG. OIG identified about $13.6 million that it believed was 
inappropriate federal reimbursement to the states in 15 of the 21 
audits. States returned about $4.5 million of disallowed claims 
identified in 10 of the 15 audits; CMS was still pursuing the remaining 
$9.1 million as of the end of our field work. OIG also made numerous 
other recommendations to states to improve their internal controls such 
as implementing controls to identify and prevent duplicate payments and 
complete reconciliation procedures for overpayments in a timely manner. 

Goal for Reducing Questionable Federal Reimbursement Helps Promote 
Accountability: 

CMS has recently developed a specific goal aimed at reducing 
questionable federal reimbursement and evaluating its oversight 
activities. CMS has established a goal to reduce by 10 percent in 
fiscal year 2006 the amount of federal reimbursement that has been 
questioned by CMS or OIG. CMS is collecting data on questionable claims 
for federal reimbursement identified from sources such as quarterly 
expenditure reviews, focused financial reviews, and OIG audits. 
According to a CMS official, as part of this process, CMS has 
identified a baseline amount of about $8 billion dollars in cumulative 
questionable federal reimbursement, which represents state claims that 
(1) CMS has determined may not be allowable or has deferred payment 
pending review of additional support from the states, or (2) OIG has 
questioned as a result of an audit. The goal for fiscal year 2006 is to 
resolve at least 10 percent of this $8 billion by (1) recovering 
amounts ultimately determined to be unallowable or (2) determining 
after further review that the claims are allowed. CMS officials 
acknowledge that the goal may not be attainable each year given the 
varying facts and circumstances of the questionable amounts. However, 
if properly established and tracked, goals of this nature should help 
in improving the effectiveness of CMS oversight activities. 

CMS has also included the goal to reduce by 10 percent the amount of 
questionable federal reimbursement in the fiscal year 2006 performance 
agreements of CMS senior financial managers in the central office. 
According to CMS officials, it will continue to hold managers 
accountable for this type of goal each fiscal year. CMS has also 
included specific goals and performance standards in regional office 
financial managers' performance agreements. For example, one regional 
office has a goal for its managers to ensure that the financial 
analysts and funding specialists complete nine focused financial 
reviews and five funding source reviews in fiscal year 2006. 

CMS has improved its processes for tracking its financial management 
activities and the attainment of the goals it has set. The Financial 
Management Activities Report (FMAR) tracks the amount of regional 
office resources (staff time, personnel costs, and travel costs) spent 
on the various categories of activities in the financial management 
workplans. The Financial Issues Report tracks all questionable state 
claims for reimbursement identified by regional financial analysts and 
funding specialists in focused financial reviews, quarterly expenditure 
reviews, and any other activities that could result in a disallowance 
or deferral of state claims, including findings from OIG reports. The 
Financial Performance Spreadsheet is the CMS tool used to track the 
fiscal year 2006 goal to resolve 10 percent of the amount of 
cumulative, questioned claims for federal reimbursement. 

These actions, which we consider significantly underway, help improve 
CMS's ability to monitor, measure, and evaluate its financial oversight 
activities and specifically address the following recommendations from 
our 2002 report: 

* Include specific Medicaid financial oversight performance standards 
in senior managers' performance agreements. 

* Collect, analyze, and compare trend information on the results of 
oversight control activities, particularly deferral and disallowance 
determinations, focused financial reviews, and technical assistance. 

* Use the information collected above to assess overall quality of 
financial management oversight. 

Other Efforts Help CMS's Oversight of Medicaid Finances: 

CMS has initiated two other programs to help carry out its 
responsibility at the federal level for helping ensure the propriety of 
Medicaid finances and comply with the Improper Payments Information Act 
of 2002[Footnote 10]--the Payment Accuracy Measurement pilot project, 
which was initiated in July 2001 and is now called the Payment Error 
Rate Measurement (PERM) project, and the Medicare-Medicaid data match 
project. Under the PERM program, states use a CMS-developed methodology 
to measure state Medicaid payment errors. By fiscal year 2007, CMS 
plans to have a national Medicaid payment error rate based on a sample 
of states and claims within those states.[Footnote 11] Under PERM, 
states will be expected to ultimately reduce their payment error rates 
over time by better targeting their activities to prevent and detect 
improper payments made to providers. Under the Medicare-Medicaid data 
match project, CMS facilitates the sharing of information between the 
Medicare and Medicaid programs by matching Medicare and Medicaid claims 
information on providers and beneficiaries to identify improper billing 
and utilization patterns which could indicate fraudulent schemes. 

These two projects, which we consider significantly underway, have 
helped CMS's efforts to oversee state Medicaid finances and 
specifically address the following two recommendations from our 2002 
report: 

* Complete efforts to develop an approach to payment accuracy reviews 
at the state and national levels. 

* Incorporate advanced control techniques, such as data mining, data 
sharing, and neural networking, where practical to detect potential 
improper payments. 

Some Previously Identified Weaknesses in Oversight Activities Have Yet 
to be Addressed: 

While CMS has taken a number of actions that improve its oversight and 
address several weaknesses we identified in our prior report, there are 
previously identified weaknesses that the agency has not yet addressed. 
Specifically, CMS has not instituted mechanisms to measure how the risk 
of inappropriate federal reimbursement has changed as a result of 
corrective actions taken. In addition, CMS has not incorporated the use 
of the MSIS database into its oversight of states claims or other 
systems projects intended to improve its analysis capabilities. CMS 
also has not developed profiles to document information on state fraud 
and abuse controls to use in its oversight of state claims. Finally, 
CMS has not developed a strategic plan specific to its Medicaid 
financial management activities. 

Measuring how risks have changed--In our 2002 report, we recommended 
that CMS develop and institute mechanisms to make risk assessment a 
continuous process and to measure whether risks have changed as a 
result of corrective actions taken to address them. CMS has processes 
in place to identify risks, and management has established procedures 
to mitigate important risks, such as detailed reviews of certain high- 
risk issues. However, CMS's processes still do not have the elements of 
risk management that are key to assessing whether actions to mitigate 
risks need to be adjusted either because (1) they are not effective, 
(2) they are effective but need to be expanded, or (3) they are no 
longer needed because the risks have been resolved or reduced to a 
tolerable level. 

