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United States Government Accountability Office: 
GAO: 

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

June 2013: 

Medicaid Demonstration Waivers: 

Approval Process Raises Cost Concerns and Lacks Transparency: 

GAO-13-384: 

GAO Highlights: 

Highlights of GAO-13-384, a report to the Ranking Member, Committee on 
Finance, U.S. Senate. 

Why GAO Did This Study: 

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

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

What GAO Found: 

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

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

Table: Comparison of 5-Year Medicaid Spending Limits as Approved by 
the Department of Health and Human Services (HHS) and as Estimated 
Using Benchmark Growth Rates and Actual Costs for Selected 
Demonstrations Approved between January 2007 and May 2012: 

Dollars in millions, federal and state spending:	 

State: Arizona; 
HHS-approved: $72,679; 
GAO estimate using benchmark growth rates and actual costs: $46,382; 
Difference: $26,297. 

State: Indiana; 
HHS-approved: $10,626; 
GAO estimate using benchmark growth rates and actual costs: $10,211; 
Difference: $416. 

State: Rhode Island; 
HHS-approved: $12,075; 
GAO estimate using benchmark growth rates and actual costs: $11,303; 
Difference: $772. 

State: Texas; 
HHS-approved: $142,394; 
GAO estimate using benchmark growth rates and actual costs: $137,987; 
Difference: $4,567. 

State: Total; 
HHS-approved: $237,774; 
GAO estimate using benchmark growth rates and actual costs: $205,723; 
Difference: $32,051. 

Source: GAO analysis of HHS data. 

[End of table] 

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

What GAO Recommends: 

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

View [hyperlink, http://www.gao.gov/products/GAO-13-384]. For more 
information, contact Katherine Iritani at (202) 512-7114 or 
iritanik@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

New Demonstrations Allowed States to Change How They Used Federal 
Funds, and to Implement New Coverage Strategies: 

For 4 of 10 Reviewed Demonstrations, HHS's Policy and Process for 
Approving Spending Limits Did Not Provide Assurances That 
Demonstrations Will Not Increase Federal Costs: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Summary of Submitted and Reviewed Applications for 
Comprehensive Section 1115 Medicaid Demonstrations: 

Appendix II: A Summary of Key Features of Recent Demonstrations: 

Appendix III: Comments from the Department of Health and Human 
Services: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Comparison of 5-Year Medicaid Spending Limits Approved by the 
Department of Health and Human Services (HHS) and Estimated Spending 
Limits Using Benchmark Growth Rates and Actual Costs: 

Table 2: Comparison of Growth Rates Approved by the Department of 
Health and Human Services (HHS) for the Arizona Medicaid Demonstration 
and Benchmark Growth Rates: 

Table 3: Comparison of Growth Rates Approved by the Department of 
Health and Human Services (HHS) for the Indiana Medicaid Demonstration 
and Benchmark Growth Rates: 

Table 4: National and State-Historical Growth Rates that the 
Department of Health and Human Services (HHS) Compared in Selecting a 
Base Year and Approving the Rhode Island Medicaid Demonstration: 

Table 5: Status of Comprehensive Section 1115 Medicaid Demonstration 
Applications, by State, Submitted to the Department of Health and 
Human Services (HHS) from January 2007 through May 2012: 

Figure: 

Figure 1: Overview of the Department of Health and Human Services' 
(HHS) Process for Projecting the Future Cost of a State's Existing 
Medicaid Program: 

Abbreviations: 

CHIP: State Children's Health Insurance Program: 

CHIPRA: Children's Health Insurance Program Reauthorization Act of 
2009: 

CMS: Centers for Medicare & Medicaid Services: 

DSH: Disproportionate Share Hospital: 

DSRIP: Delivery System Reform Incentive Payment: 

FMAP: Federal Medical Assistance Percentage: 

FPL: federal poverty level: 

HHS: Department of Health and Human Services: 

HIP: Healthy Indiana Plan: 

OMB: Office of Management and Budget: 

PPACA: Patient Protection and Affordable Care Act: 

SNCP: Safety Net Care Pool: 

UC: Uncompensated Care: 

UPL: Upper Payment Limit: 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

June 25, 2013: 

The Honorable Orrin G. Hatch: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

Dear Senator Hatch: 

The Medicaid program--a $436 billion joint federal-state program that 
finances health care coverage for low-income populations, including 
children and aged or disabled adults--involves significant and growing 
expenditures for the federal government and states. Under section 1115 
of the Social Security Act, the Secretary of Health and Human Services 
may waive certain federal Medicaid requirements and allow costs that 
would not otherwise be covered for experimental, pilot, or 
demonstration projects that are likely to promote Medicaid objectives. 
[Footnote 1] These demonstrations also allow states to test and 
evaluate new approaches for delivering Medicaid services.[Footnote 2] 
In fiscal year 2011, $57.5 billion in federal funds, or about one-
fifth of the $260 billion in federal Medicaid expenditures, were for 
services, coverage initiatives, and delivery system redesigns provided 
under section 1115 demonstrations in 40 states. For 10 of these 
states, more than half of their total federal Medicaid expenditures 
were for section 1115 demonstrations. 

Under Department of Health and Human Services (HHS) policy, section 
1115 demonstrations should not be approved unless they are budget 
neutral to the federal government; that is, the federal government 
will spend no more under a state's demonstration than it would have 
spent without the demonstration.[Footnote 3] Budget neutrality 
generally is not a statutory requirement; however, HHS's policy 
requires states to show that their demonstrations will be budget 
neutral as part of their application to HHS. Once approved, each 
demonstration operates under a negotiated budget neutrality agreement 
that places a limit on federal Medicaid spending over the life of the 
demonstration. In assessing a state's projected spending limit, HHS's 
policy calls for using estimates of growth that are the lower of: (1) 
the state's historical growth for Medicaid in recent years, or (2) the 
President's budget Medicaid trend rate projected for the nation. The 
lower rate is referred to as the benchmark growth rate.[Footnote 4] 

We have had long-standing concerns with HHS's policy, process, and 
criteria for reviewing and approving section 1115 demonstrations, 
including the absence of a federal process for obtaining public input 
and a lack of transparency in the basis for approved spending limits. 
[Footnote 5] For example, we previously found that although some 
demonstrations had the potential to significantly affect 
beneficiaries, advocates and others had not had an opportunity to 
review and provide input prior to the demonstrations' approval. In 
recent years, Congress and HHS, however, have taken significant steps 
to improve the review and approval process, by establishing a public 
input process at the federal level before demonstrations are approved. 
[Footnote 6] We have also reported that HHS had approved spending 
limits that included impermissible costs in the baselines, that 
included hypothetical costs in the baselines, or that exceeded 
benchmark growth rates. As a result of these findings, we made 
recommendations to HHS in 2002 and 2004 to take certain steps to 
improve the budget neutrality process, such as (1) clarifying the 
criteria for reviewing and approving states' demonstration spending 
limits, (2) better ensuring that valid methods are used to demonstrate 
budget neutrality, and (3) documenting material explaining the basis 
for any approvals and making the material public.[Footnote 7] In a 
2008 report, because HHS disagreed with these recommendations, we 
suggested that Congress consider requiring that HHS take these actions 
to improve the section 1115 demonstration review process.[Footnote 8] 
These issues, however, have not yet been addressed. 

You expressed interest in the section 1115 demonstrations approved by 
HHS since we last reviewed selected demonstrations, which were 
approved from July 2004 through December 2006.[Footnote 9] For this 
report, we reviewed a selection of new comprehensive section 1115 
demonstration proposals approved since 2007 for (1) the purpose of the 
demonstrations, and (2) the extent to which HHS's policy and process 
for reviewing proposed spending under the demonstrations provides 
assurances that federal costs will not increase. 

To describe the purpose of new comprehensive demonstrations HHS has 
approved since 2007, we reviewed all those approved from January 2007 
through May 2012 and that were still operating in May 2012. We 
excluded demonstrations that were extensions and amendments of 
previously approved demonstrations and those that were not 
comprehensive, that is, they were limited to one category of services. 
We also excluded demonstrations that extended coverage to new 
populations in response to Medicaid expansion, which can begin in 2014 
under the Patient Protection and Affordable Care Act (PPACA).[Footnote 
10] We identified demonstrations submitted by 10 states that met these 
criteria: Arizona, the District of Columbia, Idaho, Indiana, Michigan, 
Missouri, New Mexico, Rhode Island, Texas, and Wisconsin.[Footnote 11] 
We reviewed application and approval documents for each demonstration, 
and interviewed HHS officials.[Footnote 12] We used certain 
characteristics to describe the purpose of the demonstrations, such as 
whether the demonstrations changed how the states used federal funds, 
expanded Medicaid coverage to a new population of beneficiaries, and 
implemented new cost sharing requirements. 

To assess the extent to which HHS's policy and process provides 
assurances that federal costs will not increase over what they would 
have been in the absence of the demonstration, we reviewed HHS's 
policy. We also reviewed the documentation for the 10 new 
comprehensive demonstrations selected for the first objective and 
budget neutrality analyses prepared by the states and submitted to 
HHS. We examined the basis of HHS's approved federal and state 
combined spending limit for each demonstration, and determined whether 
HHS followed its policy for determining budget neutrality. We then 
compared the spending limits approved by HHS with our estimates of the 
spending limits. We calculated our estimate of the spending limits in 
accordance with HHS's policy by using the most recent year of 
expenditures provided by the state for the base year, and the lower of 
either the state's historical average cost growth rate or the estimate 
of the Medicaid national growth rate developed by the Centers for 
Medicare & Medicaid Services (CMS) actuary. We then estimated the 
federal share of the spending limits using the 2012 Federal Medical 
Assistance Percentage (FMAP) for each state.[Footnote 13] In our 
assessment, we did not trace the underlying spending and enrollment 
data used to develop spending limits to source documentation on 
spending or determine whether the baseline expenditures included 
impermissible costs. To the extent baseline spending or enrollment 
were overstated or understated, our estimates of benchmark spending 
limits could also be overstated or understated. We determined that the 
data were sufficiently reliable for the purpose of examining the 
information that HHS used in making its decisions about budget 
neutrality. To supplement our reviews, we interviewed HHS and Office 
of Management and Budget (OMB) officials about HHS's policy and 
process for setting spending limits for demonstrations, the basis of 
the spending limits for the 10 demonstrations, and the steps taken to 
ensure the quality of the data used to set spending limits. We did not 
obtain documentation from state officials or discuss demonstration 
proposals, approvals, and cost data with state officials. 