For example, CMS identified several Medicaid issues as part of its 
current risk assessment process that have been the subject of focused 
financial reviews across several states, for several years--issues such 
as those related to claims for skilled professional medical personnel, 
family planning, and school-based administrative services. As discussed 
earlier, CMS has issued reports to the states on these issues that 
contained recommendations requesting the states to (1) return federal 
reimbursement that CMS determined was not allowable (disallowances), 
(2) provide additional documents for CMS to determine the allowability 
of questionable claims (deferrals), or (3) improve certain state 
controls or processes. However, CMS's current risk assessment process 
does not indicate how the corrective actions taken to address these 
issues have changed their assessment of risk or their future strategies 
for mitigating the risk that these issues pose. 

To CMS's credit, it has recently taken steps to change policies related 
to state claims for targeted case management services,[Footnote 12] an 
issue that has been the subject of multiple focused financial reviews. 
While it is not clear from CMS's risk assessment why this issue was 
given a higher priority than other issues identified from its risk 
assessment, CMS officials explained that their process for determining 
what might be a high-risk issue comes from continuous coordination 
between financial management staff and Medicaid program staff that have 
in-depth program knowledge about Medicaid policy and procedures. The 
officials further explained that the results of their coordination and 
the fact that an issue is a high priority may not be noticeable to 
others until policy changes are included, for example, in HHS's budget 
submission or other legislation that is signed by the President. 

Documenting how the outcomes of detailed reviews are used to determine 
whether additional or fewer corrective actions are needed is an 
important step in risk management. For fiscal year 2006, CMS is 
planning to conduct additional detailed reviews intended to ensure that 
states have stopped certain intergovernmental transfers and other 
funding practices that have resulted in billions of dollars in 
inappropriate federal reimbursement.[Footnote 13] It will be important 
to use the results of these follow-up reviews as a basis to determine 
whether its prevention and mitigation steps are adequate and effective 
and then to adjust them accordingly. Fully documenting the results of 
these types of activities will help inform planning for future 
mitigation efforts. 

Because CMS has not fully implemented mechanisms to measure how risks 
have changed as a result of actions to address the risks, we are 
reiterating our prior recommendation in this area. 

Improving analysis capabilities--In our 2002 report, we recommended 
that CMS use comprehensive Medicaid payment data that states must 
provide to the national MSIS database. Use of these data could improve 
CMS's analysis capabilities. MSIS contains Medicaid program information 
including data on billions of claims. This database could be used to 
identify trends in certain Medicaid services from prior-year claims 
that could be useful in analyzing current-year state claims. According 
to a CMS official, CMS has not yet developed the ability to make these 
data available for use by the financial analysts and funding 
specialists in their oversight activities. Further, only a few CMS 
staff with the requisite systems capabilities are currently able to 
access and analyze the data. CMS officials said they plan to make these 
data more accessible in the future. Because CMS has not yet 
incorporated use of MSIS in its oversight activities, we are 
reiterating our prior recommendation. 

CMS also has not yet completed two other systems projects intended to 
help improve its analysis capabilities. CMS started to develop the: (1) 
Transactions, Information Inquiry, and Program Performance System 
project--an integrated financial management tool intended to link 
existing Medicaid data systems and tools; and (2) Automated Medicaid 
State Plans Project--a project to explore collecting electronic 
submission of state plans that would provide timely access to critical 
program information. CMS officials told us that due to funding 
constraints, these two projects have yet to be completed. Determining 
the systems projects needed to enhance CMS's analysis capabilities is 
important given the challenges of evaluating state Medicaid 
expenditures and funding practices. 

Collecting and using information on state fraud and abuse control 
activities--In our 2002 report, we recommended that CMS enhance the 
information that it uses in its oversight of state claims by creating 
profiles that document each state's activities to oversee its Medicaid 
program and prevent fraud and abuse. For example, we recommended that 
the profiles include information on provider screening procedures and 
payment accuracy studies. CMS currently collects some information on 
these and other state program integrity efforts as part of compliance 
reviews that are conducted by program integrity staff in DFM and the 10 
regional offices.[Footnote 14] These compliance reviews are to assess 
whether state Medicaid program integrity efforts comply with federal 
requirements such as those governing provider enrollment, claims 
review, and coordination with each state's Medicaid Fraud Control 
Unit.[Footnote 15] However, CMS officials told us that there is limited 
coordination between the staff that conduct the compliance reviews and 
the financial management staff that oversee state claims. Further, the 
compliance reviews have focused on state compliance and have not 
evaluated the effectiveness of the states' fraud and abuse prevention 
and detection activities. 

CMS is starting to develop strategies as part of the recently created 
Medicaid Integrity Program that could address the weaknesses that we 
have identified. The Deficit Reduction Act of 2005,[Footnote 16] 
enacted in February 2006, provided for the creation of a Medicaid 
Integrity Program and required CMS to develop a comprehensive plan for 
how it would implement the program. CMS officials have recently begun 
to develop the plan and have included proposals for hiring contractors 
to assess states' program integrity activities. 

Information on states' activities to oversee their Medicaid programs 
and prevent fraud and abuse is important to determine the appropriate 
level of federal oversight that should be applied to each state's 
claims. Because CMS is just starting to develop its plan and results 
are not known yet, we are reiterating our prior recommendations in this 
area. 

Developing a strategic plan to guide Medicaid financial management 
activities--In our 2002 report, we reported that CMS was starting 
several initiatives, similar to what we are currently reporting, to 
bring about improvements in its financial management activities and 
oversight. At the time of our 2002 review, CMS did not have a written 
strategic plan that described its many oversight activities and 
initiatives and the staff responsible for implementing them. Therefore, 
we recommended that CMS develop a written plan and strategy for 
Medicaid financial oversight. However, CMS still has not published a 
comprehensive plan that describes the many aspects of its Medicaid 
financial management strategy and its plans for continuing and 
sustaining its recent improvement efforts. 

A strategic plan is a key management tool that can help clarify 
organizational priorities and unify agency staff in the pursuit of 
shared goals. Strategic plans are the starting point and basic 
underpinning for a system of program goal-setting and performance 
measurement. In accordance with the Government Performance and Results 
Act of 1993 (GPRA),[Footnote 17] a multiyear strategic plan articulates 
the fundamental mission (or missions) of an organization, and lays out 
its long-term general goals for accomplishing that mission, including 
the resources needed to reach these goals. The clearer and more precise 
these goals are, the better able the organization will be to maintain a 
consistent sense of direction, regardless of leadership changes. 

HHS prepares a strategic plan as required by GPRA.[Footnote 18] The HHS 
strategic plan contains eight broad program performance goals related 
to the missions and programs of its operating divisions. However only 
one goal relates to Medicaid financial management--an overall goal for 
all HHS programs to "achieve excellence in management practices." 
Unlike the Medicare program that started publishing a separate 
comprehensive plan for financial management in fiscal year 2001 that 
outlined problems and plans to address weaknesses in the Medicare 
program's internal controls, oversight, and financial systems,[Footnote 
19] the Medicaid program has not developed its own plan for financial 
management that includes an appropriate level of detail to be useful as 
a tool to guide its financial managers. 

Medicaid officials told us that they have several planning documents-- 
such as the annual financial management work plans, the FMAR, and the 
Financial Issues Report that we previously discussed--that they use in 
managing financial management activities. While these documents provide 
information on aspects of CMS's financial management activities, they 
do not clearly define the mission of Medicaid financial management, lay 
out the goals for continuously implementing the mission, or provide a 
complete description of the operational processes, skills, technology, 
and other resources required to meet CMS's financial management goals 
and objectives. 

Without a strategic plan, CMS lacks an appropriate "roadmap" to guide 
activities for ensuring sound financial management of the Medicaid 
program. Therefore, we are reiterating our recommendation in this area. 

Use of HCFAC Funds to Enhance Medicaid Oversight Initiatives: 

During fiscal years 2003 through 2005, CMS received almost $46 million 
from the HCFAC account that it has used to help fund programs related 
to its oversight of Medicaid. Congress enacted the HCFAC program as 
part of the Health Insurance Portability and Accountability Act of 1996 
to consolidate and strengthen ongoing efforts to combat fraud and abuse 
in health care programs, including the Medicare and Medicaid programs. 
The legislation required the establishment of the national HCFAC 
program and it established the HCFAC account within the Medicare 
Federal Hospital Insurance Trust Fund, which is funded by 
appropriations out of the Trust Fund. The HCFAC program is administered 
by HHS and the Department of Justice and is designed to coordinate 
federal, state, and local law enforcement activities with respect to 
health care fraud and abuse. HHS's OIG, the Federal Bureau of 
Investigation, and the Medicare Integrity Program receive direct 
appropriations from the HCFAC account, while the Medicaid program must 
request funds from the HCFAC account and compete with other HHS 
programs, such as the Administration on Aging and the Office of General 
Counsel, for allocations from the discretionary part of the HCFAC 
account.[Footnote 20] Table 4 shows the discretionary HCFAC funds 
available to CMS in fiscal years 2003 through 2005 and the portion 
allocated to the Medicaid program run by CMSO for Medicaid financial 
management projects. 

Table 4: Discretionary HCFAC Funds for CMS and CMSO's Allocation: 

Dollars in millions. 

Total discretionary HCFAC funds for CMS; 
FY 2003: $23.37; 
FY 2004: $22.75; 
FY 2005: $31.14; 
Totals: $77.26. 

CMSO allocation; 
FY 2003: $9.56; 
FY 2004: $17.08; 
FY 2005: $18.91; 
Totals: $45.55. 

Source: CMS and HHS/OIG. 

[End of table] 

CMSO used this money to help fund projects related to its oversight of 
Medicaid. Table 5 shows the various projects for the 3 fiscal years and 
the amounts allocated to those projects. 

Table 5: Medicaid Financial Management Projects and Their HCFAC 
Allocations for Fiscal Years 2003 through 2005: 

Dollars in millions. 

Projects: Funding specialists (new staff); 
FY 2003: [Empty]; 
FY 2004: $1.69; 
FY 2005: $10.36; 
Totals: $12.05. 

Projects: OIG interagency agreement audits; 
FY 2003: $3.01; 
FY: 2004: 5.66; 
FY: 2005: 3.80; Totals: 12.47. 

Projects: Medicare-Medicaid data match project; 
FY: 2003: [Empty]; 
FY: 2004: 3.74; 
FY: 2005: 3.26; Totals: 7.0. 

Projects: Payment Accuracy Measurement/PERM/SCHIP Error Rate Pilot; 
FY: 2003: 3.70; 
FY: 2004: 3.81; 
FY: 2005: 1.20; Totals: 8.71. 

Projects: Transactions, Information Inquiry, and Program Performance 
System; 
FY: 2003: 2.02; 
FY: 2004: 1.68; 
FY: 2005: 0.29; Totals: 3.99. 

Projects: Other projects; 
FY: 2003: 0.83; 
FY: 2004: 0.50; 
FY: 2005: [Empty]; Totals: 1.33. 

Totals; 
FY: 2003: $9.56; 
FY: 2004: $17.08; 
FY: 2005: $18.91; Totals: $45.55. 

Source: CMS. 

[End of table] 

The HCFAC account provided about $12 million to CMS for the funding 
specialists for fiscal years 2004 and 2005. The funding specialists 
have been funded on an annual basis with appropriations from the HCFAC 
account. There is the chance that adequate funding might not be 
provided through the HCFAC process in any given year for the funding 
specialists; thus CMS officials have told us they would like to pursue 
ways of making the funding specialist positions permanent. CMS 
officials told us that there was a provision in its fiscal year 2007 
budget submission, but the provision was rejected during department- 
level discussions, so the funding specialists will continue to be 
funded on an annual basis with HCFAC funds. CMS officials also told us 
that some of the turnover of funding specialist staff was due to the 
uncertainty of funding and whether the positions would become 
permanent. Creating permanent funding specialist positions is 
important, given how CMS has been using them in performing reviews of 
high-risk issues. 