We conducted this performance audit from June 2012 to June 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Each state administers its Medicaid program in accordance with its own 
Medicaid plan, which determines the groups of individuals to be 
covered, services to be provided, methodologies for providers to be 
reimbursed, and the administrative requirements that states must meet. 
To receive federal matching dollars for services provided to Medicaid 
beneficiaries, each state must submit a Medicaid plan for review and 
approval by HHS. States must meet certain federal requirements, but 
have flexibility beyond these federal parameters. For example, states 
must cover certain "mandatory" populations and benefits, but they have 
the option of covering "optional" categories of individuals and 
benefits. Coverage of optional populations and benefits varies across 
the states.[Footnote 14] States may also choose from different 
delivery systems, such as fee-for-service or managed care.[Footnote 15] 

States pay health care providers for covered services provided to 
Medicaid beneficiaries based on provider claims for services rendered. 
States generally make two types of supplemental payments to certain 
providers--payments separate from and in addition to those made to 
providers using regular Medicaid payment rates. Under federal law, 
states are required to make Disproportionate Share Hospital (DSH) 
payments to hospitals that serve a disproportionate share of low-
income and Medicaid patients, in addition to regular Medicaid 
payments. Hospitals are subject to an annual limit on DSH payments, 
defined as the hospitals' uncompensated care costs for Medicaid and 
uninsured patients minus Medicaid payments, and payments made on 
behalf of uninsured patients.[Footnote 16] States also make other 
supplemental payments, which are often referred to as non-DSH 
supplemental payments or "Upper Payment Limit (UPL) payments" to 
providers such as hospitals and nursing homes. These payments are 
based on the difference between Medicaid payments for services using 
regular Medicaid payment rates and the UPL, which is the ceiling on 
federal reimbursement.[Footnote 17] In general, the use of managed 
care to deliver Medicaid services precludes states from making UPL 
payments to providers because states are prohibited from making such 
payments for services provided under a managed care contract.[Footnote 
18] 

Medicaid Section 1115 Demonstrations: 

Generally, the authority provided to the Secretary of Health and Human 
Services by section 1115 of the Social Security Act allows states to 
expand Medicaid coverage through demonstration projects to "expansion" 
populations that would not otherwise be eligible under traditional 
Medicaid programs. These demonstrations provide a way for states to 
innovate outside of many of Medicaid's otherwise applicable 
requirements. For example, states may test ways to obtain savings or 
efficiencies in how they deliver services in order to cover expansion 
populations. Under a demonstration, states may also alter their 
Medicaid benefit package for categories of covered populations. 
Without this authority, states generally would be required to provide 
covered benefits in the same amount, duration, and scope to all 
beneficiaries covered under the state plan. 

States may have more than one comprehensive demonstration. For 
example, New Jersey had one demonstration targeted at expanding 
coverage to uninsured childless adults, and a separate demonstration 
targeted at expanding coverage to uninsured parents of Medicaid-
eligible children. Both these demonstrations are comprehensive because 
they provide a broad range of services to these populations. States 
may also administer a large portion of their Medicaid program under a 
demonstration. For example, in Vermont, nearly all of the state's 
Medicaid expenditures in fiscal year 2011 were for costs associated 
with a demonstration. 

Generally, to extend Medicaid to any previously uncovered populations 
or receive federal Medicaid matching funds for otherwise unallowable 
costs under the terms of a section 1115 demonstration, states must 
establish that the demonstration is budget neutral. To do so, states 
must show that their plans for changing their Medicaid program will 
generate savings to Medicaid, or they must get approval for 
redirecting existing Medicaid funding to cover the expected costs of 
the demonstration. For example: 

* States have expanded the population eligible for Medicaid coverage 
by implementing managed care. In these demonstrations, states 
established budget neutrality by showing they would achieve savings 
from enrollment in managed care that could be used to cover new 
populations under the demonstration. 

* States also have been approved by HHS to redirect certain categories 
of federal Medicaid funding for new purposes under the demonstration. 
Specifically, states have received approval to use all or a portion of 
their DSH allotments to cover previously ineligible individuals and 
costs under their demonstrations. 

* States also have expanded coverage to previously ineligible 
populations, but in order to maintain budget neutrality, have provided 
the expansion population with a reduced benefit package--such as not 
covering inpatient hospital care--as compared to the typical benefits 
provided to Medicaid beneficiaries. Other strategies have included 
imposing higher cost-sharing on services or capping enrollment for 
expansion populations. 

Review Responsibilities for Demonstrations: 

States submit applications for section 1115 demonstrations to HHS. If 
HHS approves the demonstration, it is typically approved for a 5-year 
period.[Footnote 19] States that want to renew an existing 
demonstration have the option of requesting an extension or submitting 
an application for a new demonstration. States that submit an 
application for a new demonstration instead of an extension would need 
to terminate the existing demonstration, and would be required to 
notify beneficiaries of potential changes in coverage. A federal 
review team examines applications for both new demonstrations and 
extensions. The review team is led by CMS and includes representatives 
from OMB; from other agencies within HHS as applicable, such as the 
Substance Abuse and Mental Health Services Administration providing a 
review of waivers that affect mental health; and HHS Secretarial 
offices including the Assistant Secretary for Planning and Evaluation 
and the Assistant Secretary for Financial Resources. CMS's Office of 
the Actuary provides nationwide data on projected Medicaid cost 
growth, but is not part of the federal review team. The federal review 
may consist of negotiations, including the exchange of questions and 
answers between the review team and the state. In approving 
applications, HHS might not approve all components of the states' 
request contained in their applications. (See appendix I for a 
discussion of applications that were submitted and reviewed between 
January 2007 and May 2012.) 

Determining Budget Neutrality for Demonstrations: 

According to HHS's policy, spending limits are based on the projected 
cost of continuing states' existing Medicaid programs without a 
demonstration. The higher the projected costs, the more federal 
funding states are eligible to receive. The spending limits can be 
either an annual per person limit or an aggregate spending limit that 
remains fixed for the entire length of the demonstration, or a 
combination of both. HHS policy states that demonstration spending 
limits will be calculated from two components: 

* Spending base. States select a recently completed year that 
establishes base levels of expenditures for populations included in 
the proposed demonstration--a state's "spending base." States also 
identify beneficiary groups for inclusion in the proposed 
demonstration. For example, demonstrations may include beneficiary 
groups, such as aged, blind and disabled, or families with children. 
However, the spending base must exclude certain base year 
expenditures, such as impermissible provider payments. 

* Growth rates. States should submit to HHS 5 years of historical data 
for per person costs and beneficiary enrollment in their existing 
Medicaid program. HHS's policy states that spending limits should be 
based on a benchmark growth rate, which is the lower of state-specific 
historical growth or the estimates of nationwide growth for the 
beneficiary groups included in the demonstration.[Footnote 20] The 
policy indicates that states, in providing HHS with state-specific 
historical growth rates, must also provide quantified explanations of 
any unusual changes in the trends. Nationwide projections of cost 
growth are developed by CMS actuaries to assist OMB in preparing the 
President's budget. Growth rates for determining budget neutrality can 
vary for different eligibility groups. For example, the nationwide 
estimates of per capita cost growth in Medicaid for fiscal year 2012 
were 6.0 percent for children, 3.4 percent for aged individuals, 2.6 
percent for blind and disabled individuals, and 2.5 percent for adults. 

Figure 1 illustrates steps used to set spending limits for proposed 
section 1115 demonstrations. 

Figure 1: Overview of the Department of Health and Human Services' 
(HHS) Process for Projecting the Future Cost of a State's Existing 
Medicaid Program: 

[Refer to PDF for image: illustration] 

Establish spending base: 
* Select a recent (base) year to establish a spending base for making 
projections; 
* Identify beneficiaries and programs that will be covered by the 
demonstration’s terms and conditions[A]; 
* Determine costs associated with these beneficiaries and programs in 
the base year. 

Establish per person cost growth rates: 
* State-specific growth rate: based on beneficiary cost and enrollment 
data from a 5-year historical period; 
compared to: 
* Nationwide growth rate: based on estimates of beneficiary cost and 
enrollment growth nationwide used to develop the President’s budget; 
* HHS guidelines call for selecting the lower of the two growth rates. 

Apply growth rates to base year and establish spending limits: 
* Establish total projected costs of the existing Medicaid program by 
multiplying spending base by per person cost growth rates for each of 
5 years proposed for the demonstration; 
* Set spending limits for demonstration based on total projected costs 
of existing Medicaid program for populations included in the 
demonstration. 

Source: GAO analysis of HHS information. 

[A] For example, a state may propose, that certain groups of 
beneficiaries, such as aged and disabled beneficiaries, will operate 
under the terms of the state's approved state Medicaid plan rather than 
under the terms of the demonstration. 

[End of figure] 

Some types of section 1115 demonstrations are not required to follow 
this process for determining spending limits. Specifically, for 
demonstrations that redirect a state's federal DSH funding, HHS policy 
is to base the spending limit on the lower of the state's DSH 
allotment or actual DSH expenditures prior to the demonstration. 
[Footnote 21] In addition, there is another group of recent section 
1115 demonstrations pursuant to which federal law has defined how to 
calculate budget neutrality. Specifically, under the Children's Health 
Insurance Program Reauthorization Act of 2009 (CHIPRA), states with 
existing section 1115 demonstrations covering childless adults using 
State Children's Health Insurance Program (CHIP) funding were required 
to end these projects.[Footnote 22] States, however, could apply and 
receive approval for new section 1115 demonstrations through which 
they could continue to cover childless adults using Medicaid funds. 
CHIPRA required that these new demonstrations be budget neutral, and 
required HHS to use a defined process of identifying the spending base 
and growth rates for demonstration spending limits. 

New Demonstrations Allowed States to Change How They Used Federal 
Funds, and to Implement New Coverage Strategies: 

The 10 new comprehensive section 1115 demonstrations we examined 
focused on implementing ways of using federal funds to pay for 
services not typically covered under Medicaid. All 10 demonstrations 
were approved to implement different coverage strategies or cost 
sharing for certain beneficiary populations. Appendix II provides a 
brief summary of the key features of 10 demonstrations. 

HHS's Approvals Allowed Two States to Establish Funding Pools to Make 
New Types of Supplemental Payments: 

Two states we reviewed--Arizona and Texas--obtained the authority 
under their section 1115 demonstrations to establish funding pools for 
purposes of making supplemental payments and to receive federal 
matching funds for these payments. 

Arizona Health Care Cost Containment System: 

As approved, Arizona's section 1115 demonstration allows the state to 
make new types of supplemental payments to providers, and allowed the 
state to establish a funding pool from which these payments could be 
made. Arizona has operated a comprehensive section 1115 demonstration 
for many years, under which the majority of the Medicaid population is 
enrolled in managed care. Under its previous demonstration, the state 
made DSH payments to hospitals, but did not make UPL payments to its 
providers because the majority of services were provided under managed 
care contracts. UPL payments for services provided under managed care 
are generally prohibited under federal regulations. In March 2011, the 
state requested to terminate its existing section 1115 demonstration 
in order to limit coverage of certain adult populations.[Footnote 23] 
Subsequently, the state received approval for a new demonstration that 
continued the existing managed care delivery system, granted the 
authority for the state to make new types of supplemental payments to 
providers through a Safety Net Care Pool (SNCP), and expanded coverage 
to certain populations. 

Under the demonstration, the state obtained the authority to claim 
federal matching funds for new types of supplemental payments made to 
providers from SNCP. The state did not commit any state funds for 
these supplemental payments and instead relied on the contributions of 
eligible government entities for the nonfederal share of payments. 
According to HHS officials, because these supplemental payments were 
created under the authority of the demonstration, they were not 
subject to certain federal requirements that would otherwise apply. 
For example, officials reported that they did not consider these to be 
DSH payments and therefore the federal reimbursement for SNCP payments 
exceeds the maximum amount Arizona is allowed to receive under its DSH 
allotment.[Footnote 24] They were not considered to be UPL payments 
and therefore could be made even when services were provided under a 
managed care contract. According to HHS officials, the terms and 
conditions of the demonstration defined requirements for these 
payments. For example, under the terms and conditions, as the SNCP 
payments were Medicaid payments, HHS required they be subject to 
certain requirements when made to DSH hospitals. Specifically, SNCP 
payments received for inpatient or outpatient hospital costs were 
required to be counted against each hospital's annual DSH payment 
limit.[Footnote 25] 

The terms and conditions of Arizona's demonstration also included 
other federal requirements and limits for the SNCP payments. 
Specifically: 

* For each year of the demonstration, the state was allowed to make up 
to $332 million--total federal and nonfederal funds--in payments to 
hospitals, clinics, and other nonhospital providers that have high 
levels of uncompensated care for medical services provided to Medicaid 
eligible and uninsured individuals.[Footnote 26] Demonstration 
requirements also limited these SNCP payments for individual 
providers' to their costs of delivering services to Medicaid and 
uninsured individuals,[Footnote 27] and prohibited SNCP payments for 
nonemergency services provided to noncitizens who were not eligible 
for Medicaid. 