Other Medicaid projects included in table 5 that CMS used HCFAC funds 
for include: 

* interagency agreements between CMS and OIG for OIG audits of high- 
risk issues such as family planning services in managed care, skilled 
professional medical personnel, upper payment limits, school-based 
claims, home-and community-based services, and Medicaid administrative 
costs reported by state agencies other than the Medicaid single state 
agency; 

* Medicare-Medicaid data match project developed to identify improper 
billing and utilization patterns by matching Medicare and Medicaid 
claims information on providers and beneficiaries; 

* Payment Accuracy Measurement, PERM, and SCHIP Error Rate Pilot 
Projects, which allow states to test a methodology to determine 
improper payment error rates in their SCHIP and/or Medicaid programs; 

* Transaction, Information, Inquiry and Program Performance System to 
develop and enhance an integrated financial management tool linking 
existing CMSO data systems and tools containing critical financial, 
statistical, administrative, and other data; 

* an organizational study of Medicaid financial processes within CMS 
done by OIG under an interagency agreement with OIG; 

* a project referred to as the Annuities Project, which used both 
qualitative and quantitative research methods to develop a 
comprehensive picture of states' experience with the use of annuities 
as an asset-sheltering device by Medicaid applicants and their spouses; 

* a Waiver Management System Database project, which updated a current 
Waiver Management System Database; and: 

* a project to research options for automating the Medicaid state plan 
process from the creation and submission of state plan amendments at 
the state level through approval at the central office and regional 
offices. 

We obtained documentation to support the use of HCFAC funds for the 
above projects. 

Conclusions: 

Since we last reported in 2002, CMS has made improvements to the 
processes it uses in its efforts to oversee states and identify payment 
errors. Efforts undertaken, such as the hiring of the funding 
specialists, consolidating the review of reimbursement state plan 
amendments, and the Medicare-Medicaid data match project have enhanced 
CMS's ability to identify issues that put federal Medicaid dollars at 
risk. While CMS's actions address previously identified weaknesses and 
recommendations from our 2002 report related to (1) targeting resources 
to higher risk areas, (2) monitoring performance, (3) establishing 
mechanisms for ensuring accountability, (4) developing an approach to 
payment accuracy reviews and (5) incorporating advanced control 
techniques, it is too soon to assess the impact they will have on 
improving overall financial management and addressing emerging issues 
that put federal Medicaid dollars at risk because the results of some 
efforts are not known yet. 

In addition, several weaknesses remain in CMS's oversight that could be 
addressed by implementing our prior recommendations that remain open. 
Specifically, CMS still lacks processes to adjust oversight activities 
for changes in risk; therefore, we reiterate our prior recommendation 
related to measuring whether risks have changed as a result of 
corrective actions to address them. Also, because CMS has not yet 
addressed weaknesses we identified in its analysis capabilities, we 
reiterate our prior recommendation for CMS to incorporate using MSIS 
data in its analysis of state claims. We also reiterate our prior 
recommendations to CMS for collecting and using information on state 
fraud and abuse control activities because this information is 
important to determining the appropriate level of federal oversight of 
state claims. 

The absence of a strategic plan could hinder CMS in sustaining its 
current efforts and addressing the weaknesses that we have identified. 
Therefore, we reiterate our prior recommendation that CMS develop a 
strategic plan specific to Medicaid financial management. Also, CMS may 
not have the staff and systems needed to continuously identify and 
target high-risk issues. Therefore, we stress the importance of 
creating permanent funding specialist positions and determining what 
systems projects are needed to improve their analysis capabilities. 

Recommendations for Executive Action: 

To further improve and sustain CMS's oversight of state claims, 
including its ability to identify and address emerging issues, we 
recommend that the Administrator of CMS take the following two 
additional actions: 

* Create permanent funding specialist positions. 

* Determine what systems projects are needed to further enhance data 
analysis capabilities. 

Agency Comments and Our Evaluation: 

In written comments on a draft of this report, which are reprinted in 
appendix III, CMS agreed with our findings and recommendations and 
stated that it will continue examining issues raised in this report, 
including prior recommendations from our 2002 report that are still 
outstanding. CMS also stated that it will work to implement the two 
recommendations made in this report. CMS expressed its support for our 
recommendation to create permanent funding specialist positions, which 
are currently funded with HCFAC dollars, and stated it will consider 
alternative approaches to provide adequate resources. CMS further 
stated it will follow our second recommendation and begin the process 
of determining the system projects that are needed to further enhance 
data capabilities. CMS also provided additional information on several 
of the activities we reported on, including additional activities of 
the funding specialists and actions being taken on our prior 
recommendations. 

As we agreed with your office, unless you publicly announce the 
contents of this report earlier, we plan no further distribution of it 
until 30 days from the date of this letter. We will then send copies to 
the Secretary of Health and Human Services, Administrator of CMS, 
Inspector General of HHS, and other interested parties. Copies will be 
made available to others upon request. In addition, this report will be 
available at no charge on the GAO Web site at [Hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-8341 or calboml@gao.gov. Contact points for our 
Office of Congressional Relations and Public Affairs may be found on 
the last page of this report. Major contributors are acknowledged in 
appendix IV. 