* In addition to the $332 million, the state was allowed, for the 
first 2 years of the demonstration, to make up to $20 million--total 
federal and nonfederal funds--in payments that were previously made 
under a state-funded health program. Specifically, the state was 
approved to make payments to hospital trauma centers, hospital 
emergency departments, and rural hospitals across the state for 
clinical, professional, and operational costs. These payments were 
intended to help hospitals manage their uncompensated care costs. 
Prior to the demonstration, these were entirely state-funded payments 
that Arizona voters approved in 2002. 

Other features of Arizona's demonstration included expanding coverage 
to two groups of children: children with family income at or below 175 
percent of the federal poverty level (FPL), who were not otherwise 
eligible for Medicaid; and children up to age 19 with incomes between 
100 and 200 percent of the FPL, who had access to employer sponsored 
health care coverage, and were not otherwise eligible for Medicaid. 
Total funding--federal and nonfederal funds--available for expansion 
was capped at about $77 million each year by the demonstration. The 
state was also allowed to extend the length of Medicaid coverage for 
postpartum women from the typical 60 days to 24 months. The total cost 
allowed for this program--federal and nonfederal--was $20 million. 

Texas Healthcare Transformation and Quality Improvement Demonstration: 

Two of the purposes of the Texas section 1115 demonstration were to 
allow the state to expand its use of managed care statewide, and to 
authorize new supplemental payments through two new funding pools. 
Prior to the demonstration, the state provided services to most of the 
state's Medicaid population on a fee-for-service basis. Under this 
system, hospitals provided services to Medicaid-covered individuals 
and then submitted bills to the state for reimbursement based on the 
state's regular Medicaid payment rates. In addition, the state made 
DSH payments and UPL payments for hospital services provided on a fee-
for-service basis. 

Under the demonstration, HHS approved two new types of supplemental 
payments to be distributed through two funding pools. In creating 
these pools, the state did not commit any state funds and instead 
relied on the contributions of eligible government entities for the 
nonfederal share of payments.[Footnote 28] Under one pool, called the 
Uncompensated Care (UC) pool, the state could obtain federal matching 
funds on provider payments totaling up to $17.6 billion over the 5-
year term of the demonstration.[Footnote 29] Under the second pool, 
called the Delivery System Reform Incentive Payment (DSRIP) pool, the 
state could obtain federal matching funds on provider payments 
totaling up to $11.4 billion over the 5-year term of the 
demonstration. The demonstration significantly increased the amount of 
federal funding Texas could claim for the two new types of 
supplemental payments. For example, in fiscal year 2011--the year 
prior to the demonstration--the state claimed federal matching funds 
on about $2.6 billion in UPL payments. Under the demonstration, the 
state was authorized to receive federal matching funds on $4.2 billion 
in payments made in the first year of the demonstration and on $6.2 
billion in payments made in each of the remaining 4 years of the 
demonstration. 

HHS officials told us that because the UC pool payments were created 
under the demonstration, they were not DSH or UPL payments and 
therefore were not subject to the federal requirements that govern 
those payments. Thus, as with Arizona, these payments were in addition 
to, and not limited by, the maximum cap on federal matching that was 
provided to the state under its DSH allotment.[Footnote 30] Officials 
told us the UC pool payments also were not considered to be UPL 
payments and could be made for services provided to individuals 
enrolled in managed care. According to HHS, the terms and conditions 
of the demonstration established requirements and limits for the UC 
pool payments. Among other things, the terms and conditions required 
that these payments be limited to individual providers' uncompensated 
costs of delivering services to Medicaid beneficiaries and uninsured 
individuals.[Footnote 31] Further, as with Arizona, because the UC 
pool payments were Medicaid payments, the payments for inpatient or 
outpatient hospital costs were required to be counted against the 
amount of DSH payments that an individual hospital could receive. The 
terms and conditions also allowed the state to make these Medicaid 
supplemental payments to a variety of providers for serving Medicaid 
and uninsured individuals. These providers included physician-practice 
groups, government ambulance providers, government dental providers, 
and rural health providers with no public hospitals. 

The terms and conditions also established requirements for the DSRIP 
pool. According to these, the DSRIP pool was established to provide 
incentive payments to hospitals related to infrastructure and health 
care redesign changes as Texas prepared for the increase in Medicaid 
enrollment that was expected under PPACA beginning in 2014. The state 
received approval to make payments related to four main areas: (1) 
infrastructure development, which included hiring more physicians and 
the use of electronic health records systems at the provider level; 
(2) program innovation and redesign, which included implementing 
strategies, such as reducing inappropriate use of the emergency room 
and patient center care models; (3) quality improvements, which 
included interventions to reduce and manage chronic disease; and (4) 
population-focused improvements, which included obtaining data to 
monitor changes in health status and measuring preventive health 
activities. Like the UC pool payments, HHS officials told us that 
these payments are not subject to federal requirements that would 
apply to DSH and UPL payments, and instead are governed solely by the 
terms and conditions of the demonstration.[Footnote 32] However, 
unlike UC pool payments, DSRIP payments are incentive payments and not 
reimbursement for providing health care services. Consequently, HHS 
does not require these payments to be counted against the amount of 
DSH payments a hospital could receive under its hospital specific DSH 
limit. 

The DSRIP payments were approved by HHS under the expectation that the 
state would be expanding its Medicaid coverage under PPACA; however, 
since the demonstration's approval, the state has not confirmed that 
it intends to expand Medicaid to new populations allowed under PPACA. 
At the time Texas's demonstration was approved, PPACA required all 
states to expand Medicaid coverage to a new mandatory category of low-
income individuals, and states were eligible to receive enhanced 
federal funding for this population beginning in January of 
2014.[Footnote 33] However, subsequent to this approval, the U.S. 
Supreme Court ruled that any state that chooses not to expand Medicaid 
coverage will not be subject to a penalty of losing Medicaid funding 
for the entire program, and instead will only forgo the enhanced 
funding for that population, therefore making the expansion a choice 
for the states.[Footnote 34] In June 2013, a state law was enacted 
that would prohibit the state Medicaid agency from expanding Medicaid 
coverage.[Footnote 35] In general, HHS can withdraw authorities to 
claim federal funding for expenditures under demonstrations in certain 
circumstances, including if it determines that the approval no longer 
promotes the objectives of the Medicaid program. However, HHS 
officials stated that the delivery system improvements that will 
result from the DSRIP pool payments will benefit low-income and 
Medicaid populations, whether the state expands Medicaid or not. HHS 
does not plan to revisit the terms and conditions of the Texas 
demonstration as it relates to the DSRIP pool, even if the state does 
not expand Medicaid as provided under PPACA. 

HHS Approvals Allowed Four States to Redirect DSH Funds Primarily to 
Expand Coverage to New Populations: 

Indiana, the District of Columbia, Wisconsin, and Missouri were 
allowed to redirect all or a portion of their federal DSH allotment, 
primarily to cover populations made eligible for Medicaid under the 
terms of the demonstration. Three of the states--Indiana, the District 
of Columbia, and Wisconsin--were approved to use at least some of 
their DSH allotment solely for coverage expansion. 

* Indiana was allowed to use a portion of its DSH allotment to pay for 
services for a new population of about 36,000 higher-income parents 
and childless adults.[Footnote 36] 

* The District of Columbia demonstration expanded full Medicaid 
coverage to childless adults with incomes higher than the income level 
that would qualify them for Medicaid coverage under PPACA beginning in 
2014--over 133 percent of the FPL. Individuals in this expansion 
population were previously covered under a local program for which the 
District of Columbia did not receive federal matching funds.[Footnote 
37] 

* Wisconsin was approved to expand its plan to an estimated 35,000 
childless adults, providing them with benefits, such as physician and 
hospital services. 

The fourth state, Missouri, was also approved to redirect a portion of 
its DSH allotment for new purposes established under the 
demonstration, including, among other things, providing coverage to 
previously ineligible populations. Missouri was also allowed to 
redirect a portion of its DSH funds for payments for other purposes, 
as authorized under the demonstration, including: 

* payments to health clinics that provided ambulatory services to 
uninsured and indigent populations in and near St. Louis;[Footnote 38] 

* payments for administrative costs--nonhospital services--to a health 
commission, which will coordinate, monitor, submit reports on the 
demonstration's activities, and make recommendations for payment 
allocations;[Footnote 39] 

* a program that educated patients on primary care and proper use of 
the emergency room;[Footnote 40] and: 

* the initiation of a coverage expansion pilot that would provide a 
limited primary care benefit package and test the use of a voucher 
system to provide acute hospital services when needed by individuals 
in the pilot expansion population. 

HHS Approved a Global Cap for One State's Demonstration: 

Under the Rhode Island demonstration, HHS allowed a funding approach 
that established an overall spending--or global cap--on the federal 
matching funds for the state's Medicaid program. This cap puts the 
state at risk for any expenditures in excess of the cap, as the state 
is required to continue providing coverage for its Medicaid population 
using state funds. HHS gave the state new flexibility to manage its 
program by allowing Rhode Island to consolidate its Medicaid program 
under one comprehensive section 1115 demonstration, incorporating 
populations and services previously covered under the state plan, a 
previous section 1115 demonstration, and multiple other Medicaid 
waivers.[Footnote 41] According to HHS, this consolidation would allow 
Rhode Island to seamlessly provide services to individuals who 
previously had to qualify to receive services, such as home and 
community-based services through different programs that were governed 
by different rules and authorities. The state's proposal indicated 
that this flexibility would allow the state to better manage the use 
of long-term care and increase home and community-based services. 
Through the demonstration, the state also was given the flexibility to 
make certain programmatic changes to its Medicaid program without 
having to follow more formal procedures. For example, for certain 
changes, such as those that would otherwise need to be processed as an 
amendment to the Medicaid state plan or to the demonstration terms and 
conditions or that did not affect eligibility or benefits, the state 
was allowed to only notify HHS of the change.[Footnote 42] HHS 
officials noted that this was the first time they approved a test of 
this type of administrative flexibility. 

HHS's Approvals Allowed Three States to Use Medicaid Funds to Continue 
Coverage to Expansion Populations: 

Idaho, Michigan, and New Mexico were required by federal law to 
discontinue using CHIP funds to cover childless adults, but were 
allowed to continue services for this population with Medicaid funds 
under a new section 1115 demonstration. These three states each 
applied and received approval for new demonstrations to continue to 
provide coverage to childless adults, without expanding to any new 
populations. Under these demonstrations, various types of benefits 
were provided to the childless adult populations. For example, Idaho 
was approved to provide premium assistance for qualifying employer-
sponsored insurance, while Michigan and New Mexico were approved to 
provide coverage for services. Michigan was approved to limit benefits 
to outpatient services, and New Mexico was approved to provide 
coverage for both inpatient and outpatient services. 

States Were Approved to Implement Different Coverage Strategies and 
New Cost Sharing on Certain Populations through the Demonstrations: 

All 10 states we reviewed were approved to implement new ways of 
expanding coverage or imposing cost sharing requirements on different 
Medicaid populations. Examples of these strategies are presented below. 

* Arizona's demonstration allowed, for a limited time, the state to 
charge expansion enrollees a fee when they miss a physician 
appointment in order to encourage proper use of medical services. 
[Footnote 43] The demonstration also allowed the state to impose cost 
sharing for non-emergency use of the emergency room, as well as higher 
cost sharing for brand name drugs when a generic is available. 
[Footnote 44] 

* Indiana's demonstration allowed the state to establish a high-
deductible health plan and health care spending account for uninsured 
adults enrolled for coverage under the demonstration. Expansion 
enrollees must make specified contributions to their accounts, based 
on income levels, as a condition of continued enrollment. The accounts 
must be used by enrollees to pay for the cost of health care services 
until a deductible is reached; however, preventive services up to a 
maximum amount would be exempt from this requirement. The spending 
account was intended to provide incentives for participants to utilize 
services in a cost-efficient manner. This demonstration also allowed 
the state to impose an enrollment cap on the number of childless adult 
expansion enrollees for its health savings account program. 

* Three states--Idaho, Michigan, and New Mexico--were approved to 
continue some coverage strategies from their previous demonstrations. 
[Footnote 45] For example, Idaho's premium assistance demonstration 
required a 50 percent employer contribution toward the cost of the 
health benefit plan. Michigan's demonstration allowed the state to 
continue to provide a limited benefit package that focused on 
outpatient services and required prior authorization for some of these 
services. Finally, New Mexico's demonstration allowed the state to cap 
medical expenditures for each enrollee. 

* Rhode Island was allowed to form and pay for entities dedicated to 
reviewing the needs of enrollees eligible for long-term care. 
According to the state's proposal, this process facilitated the 
appropriate care setting by shifting care away from high-cost 
institutional settings when less costly home and community-based care 
was appropriate. The organization did this by helping enrollees decide 
how to manage their health care needs based on a distinction given to 
them as "highest need," "high need," or "preventive." This designation 
allowed the state to determine which cost-effective, long-term 
services an enrollee could receive. For example, those designated as 
highest need were approved to receive nursing home care, while those 
designated as preventive were approved to receive certain home health 
services. 

For 4 of 10 Reviewed Demonstrations, HHS's Policy and Process for 
Approving Spending Limits Did Not Provide Assurances That 
Demonstrations Will Not Increase Federal Costs: 

For 4 of 10 demonstrations we reviewed, HHS approved spending limits 
that were based on assumptions of cost growth that were higher than 
those reflected by the state's historical spending and the President's 
budget. In addition, in some cases the approved spending limits 
included costs in the base year that were hypothetical. If HHS had 
held spending limits in the four demonstrations to levels suggested by 
its policy, we estimate that the spending limits would have been $32 
billion lower over the 5-year term of the demonstrations. We also 
found that HHS's budget neutrality policy is out-dated, because it 
does not reflect HHS's current processes or provide assurances that 
data used for spending limits are reliable. 

HHS Approved Spending Limits for Four States Based on Growth 
Projections That Exceeded Benchmarks and Included Hypothetical Costs, 
with Limited Support: 

HHS approved spending limits for the Arizona, Indiana, and Rhode 
Island demonstrations that used growth rates that exceeded benchmark 
rates and, in the case of Texas, included hypothetical costs in the 
base year spending. HHS officials reported that their policy and 
process allow for negotiations in determining spending limits, 
including adjustments to the benchmark policy. However, HHS's policy 
does not specify criteria and methods for such adjustments or the 
documentation and support needed for adjustments. We found that the 
criteria and methods for making the adjustments in these states were 
not always clear or well supported. Our estimates show that, had HHS 
used benchmark growth rates and actual base year costs, the 5-year 
spending limits would have been almost $32 billion dollars lower than 
what was actually approved. The federal share of the $32 billion 
reduction would constitute an estimated $21 billion. (See table 1.) 

Table 1: Comparison of 5-Year Medicaid Spending Limits Approved by the 
Department of Health and Human Services (HHS) and Estimated Spending 
Limits Using Benchmark Growth Rates and Actual Costs: 

State: Arizona[B]; 
HHS-approved spending limit: $72.679 billion; 
Estimate of spending limit using benchmark growth rates and actual 
base year costs: $46.382 billion; 
Increase in spending in HHS approved spending limit: $26.297 billion; 
Estimated federal share of increase in spending limit[A]: $17.698 
billion. 

State: Indiana; 
HHS-approved spending limit: $10.626 billion; 
Estimate of spending limit using benchmark growth rates and actual 
base year costs: $10.211 billion; 
Increase in spending in HHS approved spending limit: $416 million; 
Estimated federal share of increase in spending limit[A]: $278 million. 

State: Rhode Island; 
HHS-approved spending limit: $12.075 billion; 
Estimate of spending limit using benchmark growth rates and actual base 
year costs: $11.303 billion; 
Increase in spending in HHS approved spending limit: $772 million; 
Estimated federal share of increase in spending limit[A]: $402 million. 

State: Texas; 
HHS-approved spending limit: $142.394 billion; 
Estimate of spending limit using benchmark growth rates and actual 
base year costs: $137.827 billion; 
Increase in spending in HHS approved spending limit: $4.567 billion; 
Estimated federal share of increase in spending limit[A]: $2.659 
billion. 

State: Total; 
HHS-approved spending limit: $237.774 billion; 
Estimate of spending limit using benchmark growth rates and actual 
base year costs: $205.723 billion; 
Increase in spending in HHS approved spending limit: $32.051; 
Estimated federal share of increase in spending limit[A]: $21.037 
billion. 

Source: GAO analysis of HHS data. 

Notes: These demonstrations were approved between January 2007 and May 
2012. Spending limits approved by HHS and our estimates of spending 
limits under HHS's policy reflect limits on total federal and state 
spending. We calculated spending limits under HHS's policy using the 
most recent year of expenditures provided by the state for the base 
year and benchmark growth rates, that is, the lower of either the 
state's historical average cost growth rate or the estimate of 
Medicaid cost growth nationwide provided by the Centers for Medicare & 
Medicaid Services' (CMS) actuary. We also excluded hypothetical costs. 
Column totals may not add due to rounding. 

[A] The estimated federal share is based on the 2012 Federal Medical 
Assistance Percentage (FMAP) for each of the four states. The federal 
government matches state Medicaid expenditures for most services 
according to the state's FMAP. A state's FMAP is calculated using a 
statutory formula based on the state's per capita income in relation 
to the national per capita income. 

[B] Amounts represent the spending limit for four of the six 
beneficiary groups included in the demonstration. For the remaining 
two groups, HHS's documentation did not include historical enrollment 
because they were new populations covered under the demonstration and 
no enrollment data existed. As a result, we could not calculate a 
spending limit for them. This figure also does not reflect other 
components of the demonstration's total spending limit, including a 
maximum of about $1.8 billion for supplemental payments to finance 
uncompensated care and other activities. 

[End of table] 

Arizona: 

HHS departed from its policy in selecting base year expenditures and 
benchmark growth rates for the approved Arizona spending limit without 
a clear rationale. Had actual base year expenditures and benchmark 
growth rates been used, the 5-year spending limit would have totaled 
about $26 billion less. HHS established the largest portion of the 
Arizona spending limit, per person spending, using an outdated 
baseline of projections of the costs of operating the program without 
the demonstration.[Footnote 46] The projections were based on the 
estimated costs of operating the program developed for the state's 
previous demonstration--initially approved in 1982--and adjusted 
forward to 2011. HHS's policy indicates that the spending limits for 
new demonstrations should be based on actual expenditures in the base 
year. Arizona's actual expenditures in 2011--the base year for the 
demonstration had HHS approved a spending limit based on its policy--
were much lower than the projected costs used by HHS as the basis of 
the spending limit. HHS officials said that the agency was not able to 
estimate the cost of the Arizona Medicaid program without the 
demonstration using recent actual expenditure data, because the 
state's Medicaid program had operated under a demonstration since 
1982. We found that HHS's rationale for relying on 30-year-old 
projections of what the Medicaid program would have cost without the 
demonstration was unsupported. Actual expenditure data were available 
and would more accurately reflect state spending under Medicaid than 
the old projections that were based on the state operating without a 
Medicaid program. We estimate that HHS's use of projected costs rather 
than actual expenditures for the base year increased the spending 
limit by about $22 billion. 

HHS's approved spending limit for Arizona also used growth rates for 
certain populations that were higher than the benchmark growth rates 
suggested by agency policy.[Footnote 47] The rates HHS used reflected 
national growth rates, which were higher than the state historical 
growth rates based on actual state historical expenditures. (See table 
2.) Instead, HHS compared national growth rates to the projected state 
growth approved as part of the state's previous demonstration, 
developed 30 years earlier. Officials also told us that they did not 
consider comparing the national growth rates to the state's historical 
growth rates derived from actual state expenditures because it was 
unclear if these expenditures would have occurred absent the 
demonstration. However, without the demonstration, Arizona would not 
have a Medicaid program. In addition, the previously approved rate 
does not appear to be a valid substitute given the large difference 
between that rate and the growth rates indicated by actual historical 
expenditure data. We estimate that HHS's use of the previously 
projected growth rates rather than actual state expenditures to derive 
the benchmark growth rate increased the approved 5-year spending limit 
by about $4.2 billion. 

Table 2: Comparison of Growth Rates Approved by the Department of 
Health and Human Services (HHS) for the Arizona Medicaid Demonstration 
and Benchmark Growth Rates: 

Medicaid beneficiary category: Persons receiving Supplemental Security 
Income; 
HHS-approved growth rate[A]: 6.0%; 
Benchmark growth rate: 4.4%. 

Medicaid beneficiary category: Persons with developmental disabilities; 
HHS-approved growth rate[A]: 6.0%; 
Benchmark growth rate: 0.3%. 

Medicaid beneficiary category: Elderly and physically disabled persons; 
HHS-approved growth rate[A]: 5.2%; 
Benchmark growth rate: 2.6%. 

Medicaid beneficiary category: Children and families; 
HHS-approved growth rate[A]: 5.2%; 
Benchmark growth rate: 2.5%. 

Source: GAO analysis of HHS data. 

[A] Annual growth rates approved by HHS in October 2011 for the 5-year 
term of the demonstration (October 2011-September 2016). 

[End of table] 

Indiana: 

For the Indiana demonstration, HHS approved a spending limit that was 
based on a projected growth rate that exceeded the benchmark growth 
rate without clear support for doing so. Had HHS used the benchmark 
growth rate, the demonstration's 5-year spending limit would have been 
an estimated $416 million lower. While HHS developed growth rates 
based on only 3 of the 5 years of historical data, HHS documented that 
the most recent 2 years of data reflected large decreases in spending 
from the state's increased use of managed care and that these changes 
in spending were a onetime effect that likely would not continue. We 
determined that HHS had adequately explained and documented its reason 
for making this adjustment. However, we found that HHS did not have 
adequate support for approving a 4.4 percent growth rate for all four 
populations included in the demonstration, when the historical data 
provided by the state showed benchmark growth rates that were lower 
than 4.4 percent for three of those populations.[Footnote 48] (See 
table 3.) HHS officials stated that a policy decision was made to use 
the average state historical growth rates because it was believed that 
it was more likely to reflect cost trends in the future. Officials 
added that one of the individual populations had a zero growth rate 
historically and it was decided that as a result of regular health 
care inflation, costs would grow. Approving an average growth rate 
does not appear to be a valid substitute for the state historical 
growth rates for each population given the significant difference for 
the adult caretaker populations, and the fact that health care 
inflation was present during prior years and would have also affected 
population-specific growth rates. Had HHS used benchmark growth rates 
for each population, the spending limit would have been about $416 
million lower than the approved spending limit. 