Signed by: 

Linda Calbom: 
Director, Financial Management and Assurance: 

[End of section] 

Appendix I: Scope and Methodology: 

To identify the extent to which the Centers for Medicare & Medicaid 
Services (CMS) has improved its oversight, including its ability to 
identify and address emerging issues that put federal Medicaid dollars 
at risk, we performed work at CMS headquarters and two regional 
offices. We reviewed and assessed aspects of CMS's financial oversight 
processes, which include identifying high-risk areas in order to 
develop an annual regional office financial management workplan and 
conducting focused financial reviews of high-risk areas. We reviewed 35 
of the 113 focused financial reviews conducted by CMS regional offices 
for fiscal years 2003 and 2004. We selected reviews of specific issues 
that were reviewed across regions and fiscal years, such as 
disproportionate share hospital payments and school-based 
administrative services. We did not select certain issues, such as 
upper payment limits and intergovernmental transfers, because these 
issues have been well-covered in other reports and by CMS's actions. We 
looked for consistency of the reviews among regions and fiscal years 
and the extent to which states implemented CMS's recommendations. We 
obtained and reviewed documentation showing the activities and work 
performed by the new funding specialists hired by CMS during 2004 and 
2005 as part of its efforts to improve its financial management of the 
Medicaid program. We reviewed our prior reports and reports by the 
Department of Health and Human Service's Office of Inspector General 
(OIG) and others. We also reviewed interagency agreements between CMS 
and OIG. We interviewed OIG staff, and CMS officials and staff at the 
CMS central office in Baltimore, Maryland, and two regional offices-- 
New York and Chicago. We selected the New York and Chicago regional 
offices to visit based on the number of focused financial reviews we 
selected to review that were performed by these regions. Sixteen of the 
35 focused financial reviews we selected to review were performed by 
these two regions; the remaining 19 focused financial reviews were done 
by seven other regional offices. We also considered the Comptroller 
General's Standards for Internal Control in the Federal 
Government.[Footnote 21] 

To determine how CMS used funds from the Health Care Fraud and Abuse 
Control (HCFAC) account for fiscal years 2003 through 2005, we obtained 
from CMS a list of Medicaid projects that were funded from the HCFAC 
account in fiscal years 2003 through 2005. We obtained and examined 
documentation from CMS such as invoices; grant awards; interagency 
agreements; and accounting, budget, and payroll records that support 
the information provided by CMS on how it spent HCFAC funds for fiscal 
years 2003 through 2005. We also reviewed the HCFAC program and funding 
legislation, 42 U.S.C. §§ 1320a-7c, 1395i(k). 

We requested written comments on a draft of this report from the 
Administrator of CMS or his designee. His written comments are 
reprinted in appendix III. We conducted our review from February 2005 
to May 2006 in accordance with generally accepted government auditing 
standards. 

[End of section] 

Appendix II Status of Prior Recommendations: 

Table 6: Recommendations Made in GAO-02-300 - Medicaid Financial 
Management: Better Oversight of State Claims for Federal Reimbursement 
Needed (February 2002): 

Recommendation: Risk assessment: 
The Centers for Medicare & Medicaid Services (CMS) administrator should 
revise current risk assessment efforts in order to more effectively and 
efficiently target oversight resources towards areas most vulnerable to 
improper payments by taking the following actions; 
1. Collecting, summarizing, and incorporating profiles of state 
financial oversight activities that include information on state 
prepayment edits, provider screening procedures, postpayment detection 
efforts, and payment accuracy studies; 
2. Incorporating information from reviews of state initiatives to 
prevent Medicaid fraud and abuse; 
3. Developing and instituting feedback mechanisms to make risk 
assessment a continuous process and to measure whether risks have 
changed as a result of corrective actions taken to address them; 
4. Completing efforts to develop an approach to payment accuracy 
reviews at the state and national levels; 
Status and action(s) taken: 
Recommendations 1 and 2: Open/reiterate; CMS currently collects some 
information on state program integrity efforts as part of compliance 
reviews that are conducted to assess whether state Medicaid program 
integrity efforts comply with federal requirements. Also, CMS is 
starting to develop strategies as part of the recently created Medicaid 
Integrity Program that include proposals for hiring contractors to 
assess states' program integrity activities. Because CMS is just 
starting these efforts and results are not known yet, we are 
reiterating our prior recommendations in this area; 
Recommendation 3: Open/reiterate; CMS's processes still lack elements 
of risk management that are key to assessing whether actions to 
mitigate risks need to be adjusted either because (1) they are not 
effective, (2) they are effective but need to be expanded, or (3) they 
are no longer needed because the risks have been resolved or reduced to 
a tolerable level. Therefore, we are reiterating our prior 
recommendation; 
Recommendation 4: Closed implemented; In July 2001, CMS initiated the 
Payment Accuracy Measurement pilot project, now called the Payment 
Error Rate Measurement (PERM) project. Under the PERM program, states 
use a CMS- developed methodology to measure state Medicaid payment 
errors. By fiscal year 2007, CMS plans to have a national Medicaid 
payment error rate based on a sample of states and claims within those 
states. These actions, which we consider significantly underway, help 
improve CMS's ability to ensure payment accuracy and address our 
recommendation. 

Recommendation: Financial oversight control activities; The CMS 
administrator should restructure oversight control activities by taking 
the following actions; 
5. Increasing in-depth oversight of areas of higher risk as identified 
from the risk assessment efforts and applying fewer resources to lower 
risk areas; 
6. Incorporating advanced control techniques, such as data mining, data 
sharing, and neural networking, where practical to detect potential 
improper payments; 
7. Using comprehensive Medicaid payment data that states must provide 
in the legislatively mandated national Medicaid Statistical Information 
System (MSIS) database; 
Status and action(s) taken: 
Recommendation 5: Closed implemented; The new funding specialists are 
helping CMS to collect and summarize more information on states' 
Medicaid programs to help CMS target its oversight efforts to high-risk 
issues such as certain payment arrangements that have been problematic 
in the past. A major activity of the funding specialists during their 
first year was the completion of state funding profiles to help CMS in 
its review and oversight of the states' financial issues. For example, 
the profiles include a "watch list" section where the funding 
specialists can highlight significant funding-related concerns that may 
need to be addressed in the future. These actions, which we consider 
significantly underway, address our prior recommendation; 
Recommendation 6: Closed implemented; CMS developed and implemented the 
Medicare-Medicaid data match project. Under this data match project, 
CMS facilitates the sharing of information between the Medicare and 
Medicaid programs by matching Medicare and Medicaid claims information 
on providers and beneficiaries to identify improper billing and 
utilization patterns which could indicate fraudulent schemes. These 
actions, which we consider significantly underway, address our prior 
recommendation; 
Recommendation 7: Open/reiterate; CMS has not yet developed the ability 
to make these data available for use by the financial analysts and 
funding specialists in their oversight activities. The MSIS database is 
very voluminous as it contains data on billions of claims. CMS 
officials said they plan to make these data more accessible in the 
future. Because CMS has not yet incorporated use of MSIS in its 
oversight activities, we are reiterating our prior recommendation. 