Table 3: Comparison of Growth Rates Approved by the Department of 
Health and Human Services (HHS) for the Indiana Medicaid Demonstration 
and Benchmark Growth Rates: 

Medicaid beneficiary category: Children; 
HHS-approved growth rate[A]: 4.4%; 
Benchmark growth rate: 4.9%. 

Medicaid beneficiary category: Pregnant women; 
HHS-approved growth rate[A]: 4.4%; 
Benchmark growth rate: 4.1%. 

Medicaid beneficiary category: Historically eligible adult caretakers; 
HHS-approved growth rate[A]: 4.4%; 
Benchmark growth rate: 0.0%. 

Medicaid beneficiary category: Newly eligible adult caretakers; 
HHS-approved growth rate[A]: 4.4%; 
Benchmark growth rate: 0.0%. 

Source: GAO analysis of HHS data. 

[A] Annual growth rates approved by HHS in December 2007 for the 5-year 
term of the demonstration. (January 2008-December 2012). 

[End of table] 

Rhode Island: 

HHS approved an aggregate spending limit of about $12.1 billion for 
the Rhode Island demonstration based on a growth rate that exceeded 
the benchmark growth rate without clearly supporting the use of a 
higher growth rate. Had HHS used the benchmark growth rate, we 
estimate that the spending limit would have been about $772 million 
lower than the approved limit. According to HHS officials, the 
spending limit was developed using the 2006 base year average national 
growth rate of 7.8 percent; however, the state's historical growth 
rate in the 5 years prior to applying for the demonstration was 7.0 
percent. HHS officials told us that though the state provided data for 
2007 to be used as the base year, HHS instead chose 2006 as the base 
year, because negative trends in the 2007 data were not 
representative, did not appear reliable, and contained what they 
called outliers. So while HHS based the Rhode Island spending limit on 
the lower of the two growth rates for 2006, the agency could not 
provide clear support for using that base year. (See table 4.) 

Table 4: National and State-Historical Growth Rates that the 
Department of Health and Human Services (HHS) Compared in Selecting a 
Base Year and Approving the Rhode Island Medicaid Demonstration: 

Growth rates using 2006 as base year: 
HHS-approved growth rate[A]: 7.8%; 
State historical growth rate: 7.9%. 

Growth rates using 2007 as base year: 
National growth rate: 8.0%; 
State-historical growth rate: 7.0%. 

Source: GAO analysis of HHS data. 

[A] The HHS-approved growth rate in Rhode Island was the national 
growth rate (January 2009-December 2013). 

[End of table] 

Texas: 

In Texas, the HHS-approved spending limit included two types of 
hypothetical costs in the state's base year expenditures. These costs 
represented higher payment amounts the state could have paid to 
providers, but did not actually pay. We estimated that, had the state 
only included actual expenditures as indicated by HHS's policy, the 
spending limit would have totaled about $4.6 billion less. HHS's 
decision sets a precedent that a state can increase a demonstration 
spending limit on the basis that it could have hypothetically paid 
Medicaid providers more than it actually chose to pay them, without a 
clear basis for doing so. 

First, Texas's spending limit was based, in part, on hypothetical 
costs as opposed to actual incurred expenditures with respect to UPL 
payments that could be made for inpatient hospital services but were 
not actually made. Prior to applying for this demonstration, about 1.3 
million of the state's Medicaid population received inpatient hospital 
services under managed care, and the state did not make UPL payments 
for these services.[Footnote 49] In its spending limit estimate, 
however, Texas included costs for UPL payments and fee-for-service 
payments for beneficiaries previously receiving inpatient hospital 
services under a managed care delivery model. In its proposal, the 
state said it would take certain actions in response to directives 
from its state legislature. Specifically, the state said that if the 
demonstration was not approved by HHS it would carve out inpatient 
hospital services previously provided under managed care and pay for 
these services on a fee-for-service basis and also make UPL payments 
for these services. These actions would increase costs because fee-for-
service payments and UPL payments to hospitals would greatly exceed 
capitation payments made to managed care plans. HHS officials stated 
that, given a directive of the Texas legislature, they believed the 
state would do so, and they allowed the estimated increased costs of 
such an arrangement to be factored into the spending limit even though 
Texas had not changed its payment model. As a result, $3.8 billion of 
the demonstration spending limit was based on what Texas estimated it 
could pay providers in the future but had not been paying prior to the 
demonstration. 

Second, Texas proposed including additional hypothetical costs in the 
base year expenditures by using the maximum amount of UPL payments the 
state could have paid rather than the actual amount of payments the 
state did make. In its proposal, the state documented that during each 
of the 4 years leading up to and including the base year, the state's 
actual hospital inpatient UPL payments were less than the maximum 
amount the state could have paid.[Footnote 50] HHS officials noted 
that because the actual payments were accounting for an increasing 
percentage of the maximum UPL payments the state could have made, they 
allowed the state to use this larger amount. As a result of HHS's 
decision, about $796 million of the demonstration spending limit was 
based on a hypothetical expenditure that did not represent actual 
expenditures of the state under its program.[Footnote 51] 

HHS Approved Spending Limits for Three Demonstrations Based on Actual 
DSH Expenditures and Followed Statutory Criteria in Approving Spending 
Limits for Three Other Demonstrations: 

HHS approved spending limits for three demonstrations that redirected 
federal DSH funds, which were consistent with its policy. For the 
District of Columbia, Missouri, and Wisconsin demonstrations, HHS 
limited federal spending to the lower of the states' DSH allotment or 
actual DSH expenditures in the year prior to the demonstrations. 
[Footnote 52] This approach helps provide assurances that the federal 
government will spend no more under the demonstrations than what it 
would have spent without them. For the District of Columbia and 
Missouri, HHS limited federal spending to a specific dollar amount, 
which represented a portion of the states' DSH expenditures in the 
year prior to the demonstrations' approvals.[Footnote 53] The 
Wisconsin spending limit was set at the total DSH allotment, which 
also represented the amount of expenditures in the year prior to the 
demonstration's approval. The approved spending limit for the entire 
length of the demonstration was about $145 million for the District of 
Columbia, $105 million for Missouri, and $797 million for Wisconsin. 

The Idaho, Michigan, and New Mexico demonstrations were a unique type 
of section 1115 demonstration governed by requirements not applicable 
to other types of Medicaid section 1115 demonstrations. For these 
three states, HHS set spending limits using a process provided for 
under CHIPRA. These states applied and received approval for new 
section 1115 demonstrations, through which they continued to cover 
childless adults using Medicaid funds instead of CHIP funds. CHIPRA 
also defined the budget neutrality process for such demonstrations by 
identifying the base year and growth rates for demonstration spending 
limits.[Footnote 54] For each of the three demonstrations, HHS 
followed the budget neutrality procedures outlined in CHIPRA in 
setting the spending limit on an annual basis. The initial annual 
spending limits were based on expenditure projections of about $80,000 
for Idaho, about $137 million for Michigan, and about $177 million for 
New Mexico. For the first demonstration year, spending limits were 
slightly less because the demonstrations operated less than a full 
year. 

HHS's Policy Does Not Reflect Current Processes or Provide Assurances 
That Data Used for Developing Spending Limits Are Reliable: 

HHS's policy for setting spending limits for proposed demonstrations 
is inconsistent with its actual practices. To this extent, HHS's 
internal controls are insufficient. According to Standards for 
Internal Control in the Federal Government, government processes, 
including management directives and administrative policies, should be 
clearly documented.[Footnote 55] In discussing documentation for HHS's 
policy, published in 2001, officials indicated that it reflected HHS's 
most current processes and policy on budget neutrality, but 
acknowledged that some aspects of the policy, as written, were no 
longer applicable to current processes. For example, HHS officials 
told us that the methods described for determining spending limits of 
demonstration extensions were no longer applied. In addition, while 
the policy requires that states submit 5 years of historical data in 
developing spending limits--and HHS officials told us that this is 
their preference--the agency's current processes allow states to use 
data based on the state's estimate of spending or enrollment. For 
example, if the 2 most recent years of expenditure data are not 
available because of delays in Medicaid claims processing, estimates 
for these years can be used. Officials indicated that if estimates are 
used instead of actual data, the state must explain any adjustments. 
But HHS officials did not have documentation for the current process 
or policy on when estimates are allowed, or the type of documentation 
of adjustments that is required. In addition, the HHS's policy does 
not require documentation or describe how the data used to set 
spending limits are reviewed to ensure reliability and accuracy. 
According to officials, the data used for projecting spending comes 
from each state's Medicaid data system, and HHS generally does not 
test the accuracy of the data. However, officials noted that the state 
systems may have their own quality and reliability checks. 

In October 2012, HHS introduced an optional waiver application 
template that included a standard budget neutrality form that states 
could use to submit 1115 demonstration applications.[Footnote 56] The 
template provides a standard format for states to submit commonly used 
data elements--such as historical expenditure and enrollment data, and 
the projected growth rates and per capita costs based on the state 
historical enrollment and costs--and a description of the sources and 
methods for obtaining state historical data. The budget neutrality 
form allows states to submit actual or estimated data. HHS officials 
told us that the new template does not establish any new budget 
neutrality policy, but instead was intended to make the application 
template more user-friendly than the prior template that was developed 
in conjunction with the agency's policy published in 2001. The new 
budget neutrality form reiterates HHS's 2001 policy that states that 
spending limits should be based on the lower of the state-specific 
historical growth rate or estimated nationwide growth rate. The form 
does not provide additional guidance, for example, on the process and 
criteria for when estimated state historical data rather than actual 
state historical expenditure data are used in setting spending limits, 
or when deviations from the benchmark policy are allowed and how they 
should be documented and supported. 

Conclusions: 

The fiscal challenges facing the federal government require prudent 
stewardship of federal Medicaid resources. While section 1115 Medicaid 
demonstrations serve as an important mechanism for states to implement 
projects that allow for innovation while promoting Medicaid 
objectives, HHS policy requires that they not expose the federal 
government to additional financial liability. The Secretary of Health 
and Human Services has an important responsibility for ensuring that 
comprehensive demonstrations will not increase federal costs above 
what would be incurred without these demonstrations. HHS's long-
standing budget neutrality policy for these demonstrations, on its 
face, recognizes that states should not be given access to additional 
federal funding at the same time they are provided with greater 
program flexibility. However, neither the policy, nor HHS's 
implementation of it, ensures the prudent stewardship of federal 
Medicaid spending. 

After examining HHS's approach for approving spending limits of 
recently approved demonstrations, we have three main concerns 
regarding the budget neutrality policy and process. First, HHS's 
policy is not reflected in its actual practices and, contrary to sound 
management practices, is not adequately documented. Second, the policy 
and processes lack transparency regarding criteria and the supporting 
evidence required to justify deviations from historical spending and 
established benchmark growth rates. We recognize that forecasting 
spending during changing economic times is challenging and a state's 
circumstances may warrant such deviations. Nonetheless, we believe 
that approved spending limits that are based on baselines and growth 
rate expectations that greatly deviate from HHS's current benchmarks 
should be well-supported and documented. HHS's policy is currently 
silent as to when deviations are allowed and does not require that 
reliable evidence be provided to justify deviations. Transparency 
around the basis for spending limit decisions is important not only 
for assurances of the ongoing fiscal integrity and sustainability of 
the program, but also for assurances of consistency of approvals among 
states. Third, the policy as implemented allows methods for 
establishing spending limits that we believe are inappropriate for 
such purposes, such as allowing states to include hypothetical costs 
in the baseline for spending limits. The second and third concerns 
parallel those we have raised in earlier reports. In 2008, because HHS 
disagreed that changes to the budget neutrality policy and review 
process were needed, we suggested that Congress consider requiring 
increased attention to fiscal responsibility in the approval of 
section 1115 Medicaid demonstrations and require the Secretary of 
Health and Human Services to improve the demonstration review process 
by, for example, clarifying the criteria for approving spending limits 
and documenting and making public the basis for such approvals. Thus 
far Congress has not acted on this suggestion. On the basis of the 
findings in this report, we believe the Secretary needs to take 
additional actions to ensure that HHS's budget neutrality policy 
reflects current practices and that the spending limits for the Texas 
and Arizona demonstrations are appropriate, well supported, and based 
on clear criteria. 

Recommendations for Executive Action: 

To improve the transparency of the process for reviewing and approving 
spending limits for comprehensive section 1115 demonstrations, we 
recommend that the Secretary of Health and Human Services take the 
following two actions: 

1. update the agency's written budget neutrality policy to reflect 
actual criteria and processes used to develop and approve 
demonstration spending limits, and ensure the policy is readily 
available to state Medicaid directors and others; and: 

2. reconsider adjustments and costs used in setting the spending 
limits for the Arizona and Texas demonstrations, and make appropriate 
adjustments to spending limits for the remaining years of each 
demonstration. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to HHS for comment. In its written 
comments, HHS acknowledged that it has not always communicated its 
budget neutrality policy broadly or clearly, but stated it has applied 
its policy consistently. The Department suggested that recent steps to 
increase transparency--such as publishing a new section 1115 
application template and implementing a federal public input process--
reflect updated policy on how HHS sets spending limits and ensures 
demonstrations are budget neutral. While the application template may 
contain guidance on some of the data elements commonly used to 
demonstrate budget neutrality, we do not believe that it addresses how 
HHS reviews the applications or the criteria used for setting spending 
limits. We have revised our report to clarify how this template falls 
short of clarifying HHS's budget neutrality policy. HHS did not 
otherwise identify any written policy it has issued since 2001 either 
during the course of our review or in its comments. 

HHS did not concur with our recommendation that its budget neutrality 
policy should be updated to reflect the actual criteria and processes 
used to develop and approve demonstration spending limits, and ensure 
that the policy is readily available. HHS stated that our findings 
that four states' spending limits would have been lower had the agency 
followed its policy were flawed. HHS said that we used only a subset 
of the best available data that the Department used to assess budget 
neutrality and that we relied on an outdated policy issued in 2001. We 
disagree with these assertions. It is important to note that, to do 
our analysis, we relied on extensive documentation and information 
that HHS officials specifically provided us as the basis for the 
selected states' budget neutrality determinations. For example, we 
obtained the spreadsheets with the data and calculations that HHS used 
to determine each state's demonstration spending limits. We reconciled 
these spreadsheets with the spending limits and documentation in each 
state's demonstration approval and had numerous discussions with HHS 
officials to confirm our understanding of the data and the basis for 
the final spending limits. At no time did officials tell us that they 
had provided us only with a subset of the data used to assess budget 
neutrality or cite additional information or data that we had not 
considered. HHS's assertion that we relied on an outdated budget 
neutrality policy that did not reflect the Department's current policy 
also conflicts with information provided to us during the course of 
this review. On multiple occasions, we discussed with officials the 
policy used to establish demonstration spending limits, including the 
applicability of the 2001 written policy. HHS officials told us--both 
verbally and in writing--that the 2001 written policy generally 
reflected the Department's current policy toward budget neutrality. 
They told us that this document was the most recent document capturing 
the budget neutrality policy. However, as we described in the draft 
report, HHS officials told us that some parts of the 2001 written 
policy were outdated. The Department did not have any plans to update 
the 2001 policy. 

HHS did not concur with our recommendation that it should make 
adjustments to the spending limits for the remaining years of the 
Arizona and Texas demonstrations. In its comments, HHS said that the 
adjustments and costs it used were justified. However, HHS did not 
provide any new information or support beyond what was considered and 
discussed in the draft report. For example, HHS did not respond to our 
concerns that Texas' spending limit included $3.8 billion in costs 
that the state could hypothetically pay providers in the future but 
did not actually pay them prior to the demonstration. We continue to 
believe HHS' decisions were not clear or well supported. HHS also 
stated that it had significantly strengthened the accountability in 
Texas by requiring HHS approval before federal matching funds can be 
drawn down for state expenditures made under the demonstration, and by 
instituting robust reporting requirements. We believe that improved 
oversight of actual spending occurring under the demonstrations does 
not lessen the need for establishing sound spending limits. 

HHS's comments are reproduced in appendix III. HHS also provided 
technical comments, which we incorporated as appropriate. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to the Secretary of Health and Human Services. In addition, the report 
is available at no charge on the GAO website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-7114 or iritanik@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Major contributors to this report are 
listed in appendix IV. 

Sincerely yours, 

Signed by: 

Katherine M. Iritani: 
Director, Health Care: 

[End of section] 

Appendix I: Summary of Submitted and Reviewed Applications for 
Comprehensive Section 1115 Medicaid Demonstrations: 

From January 2007 through May 2012, the Department of Health and Human 
Services (HHS) received 62 comprehensive section 1115 Medicaid 
demonstration applications from 38 states, 3 of which were 
subsequently withdrawn by the states. HHS approved 45 of the remaining 
applications, disapproved 1, and another 13 were still pending 
completion of review as of May 31, 2012.[Footnote 57] About two-
thirds, or 31, of the 45 approved applications were for extensions of 
existing demonstrations, while 8 of the 13 still under review were for 
new demonstrations. For the 46 reviews that HHS completed, reviews 
took from 47 days to almost 4 years, and averaged 323 days from the 
date of application to the date of the review decision.[Footnote 58] 
About 72 percent of the reviews took a year or less to complete. (See 
table 5.) 

Table 5: Status of Comprehensive Section 1115 Medicaid Demonstration 
Applications, by State, Submitted to the Department of Health and 
Human Services (HHS) from January 2007 through May 2012: 

State: AR; 
Demonstration name: Arkansas Safety Net Benefit Program; 
Application date: 9/29/10; 
Decision date: 12/29/11; 
Days between application and decision: 456. 

State: AR; 
Demonstration name: Arkansas ARKidsB; 
Application date: 12/18/07; 
Decision date: 12/23/10; 
Days between application and decision: 1,101. 

State: AR; 
Demonstration name: Arkansas TEFRA-like; 
Application date: 6/01/10; 
Decision date: 12/14/10; 
Days between application and decision: 196. 

State: AZ; 
Demonstration name: Arizona Health Care Cost Containment System[A]; 
Application date: 3/31/11; 
Decision date: 10/21/11; 
Days between application and decision: 204. 

State: CA; 
Demonstration name: California Bridge to Reform; 
Application date: 6/03/10; 
Decision date: 11/02/10; 
Days between application and decision: 152. 

State: CO; 
Demonstration name: Colorado Adults without Dependent Children; 
Application date: 12/02/11; 
Decision date: 3/30/12; 
Days between application and decision: 119. 

State: CO; 
Demonstration name: Colorado Adult Prenatal Coverage and Premium 
Assistance in CHP+; 
Application date: 5/27/09; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: DC; 
Demonstration name: District of Columbia Childless Adults[A]; 
Application date: 7/23/10; 
Decision date: 10/28/10; 
Days between application and decision: 97. 

State: DE; 
Demonstration name: Delaware Diamond State Health Plan; 
Application date: 7/01/09; 
Decision date: 1/31/11; 
Days between application and decision: 579. 

State: FL; 
Demonstration name: Florida Medicaid Reform; 
Application date: 6/30/10; 
Decision date: 12/15/11; 
Days between application and decision: 533. 

State: FL; 
Demonstration name: Florida MEDS-AD; 
Application date: 12/30/09; 
Decision date: 12/14/10; 
Days between application and decision: 349. 

State: HI; 
Demonstration name: Hawaii QUEST Expanded; 
Application date: 2/17/07; 
Decision date: 2/07/08; 
Days between application and decision: 355. 

State: IA; 
Demonstration name: Iowa Care; 
Application date: 10/09/09; 
Decision date: 09/01/10; 
Days between application and decision: 327. 

State: ID; 
Demonstration name: Idaho Children's Access Card; 
Application date: 8/04/09; 
Decision date: 9/30/10; 
Days between application and decision: 422. 

State: ID; 
Demonstration name: Idaho Non-pregnant Childless Adults 
(Idaho Adult Access Card Demonstration)[A]; 
Application date: 9/09/09; 
Decision date: 12/23/09; 
Days between application and decision: 105. 

State: IL; 
Demonstration name: Illinois New Demo Program; 
Application date: 1/30/12; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: IN; 
Demonstration name: Healthy Indiana Plan[A]; 
Application date: 7/03/07; 
Decision date: 12/14/07; 
Days between application and decision: 164. 

State: IN; 
Demonstration name: Healthy Indiana Plan; 
Application date: 12/28/11; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: KS; 
Demonstration name: Kansas Kan Care[B]; 
Application date: Withdrawn; 
Decision date: Withdrawn; 
Days between application and decision: Withdrawn. 

State: KY; 
Demonstration name: Kentucky Health Care Partnership; 
Application date: 10/29/10; 
Decision date: 11/17/11; 
Days between application and decision: 384. 

State: LA; 
Demonstration name: Louisiana Greater New Orleans Community 
Health Connection; 
Application date: 8/06/10; 
Decision date: 9/22/10; 
Days between application and decision: 47. 

State: MA; 
Demonstration name: MassHealth; 
Application date: 6/30/10; 
Decision date: 12/20/11; 
Days between application and decision: 538. 

State: MD; 
Demonstration name: Maryland Health Choice; 
Application date: 7/01/10; 
Decision date: 6/27/11; 
Days between application and decision: 361. 

State: ME; 
Demonstration name: Maine Childless Adults; 
Application date: 9/30/09; 
Decision date: 9/27/10; 
Days between application and decision: 362. 

State: MI; 
Demonstration name: Michigan Medicaid Nonpregnant Childless 
Adults Waiver (Adults Benefit Waiver)[A]; 
Application date: 9/29/09; 
Decision date: 12/22/09; 
Days between application and decision: 84. 

State: MN; 
Demonstration name: Minnesota Long Term Care Realignment; 
Application date: 2/13/12; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: MN; 
Demonstration name: Minnesota Prepaid Medical Assistance Project Plus; 
Application date: 6/29/10; 
Decision date: 6/30/11; 
Days between application and decision: 366. 

State: MO; 
Demonstration name: Missouri Gateway to Better Health[A]; 
Application date: 2/16/10; 
Decision date: 7/28/10; 
Days between application and decision: 162. 

State: MS; 
Demonstration name: Healthier Mississippi; 
Application date: 9/29/08; 
Decision date: 10/28/10; 
Days between application and decision: 759. 

State: MT; 
Demonstration name: Montana Basic Medicaid for Able Bodied Adults; 
Application date: 1/25/08; 
Decision date: 11/24/10; 
Days 
between application and decision: 1,034. 

State: MT; 
Demonstration name: Montana Medicaid Pharmacy Part D; 
Application date: 1/28/11; 
Decision date: 6/17/11; 
Days between application and decision: 140. 