Recommendation: Monitoring performance; 
The CMS administrator should develop mechanisms to routinely monitor, 
measure, and evaluate the quality and effectiveness of financial 
oversight, including audit resolution, by taking the following actions; 
8. Collecting, analyzing, and comparing trend information on the 
results of oversight control activities, particularly deferral and 
disallowance determinations, focused financial reviews, and technical 
assistance; 
9. Using the information collected above to assess overall quality of 
financial management oversight; 
10. Identifying standard reporting formats that can be used 
consistently across regions for tracking open audit findings and 
reporting on the status of corrective actions; 
11. Revising Division of Audit Liaison audit tracking reports to ensure 
that all audits with Medicaid-related findings are identified and 
promptly reported to the regions for timely resolution; 
Status and action(s) taken: 
Recommendations 8 and 9: Closed implemented; CMS has improved its 
processes for tracking the results of financial management activities. 
CMS uses several tracking reports--the Financial Management Activities 
Report (FMAR), the Financial Issues Report, and the Financial 
Performance Spreadsheet. The FMAR tracks the amount of regional office 
resources (staff time, personnel costs, and travel costs) spent on the 
various categories of activities in the financial management workplans. 
The Financial Issues Report tracks all questionable state claims 
identified by regional financial analysts and funding specialists in 
financial management reviews and any other activities that resulted in 
a disallowance or deferral of state claims, including findings from 
Office of Inspector General (OIG) reports. The Financial Performance 
Spreadsheet is the CMS tool used to track the fiscal year 2006 goal to 
resolve 10 percent of the amount of cumulative, questioned claims for 
federal reimbursement. These actions, which we consider significantly 
underway, help improve CMS's ability to monitor, measure, and evaluate 
its financial oversight activities and address our prior 
recommendations; 
Recommendations 10 and 11: Open; CMS did not agree with these prior 
recommendations on audit tracking. During the course of our current 
audit, we coordinated with CMS regional office staff on open audit 
findings and the status of corrective actions for fiscal year 2004 OIG 
audits completed under the interagency agreement. The staff provided us 
with a current status on open audit findings that we inquired about. We 
did not obtain updated information from the Division of Audit Liaison 
in CMS's central office as to whether they have changed their audit 
tracking processes. 

Recommendation: Organizational structure; 
The CMS administrator should establish mechanisms to help ensure 
accountability and clarify authority and internal control 
responsibility between regional office and headquarters financial 
managers by taking the following actions; 
12. Including specific Medicaid financial oversight performance 
standards in senior managers' performance agreements; 
13. Developing a written plan and strategy which clearly defines and 
communicates the goals of Medicaid financial oversight and 
responsibilities for implementing and sustaining improvements; 
Status and action(s) taken: 
Recommendation 12: Closed implemented; CMS staff provided us with 
fiscal year 2006 performance agreements of CMS senior financial 
managers in the central office, and they include goals for improving 
financial management. They specifically state that managers are 
responsible for achieving the goal of reducing by 10 percent the amount 
of cumulative, questioned federal reimbursement. According to CMS, it 
will continue to hold managers accountable for the goal of reducing 
questionable reimbursement each fiscal year. CMS has also included 
specific goals and performance standards in regional financial 
managers' performance plans, such as assuring completion of a specified 
number of focused financial reviews and funding source reviews. These 
actions, which we consider significantly underway, address our prior 
recommendation; 
Recommendation 13: Open/reiterate; Medicaid officials said that they 
have several documents that articulate their plans and strategy. 
However, CMS still lacks a published, comprehensive plan that describes 
the many aspects of its Medicaid financial management strategy and its 
plans for continuing and sustaining its recent improvement efforts. 
Therefore, we reiterate our prior recommendation. 

Source: GAO. 

[End of table] 

[End of section] 

Appendix III: Comments from the Centers for Medicare & Medicaid 
Services: 

Department Of Health & Human Services: 
Centers for Medicare & Medicaid Services:  

Administrator: 
Washington, DC 20201:  

Date: Jun 19 2006:  

To: Linda Calbom:  
Director, Financial Management and Assurance: 
Government Accountability Office:  

From: Mark B. McClellan, M.D., Ph.D. Administrator:  

Subject: Government Accountability Office's (GAO) Draft Report: 
Medicaid Financial Management. Steps Taken to Improve Federal Oversight 
but Other Actions Needed to Sustain Efforts (GAO-06-705):  

We appreciate the opportunity to respond to the above referenced draft 
report dated June 2006. We are very pleased that the GAO, through this 
review, recognized the numerous steps that the Centers for Medicare & 
Medicaid Services (CMS) has taken since 2003 to improve its Medicaid 
financial management activities, many of which were previously 
identified as areas of weakness by the GAO in a 2002 report. Based on 
the significant financial management activities initiated by CMS, the 
draft report considers as implemented six previous GAO recommendations. 
The findings of this draft report clearly reflect CMS' ongoing 
commitment to the fiscal integrity of the Medicaid program.  

We are also very pleased with the GAO's recommendation to create 
permanent funding specialist positions, which are presently funded 
through Health Care Fraud and Abuse Control (HCFAC) dollars. As you are 
already aware, CMS proposed the hiring of 100 funding specialists in 
2003 to augment the financial management review activities nationally. 
We believe these 100 additional funding specialists have provided CMS 
with an improved ability to strengthen our oversight of the Medicaid 
program. Medicaid is a large and complex program with an annual budget 
that exceeds $300 billion. Such a significant program warrants a 
serious commitment to adequate financial management resources. We will 
consider alternative approaches to provide adequate resources.  