State: NJ; 
Demonstration name: New Jersey Comprehensive Waiver; 
Application date: 9/9/11; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: NJ; 
Demonstration name: New Jersey Childless Adults; 
Application date: 2/24/11; 
Decision date: 4/14/11; 
Days between application and decision: 49. 

State: NJ; 
Demonstration name: New Jersey Family Coverage Under SCHIP; 
Application date: 9/30/08; 
Decision date: 8/13/12; 
Days between application and decision: 1,413. 

State: NM; 
Demonstration name: New Mexico State Coverage Insurance-Title XIX 
Component[A]; 
Application date: 9/28/09; 
Decision date: 12/30/09; 
Days between application and decision: 93. 

State: NM; 
Demonstration name: New Mexico State Coverage Insurance-Title XXI 
Component; 
Application date: 9/24/10; 
Decision date: 2/18/11; 
Days between application and decision: 147. 

State: NM; 
Demonstration name: New Mexico State Coverage Insurance-Title XXI 
Component; 
Application date: 5/1/12; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: NM; 
Demonstration name: New Mexico Title XXI SCHIP; 
Application date: 12/29/09; 
Decision date: 12/16/10; 
Days between application and decision: 352. 

State: NM; 
Demonstration name: New Mexico Centennial Care-New 1115[B]; 
Application date: Withdrawn; 
Decision date: Withdrawn; 
Days between application and decision: Withdrawn. 

State: NV; 
Demonstration name: Nevada Comprehensive Care Waiver; 
Application date: 4/24/12; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: NY; 
Demonstration name: New York State's People First Waiver; 
Application date: 11/04/11; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: NY; 
Demonstration name: New York Federal-State Health Reform Partnership; 
Application date: 9/30/10; 
Decision date: 3/31/11; 
Days between application and decision: 182. 

State: NY; 
Demonstration name: New York Partnership Plan; 
Application date: 3/31/09; 
Decision date: 7/29/11; 
Days between application and decision: 850. 

State: OH; 
Demonstration name: Ohio Transformation; 
Application date: 4/26/12; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: OK; 
Demonstration name: Oklahoma SoonerCare; 
Application date: 6/30/09; 
Decision date: 12/30/09; 
Days between application and decision: 183. 

State: OK; 
Demonstration name: Oklahoma SoonerCare; 
Application date: 12/30/11; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: OR; 
Demonstration name: Oregon Health Plan; 
Application date: 10/22/09; 
Decision date: 3/17/10; 
Days between application and decision: 146. 

State: OR; 
Demonstration name: Oregon Health Plan; 
Application date: 2/29/12; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: RI; 
Demonstration name: Rhode Island Global Consumer Choice Compact[A]; 
Application date: 8/08/08; 
Decision date: 1/16/09; 
Days between application and decision: 161. 

State: TN; 
Demonstration name: TennCare II; 
Application date: 6/15/09; 
Decision date: 12/15/09; 
Days between application and decision: 183. 

State: TX; 
Demonstration name: Texas Healthcare Transformation and Quality 
Improvement Program[A]; 
Application date: 7/15/11; 
Decision date: 12/12/11; 
Days between application and decision: 150. 

State: TX; 
Demonstration name: Texas Health Care Reform Section 1115 
Demonstration[C]; 
Application date: Withdrawn; 
Decision date: Withdrawn; 
Days between application and decision: Withdrawn. 

State: UT; 
Demonstration name: Utah Medicaid Payment and Service Delivery Reform; 
Application date: 6/30/11; 
Decision date: Pending; 
Days between application and decision: Pending. 

State: UT; 
Demonstration name: Utah Primary Care Network; 
Application date: 3/01/10; 
Decision date: 6/23/10; 
Days between application and decision: 114. 

State: VA; 
Demonstration name: Virginia FAMIS MOMS and FAMIS Select; 
Application date: 10/15/09; 
Decision date: 6/29/10; 
Days between application and decision: 257. 

State: VT; 
Demonstration name: Vermont Global Commitment to Health; 
Application date: 9/29/09; 
Decision date: 12/29/10; 
Days between application and decision: 456. 

State: VT; 
Demonstration name: Vermont Choices for Care; 
Application date: 6/17/10; 
Decision date: 9/21/10; 
Days between application and decision: 96. 

State: WA; 
Demonstration name: Washington Transitional Bridge Demonstration; 
Application date: 7/07/10; 
Decision date: 1/03/11; 
Days between application and decision: 180. 

State: WI; 
Demonstration name: Wisconsin BadgerCare Plus for Childless Adults[A]; 
Application date: 7/01/08; 
Decision date: 12/31/08; 
Days between application and decision: 183. 

State: WI; 
Demonstration name: Wisconsin BadgerCare; 
Application date: 9/28/10; 
Decision date: 12/30/10; 
Days between application and decision: 93. 

State: WI; 
Demonstration name: Wisconsin Senior Care; 
Application date: 2/9/09; 
Decision date: 8/17/09; 
Days between application and decision: 189. 

State: WI; 
Demonstration name: Wisconsin Medicaid 2014; 
Application date: 11/10/11; 
Decision date: Pending; 
Days between application and decision: Pending. 

Source: GAO analysis of Centers for Medicare & Medicaid Services (CMS) 
data. 

Notes: All of the demonstrations for which the review process was 
completed were approved with the exception of the Montana Medicaid 
Pharmacy Part D demonstration. Applications marked as pending had not 
been fully reviewed by HHS as of May 31, 2012. 

[A] This is 1 of the 10 new approved comprehensive demonstrations that 
we reviewed. 

[B] Application was withdrawn and subsequently resubmitted after May 
31, 2012, which exceeded the time frame covered by this report. 

[C] State withdrew application after HHS raised concerns about the 
state's proposal. 

[End of table] 

Officials with HHS stated that the nature of demonstration reviews is 
unpredictable because of the different factors outside HHS's control, 
which can influence the review. Further, HHS generally does not have a 
set time frame within which applications must be reviewed.[Footnote 
59] There are a number of factors that may have affected the review 
times for the demonstrations we reviewed.[Footnote 60] For example, 
prior to applying for a new demonstration, states may submit a concept 
paper to HHS to receive technical assistance, advice, and other 
guidance. There may then be extended dialogue between a state and HHS 
about the plans included in a concept paper. The process can provide 
states with an initial indication of the acceptability of their 
proposal and thereby facilitate the application process. According to 
the officials, in cases where states have submitted such papers, HHS 
reviews may be shorter. In addition, the purpose, scale, and 
complexity of demonstration applications vary, and will result in the 
need for more or less discussion between the state and HHS. Similarly, 
the completeness of the application can affect review times. 
Applications may have lacked important details, such as data on how 
the program will be implemented, its effect on relevant beneficiary 
populations, or how budget neutrality is achieved. In these cases HHS 
may request extensive clarification, which adds to the review time 
because of the time states need to respond. Also, HHS officials said 
that state legislative activity can alter the proposal during 
development, or midcourse, which would extend HHS review times. 

[End of section] 

Appendix II: A Summary of Key Features of Recent Demonstrations: 

This appendix summarizes key information on 10 new comprehensive 
section 1115 demonstrations approved from January 2007 through May 
2012. Key information presented includes: a summary of specific 
details about the purpose of the demonstration; the population 
covered; the term of each demonstration; the estimated number of 
people covered in the first and last year of the demonstration; and 
the approved spending limit over the term of each demonstration. 
[Footnote 61] Because the scope and purpose of demonstrations vary by 
state, the amount and detail of the information provided for each 
demonstration also varies. 

Arizona Health Care Cost Containment System: 

Demonstration Term: October 2011-September 2016: 

Estimated Number of People Covered: first year: 1,129,869; last year: 
1,806,984: 

Approved Spending Limit: Over $74.4 billion: 

Arizona requested to terminate its previous section 1115 
demonstration, operating since 1982, in order to eliminate coverage 
for one of its adult populations covered previously, and to implement 
an enrollment freeze on its childless adults, effective in July 2011. 
The population that was to be eliminated was covered through the 
Medical Expense Deduction program, which was for adults with income in 
excess of 100 percent of the federal poverty level (FPL) who have 
qualifying health care costs that reduce their income to or below 40 
percent of the FPL. The enrollment freeze applied to adults without 
dependent children with family income up to and including 100 percent 
of the FPL. This new demonstration continued to provide coverage for 
the Medicaid population through managed care. In addition, the state 
was approved to establish state a funding pool for making supplemental 
payments, totaling over $300 million per year, to providers that cover 
Medicaid and uncompensated care costs, and to make hospital payments 
for trauma and emergency services through a program that was 
originally a state-funded initiative. The demonstration also expanded 
coverage to certain children up to age 19 and women who lose Medicaid 
pregnancy coverage.[Footnote 62] The state increased personal 
financial responsibility through cost sharing by implementing the use 
of penalties for certain enrollees that miss scheduled physician 
appointments, and encouraging appropriate utilization of emergency 
room care by imposing cost sharing for improper use of the emergency 
room.[Footnote 63] The state also imposed higher cost sharing for 
brand name drugs when a generic is available.[Footnote 64] 

District of Columbia Childless Adults: 

Demonstration Term: November 2010-December 2013: 

Estimated Number of People Covered: first year: 4,815; last year: 
11,121: 

Approved Spending Limit: $145 million: 

The District of Columbia was approved to redirect Disproportionate 
Share Hospital (DSH) funds in order to provide full Medicaid benefits 
to adults ages 21 through 64 with incomes between 133 percent and 200 
percent of the FPL. Benefits under the demonstration were provided 
through a mandatory managed care delivery system. Most anticipated 
enrollees were covered previously through a local program that 
provided more limited benefits. 

Idaho Nonpregnant Childless Adults (Idaho Adult Access Card 
Demonstration): 

Demonstration Term: January 2010-September 2014: 

Estimated Number of People Covered: first year: 350; last year: 350: 

Approved Spending Limit: [Footnote 65] $596,476: 

Idaho was approved under a new demonstration to continue to provide 
premium subsidies to nonpregnant childless adults age 18 and above 
with incomes at or below 185 percent of the FPL.[Footnote 66] The 
demonstration allows a premium subsidy up to $100 per month per 
enrolled adult--a qualifying employee or the spouse of the employee--
toward the individual's share of the employer-sponsored health 
insurance premium. Participating employers are required to make a 50 
percent contribution toward the cost of the health benefit plan. 

Healthy Indiana Plan: 

Demonstration Term: January 2008-December 2012: 

Estimated Number of People Covered: first year: 669,894; last year: 
848,919: 

Approved Spending Limit: $10.6 billion: 

Indiana received approval to operate two distinct health insurance 
programs. This demonstration preserved the program previously in place 
for Medicaid-eligible individuals and expanded coverage to uninsured 
adults; both programs were run through a managed care delivery system. 
The first program, called the Hoosier Healthwise Program, continued 
coverage for current Medicaid-eligible individuals. The second 
program, called Healthy Indiana Plan (HIP), expanded coverage for 
uninsured adults, not currently eligible for Medicaid. The expansion 
was partially funded using redirected DSH funding. The HIP provided a 
high-deductible health plan and an account similar to a health savings 
account for uninsured adults including low-income custodial parents 
and caretaker relatives of Medicaid and State Children's Health 
Insurance Program (CHIP) children, and uninsured noncustodial parents 
and childless adults ages 19 through 64 with incomes between 22 and 
200 percent of the FPL. 