The CMS further appreciates the identification of nine specific areas 
of improvement to Federal oversight in the draft report as follows:   

1. Improved efforts to oversee State claims for Federal reimbursement; 

2. Improved efforts to identify payment errors;  

3. Enhanced ability to address high-risk State funding practices that 
increase Federal costs through the hiring of approximately 100 funding 
specialists; 

4. Creation of a new unit that centralized responsibility for approving 
State plan amendments (SPAs) related to reimbursement;  

5. Continuation of identifying billions of dollars in questionable 
Federal reimbursement through focused financial reviews and OIG audits; 

6. Created goals to reduce inappropriate Federal reimbursement;  

7. Enhancing internal tracking processes related to results of its 
financial management activities;  

8. Requiring accountability of financial managers;  

9. Measuring payment errors under the Improper Payments Information 
Act.  

The report also identifies a few areas that were previously identified 
by the GAO as weaknesses in CMS financial management processes and for 
which the GAO believes the Agency has yet to adequately address. CMS is 
committed to further improving all Medicaid financial management 
activities and we will continue to examine these issues raised in the 
draft report. Moreover, CMS will follow the second recommendation of 
the draft report and begin the process of determining the system 
projects that are needed to further enhance data capabilities.  

We again appreciate the opportunity to comment on what we believe is a 
very positive determination made by the GAO on CMS' improvements to its 
Federal oversight of Medicaid financial management. We encourage the 
GAO to articulate its support of creating permanent funding specialists 
in its final report to Congress.  

Additional technical comments are attached to this letter under Exhibit 
A:  

Technical Comments:  

Exhibit A:  

* We are compelled to acknowledge the efforts of CMS' 65 financial 
analysts who were primarily responsible for providing fiscal oversight 
of the program until the recent hiring of the funding specialists. We 
believe that under our historic resource limitations, our relatively 
small staff of 65 financial analysts did a commendable job in Medicaid 
financial management prior to the hiring of the funding specialists.  

* We wish to emphasize that the funding specialists were hired to fill 
a new role within Medicaid financial management. Our traditional 
financial management processes of focused financial reviews and CMS-64 
reviews are retrospective in nature and have the potential to result in 
deferrals or disallowances. While these are critical components of 
Medicaid financial management, we hired the funding specialists to 
broaden our financial management activities and become more proactive 
in addressing high-risk areas. The funding specialists focus on front- 
end Medicaid financial management, working with our partners, the 
States, throughout the State budget formulation process, wherein 
important Medicaid financing decisions are made. Because the Federal 
government now has a presence during the State budget process, we are 
in a position to provide technical assistance on Medicaid financing 
issues to State officials prior to potentially problematic claims being 
submitted to CMS. We find this to be a "win-win" for States and CMS 
because it allows us to communicate in a proactive manner and address 
problems before they develop into potentially adversarial deferral or 
disallowance actions. As the GAO also points out, with the increased 
resources, we are able to use the expertise of the funding specialists 
to enhance our traditional Medicaid financial management process as 
well.  

* We appreciate the GAO's recognition of our efforts to track our 
financial management activities using the Financial Management 
Activities Report, the Financial Issues Report, and the Financial 
Performance Spreadsheet. We wish to also mention the process we are 
using to track the funding specialists' efforts in proactively 
identifying potential Federal financial participation (FFP) at risk and 
averting FFP at risk. The Funding Specialist Financial & Funding Issues 
Report (FSFFIR) is a tool we have developed to capture the results of 
the funding specialists' particular focus on proactive examinations of 
Medicaid financing proposals and practices. The FSFFIR allows us to 
measure the impact of the funding specialists in the important areas of 
cost avoidance and cost savings. By coupling the FSFFIR process with 
our other efforts to monitor performance in terms of recoveries and 
resolutions of outstanding issues, we believe we have a set of tools 
that will better reflect the full range of results arising from our 
Medicaid financial management activities during the year.  

* The 10 Central Office funding specialists have a unique role that 
should be amplified beyond what is written in the GAO report. 
Generally, they provide cross-cutting technical assistance and policy 
direction on Medicaid reimbursement and State financing issues while 
serving as the liaison between assigned regional offices and relevant 
Central Office organizational groups. In addition to coordinating the 
monthly calls including regional office and Central Office financial 
staff and supporting the regional office funding specialists, the 
Central Office funding specialists review financial management reports, 
provide funding-related technical assistance on SPAs and waivers, 
review tax proposals submitted by States, assist in the development of 
Medicaid financing policy guidance and regulations, coordinate the 
Financial Issues Report and the Financial Performance Spreadsheet 
processes, and contribute generally to all relevant Central Office 
Medicaid financial management functions.  

* The GAO report mentions the completion of State Medicaid funding 
profiles by the funding specialists during FY 2005. The funding 
profiles represent an unprecedented effort by CMS to examine Medicaid 
financing in a comprehensive manner. The profiles include information 
about the State's budget development; the State's legislative process; 
the flow of Medicaid funding within the State; the various Medicaid 
payment methodologies the State employs; and high risk areas that 
warrant special attention from financial management staff. The funding 
profiles were not developed as part of any existing CMS review process; 
rather, they allowed CMS to look globally at Medicaid financing within 
the State to understand the issues and work proactively to address any 
problems. We have been pleased to discover during 2006 that the work 
developing last year's Medicaid funding profiles has led to the 
identification of several financing issues. Updates to the State 
Medicaid funding profiles will be completed by the end of FY 2006. Like 
last year, these FY 2006 updates will be made available to all CMS 
staff via the intranet.  

* The GAO report correctly states that all institutional reimbursement 
SPAS are approved by the Director of CMSO, thus eliminating the 
decentralized approval process that had been in place at all 10 
regional offices. In addition, we wish to point out that the CMSO 
Director's office reviews descriptions of all non-institutional 
reimbursement SPAS prior to approval by the regional office. This has 
produced a more centralized review process for non-institutional SPA's 
as well.  

* GAO has recommended that CMS enhance the information we use in our 
oversight of State claims by creating profiles that document each 
State's activities to oversee its Medicaid program and prevent fraud 
and abuse. This concept is part of the overall planning and could be 
implemented as we bring the new Medicaid Integrity Program (MIP) 
organization on line.  

* In order to address previous barriers to access to Medicaid 
Statistical Information System (MSIS) data, we have implemented a Web- 
based statistical summary Datamart which will support review of broad 
payment patterns and trends. This tool is readily available, and new 
financial auditors received an introduction to the use of the Datamart 
tools during their orientation.  

* On building electronic State plan processes, we have implemented a 
State plan tracking system to monitor SPAS. We have investigated 
options for maintaining electronic State plan materials. Some regional 
offices are pilot testing approaches. However, implementation of a 
broad-based solution remains an intractable problem with questionable 
cost-benefit in today's tight IT budgets.  

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Linda Calbom, (202) 512-8341 or calboml@gao.gov: 

Acknowledgments: 

Staff members who made key contributions to this report include 
Kimberly Brooks (Assistant Director), Theresa Bowman, Lisa Crye, Abe 
Dymond, Diane Morris, Michelle Smith, and Edward Tanaka. 

[End of section] 

Related GAO Products: 

Medicaid Integrity: Implementation of New Program Provides 
Opportunities for Federal Leadership to Combat Fraud, Waste, and Abuse. 
GAO-06-578T. Washington, D.C.: March 28, 2006. 

Medicaid Fraud and Abuse: CMS's Commitment to Helping States Safeguard 
Program Dollars Is Limited. GAO-05-855T. Washington, D.C.: June 28, 
2005. 

Medicaid: States' Efforts to Maximize Federal Reimbursements Highlight 
Need for Improved Federal Oversight. GAO-05-836T. Washington, D.C.: 
June 28, 2005. 

Medicaid Financing: States' Use of Contingency-Fee Consultants to 
Maximize Federal Reimbursements Highlights Need for Improved Federal 
Oversight. GAO-05-748. Washington, D.C.: June 28, 2005. 

Health Care Fraud and Abuse Control Program: Results of Review of 
Annual Reports for Fiscal Years 2002 and 2003. GAO-05-134. Washington, 
D.C.: April 29, 2005. 

High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 
2005. 

Medicaid Program Integrity: State and Federal Efforts to Prevent and 
Detect Improper Payments. GAO-04-707. Washington, D.C.: July 16, 2004. 

Medicaid: Intergovernmental Transfers Have Facilitated State Financing 
Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004. 

Medicaid: Improved Federal Oversight of State Financing Schemes Is 
Needed. GAO-04-228. Washington, D.C.: February 13, 2004. 

Major Management Challenges and Program Risks: Department of Health and 
Human Services. GAO-03-101. Washington, D.C.: January 2003. 

Medicaid Financial Management: Better Oversight of State Claims for 
Federal Reimbursement Needed. GAO-02-300. Washington, D.C.: February 
28, 2002. 

FOOTNOTES 

[1] A list of related GAO products is provided at the end of this 
report. 

[2] GAO, Medicaid Financial Management: Better Oversight of State 
Claims for Federal Reimbursement Needed, GAO-02-300 (Washington, D.C.: 
Feb. 28, 2002). 

[3] GAO, Major Management Challenges and Program Risks: Department of 
Health and Human Services, GAO-03-101 (Washington, D.C.: January 2003). 

[4] Congress enacted the HCFAC program as part of the Health Insurance 
Portability and Accountability Act of 1996 to consolidate and 
strengthen ongoing efforts to combat fraud and abuse in health care 
programs, including the Medicare and Medicaid programs. Pub. L. No. 104-
191, tit. II, 110 Stat. 1936, 1991 (Aug. 21, 1996). The legislation 
required the establishment of the national HCFAC program and it 
established the HCFAC account within the Medicare Federal Hospital 
Insurance Trust Fund, which is funded by appropriations out of the 
Trust Fund. 

[5] As of April 25, 2006, 10 funding specialists were assigned to the 
central office and 80 were assigned to the regional offices and 
deployed to the states. There were 10 vacant positions in the regional 
offices. 

[6] We have other ongoing work related to CMS's review process of 
proposed state plan amendments and plan to report our results later 
this year. 

[7] Institutional reimbursement state plan amendments describe how 
states will reimburse institutions, mainly hospitals and nursing homes, 
for services they provided to Medicaid-eligible individuals. 
Noninstitutional reimbursement state plan amendments cover payments to 
providers of services, mainly physicians. 

[8] Noninstitutional reimbursement amendments are still approved by 
regional offices. According to CMS officials, the number of 
noninstitutional reimbursement amendments is quite voluminous compared 
to institutional-related amendments, but the institutional amendments 
involve much larger reimbursement amounts. 

[9] Kaiser Commission on Medicaid and the Uninsured, Medicaid's Federal-
State Partnership: Alternatives for Improving Financial Integrity 
(February 2004), p. 20. 

[10] Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002). 

[11] For additional information on the PERM project, see GAO, Improper 
Payments: Federal and State Coordination Needed to Report National 
Improper Payment Estimates on Federal Programs, GAO-06-347 (Washington, 
D.C.: Apr. 14, 2006). 

[12] Targeted case management services are services which assist an 
individual in gaining access to needed medical, social, education, and 
other services. Proposed changes are estimated to save $2.1 billion 
over 10 years. 

[13] CMS has been working with states to terminate certain funding and 
payment practices. We have other ongoing worked related to CMS's 
oversight of these payment arrangements and plan to report our results 
later this year. 

[14] According to a CMS official, its Medicaid staff resources 
allocated to supporting or overseeing states' antifraud and abuse 
operations was an estimated 6.1 FTEs--2.6 FTEs at headquarters and 3.5 
FTEs in the regional offices. 

[15] As we have reported in the past, CMS has only conducted about 
eight state compliance reviews a year due to staffing and funding 
constraints. 

[16] Pub. L. No. 109-171, § 6034, 120 Stat. 3, 74-78 (2006). 

[17] Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993). See 5 U.S.C. 
§306. 

[18] 5 U.S.C. § 306. 

[19] Kaiser, p. 11. 

[20] Discretionary funds are appropriated from the Trust Fund to the 
HCFAC account to cover HCFAC program costs in amounts the Secretary of 
HHS and the Attorney General certify as necessary. 42 U.S.C. § 
1395i(k)(3)(A)(i). 

[21] GAO, Standards for Internal Control in the Federal Government, 
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

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