Participation in HIP is voluntary, but all enrollees are required to 
receive medical care through the high-deductible health plans. HIP 
enrollees are required to help fund the $1,100 deductible by 
contributing to a savings account.[Footnote 67] These accounts are 
used by enrollees to pay for the cost of health care services until 
the deductible is reached; however, preventive services up to a 
maximum amount are exempt from this requirement. The benefits 
available under HIP are limited to $300,000 annually, and $1 million 
over a lifetime. The demonstration also included cost sharing 
depending on income. 

Michigan Childless Adults Waiver: 

Demonstration Term: January 2010-September 2014: 

Estimated Number of People Covered: first year: 74,379; last year: 
90,665: 

Approved Spending Limit: [Footnote 68] $1 billion: 

Michigan was approved under a new demonstration to continue providing 
a limited ambulatory benefit package through a managed care delivery 
system to low-income nonpregnant childless adults ages 19 through 64 
years with incomes at or below 35 percent of the FPL.[Footnote 69] The 
benefit package included outpatient hospital services, physician 
services, diagnostic services, pharmacy, mental health and substance 
abuse services. Enrollees may be required to receive prior 
authorization before accessing certain ambulatory services. 

Missouri Gateway to Better Health: 

Demonstration Term: July 2010-December 2013: 

Estimated Number of People Covered: [Footnote 70] not available: 

Approved Spending Limit: $105 million: 

Missouri was approved to redirect its DSH funding to pay for four main 
activities in the St. Louis area: (1) health clinics that will provide 
services to the uninsured; (2) a health commission to manage 
activities related to the demonstration; and (3) a program to educate 
and encourage patients to use primary care rather than the emergency 
room. Lastly, the state was approved to expand coverage through a 
pilot that provides limited primary care benefits and a voucher system 
to provide acute hospital services to a population in the St. Louis 
area. 

New Mexico State Coverage Insurance--Title XIX Component: 

Demonstration Term: January 2010-September 2014: 

Estimated Number of People Covered: [Footnote 71] 29,770: 

Approved Spending Limit: $1.3 billion: 

New Mexico was approved under a new demonstration to continue to 
provide coverage for nonpregnant childless adults.[Footnote 72] The 
eligible population is nonpregnant childless adults ages 19 to 64 
years with incomes up to and including 200 percent of the FPL who are 
not eligible for Medicaid. Enrollees receive a comprehensive benefit 
package through a managed care delivery system in which premiums and 
copayments are required. These premiums include up to $35 for higher-
income childless adults. The demonstration was designed to provide 
health care coverage to uninsured individuals who are unemployed, self-
employed, or employed by an employer with 50 or fewer employees. 

Rhode Island Global Consumer Choice Compact: 

Demonstration Term: January 2009-December 2013: 

Estimated Number of People Covered: first year: 192,778; last year: 
206,540: 

Approved Spending Limit: $12.1 billion: 

Rhode Island was approved to operate its entire Medicaid program under 
a demonstration and to continue to provide coverage to populations 
that were previously covered under several distinct waivers.[Footnote 
73] Rhode Island was allowed to redesign its Medicaid program to 
provide cost-effective services that will ensure beneficiaries receive 
the appropriate services in the least restrictive and most appropriate 
setting. For example, the state was allowed to form and pay for 
entities dedicated to reviewing the needs of enrollees eligible for 
long-term care. This organization helps enrollees decide how to manage 
their health care needs based on a distinction given to them as 
"highest need," "high need," or "preventive." This designation allows 
the state to determine which cost-effective long-term services an 
enrollee can receive. For example, those designated as highest-need 
individuals are approved to receive nursing home care while those 
designated as preventive are approved to receive certain home health 
services. The state was also approved to include other services under 
the demonstration, such as parenting and childbirth education classes, 
tobacco cessation services, and window replacement for lead-poisoned 
children. 

Texas Healthcare Transformation and Quality Improvement Program: 

Demonstration Term: December 2011-September 2016: 

Estimated Number of People Covered: first year: 3,872,680; last year: 
4,767,680: 

Approved Spending Limit: $142 Billion: 

The Texas demonstration allowed the state to both expand the use of a 
managed care delivery system to existing covered populations and to 
preserve supplemental payments through the establishment of funding 
pools. The state was allowed to claim approximately $29 billion over 
the 5-year term of the demonstration on these pool payments. One pool 
was used to reimburse providers for uncompensated care costs, and the 
other was used to provide incentive payments to participating 
hospitals that implement and operate delivery system reforms.[Footnote 
74] The state also was approved to cover children's primary and 
preventive Medicaid dental services through a capitated statewide 
dental services program. 

Wisconsin BadgerCare Plus for Childless Adults: 

Demonstration Term: January 2009-December 2013: 

Estimated Number of People Covered: first year: 25,129; last year: 
40,800: 

Approved Spending Limit: $797 million: 

Wisconsin obtained approval to redirect its DSH funding to expand 
coverage to childless adults, who are defined as individuals between 
the ages of 19 and 64 years with income that does not exceed 200 
percent of the FPL. The program included a variety of features: a 
requirement for participants to complete a health needs assessment--
used to match enrollees with health maintenance organizations and 
providers that meet the individual's specific health care needs; 
tiering of health plans based on quality of care indicators; and 
enhanced online and telephone application tools that allow childless 
adults to choose from a variety of health insurance options. 

[End of section] 

Appendix III: Comments from the Department of Health and Human 
Services: 

Department of Health & Human Services: 
Office of The Secretary
Assistant Secretary for Legislation: 
Washington, DC 20201: 

May 31, 2013: 

Katherine Iritani: 
Director, Health Care: 
U.S. Government Accountability Office: 
441 G Street NW: 
Washington, DC 20548: 

Dear Ms. Iritani: 

Attached are comments on the U.S. Government Accountability Office's 
(GAO) report entitled, entitle, "Medicaid Demonstration Waivers: 
Approval Process Raises Cost Concerns and Lacks Transparency" (GAO-13-
384). 

The Department appreciates the opportunity to review this report prior 
to publication. 

Sincerely, 

Signed by: 

Jim R. Esquea: 
Assistant Secretary for Legislation: 

Attachment: 

General Comments Of The Department Of Health And Human Services (HHS) 
On The Government Accountability Office's (GAO) Draft Report Entitled, 
"Medicaid Demonstration Waivers: Approval Process Raises Concerns And 
Lacks Transparency" (GAO-13-384): 

The Department appreciates the opportunity to review and comment on 
this draft report. 

As GAO notes, budget neutrality as applied to section 1115 
demonstrations is not required by law, but rather is a policy that HHS 
has applied over the years to ensure that federal expenditures under 
such demonstrations do not exceed what the federal government would 
have spent in the Medicaid program absent the demonstration. There 
are, as GAO points out, different ways that budget neutrality can be 
calculated. While we agree that budget neutrality policy has not 
always been conveyed as broadly and clearly as it could have been, the 
agency's policy has been consistently applied over the years. 

Moreover, over the last period of time, HHS has taken new steps to 
make our approach to budget neutrality more transparent. On October 5, 
2012. CMS released a section 1115 template for states to use in order 
to clarify the requirements and simplify the application process. This 
template includes instructions and an accompanying budget worksheet 
that provides guidance on some of the most commonly used data elements 
for demonstrating budget neutrality. Consistent with CMS' policy that 
budget neutrality calculations should be based on the best available 
data, states must provide an explanation of how the demonstration 
program will achieve budget neutrality and include data that supports 
the state's rationale. This guidance had not previously been 
communicated in this format and is part of the agency's broader effort 
to increase transparency in section 1115 demonstrations. 

The section 1115 demonstration template is only one component of a 
broader set of recent initiatives that CMS has undertaken to improve 
transparency and the quality of care provided under demonstrations, 
while at the same time ensuring accountability for demonstration 
expenditures. For example, the Texas section 1115 demonstration 
reviewed by GAO includes detailed protocols and evaluation and 
monitoring criteria to guide the implementation of the demonstration 
and ensure accountability for the associated expenditures (for more 
information see [hyperlink, http://medicaid.gov/Medicaid-CHIP-Program-
Information/By-Tonics/Waivers/1115/downloads/tx/tx-healthcare-
transformation-ca.pdf]. 

In addition, CMS launched a new section on the Medicaid.gov website to 
receive public comments on demonstration applications and renewals and 
provide the public with all relevant demonstration documents, 
including budget neutrality agreements: [hyperlink, 
http://medicaid.gov/Medicaid-CHIP-Program-Information/By-
Topics/Waivers/Waivers.html]. Another example of CMS' focus on.quality 
and accountability is the recently released series of tools and 
guidance on implementing managed care amendments to 1115 
demonstrations that include long-term services and supports (see 
[hyperlink, http://medicaid.gov/Medicaid-CHIP-Program-Information/By-
Topics/Long-Term-Services-and-Supportiong-Term-Services-and-
Support.html]). 

These changes and additional tools have assisted CMS in its consistent 
application of budget neutrality policy by adding to the transparency 
of the process and enhancing understanding between CMS and the states. 

GAO Recommendation: 

HHS should update the agency's written budget neutrality policy to 
reflect the actual criteria and processes used to develop and approve 
demonstration spending limits and ensure the policy is readily 
available to state Medicaid directors and others. 

HHS Response: 

HHS does not concur with GAO's assertion that HHS's budget neutrality 
policy and process do not assure that all recently approved 
demonstrations will be budget neutral. 

GAO estimates that if HHS "had held the four demonstrations' spending 
to levels suggested by its policy" the 5-year spending limits should 
have been lower. This conclusion is flawed. First, in coming to its 
conclusion, GAO used only a subset of the data that CMS uses to assess 
budget neutrality and to determine the appropriate trend rate and 
estimates used in assessing budget neutrality. 

Second, GAO relied on a very narrow reading of HHS's budget neutrality 
policy as a result of focusing on outdated written guidance provided 
in a letter to state Medicaid directors issued in 2001 for a different 
purpose (the letter related to a particular waiver approach known as 
the Health Insurance Flexibility and Accountability initiative). The 
2001 letter was released to explain a specific policy established at 
the time and CMS no longer relies on this guidance in its review and 
approval of section 1115 demonstrations. 

As noted previously, HHS policy is to use the best available data in 
determining the appropriate trend rate to estimate what expenditures 
would have been without a demonstration. Generally, that means using 
the lower of either the state's historical spending trend rate, or the 
President's budget trend rate, unless the state supplies compelling 
justification that another trend rate would be more appropriate. For 
example, in light of the recent economic downturn, in some cases CMS 
has determined that recent state trend rates are not an accurate 
indicator of what a state would have spent in future years in the 
absence of a waiver. During the downturn, many states took a variety 
of steps to reduce expenditures, for example, by cutting provider 
payment rates or reducing benefits. These actions were, in some 
instances, never intended to be permanent; and thus, we accounted for 
cyclical changes in spending by examining other relevant state data in 
establishing the "without waiver" baseline. As GAO notes "forecasting 
spending during changing economic times is challenging and a state's 
circumstances may warrant such deviations." As the report notes, it is 
also important to underscore that budget neutrality calculations set 
only the upper limits on the federal funds available to states under 
the demonstration; in order to claim federal matching funds, states 
must submit evidence of actual expenditures that are permissible under 
the terms of the demonstration. 

GAO Recommendation: 

HHS should reconsider adjustments and costs used in setting the 
spending limits for the Arizona and Texas demonstrations and make 
appropriate adjustments to spending limits for the remaining years of 
each demonstration. 

HHS Response: 

HHS does not concur with GAO's recommendation to reconsider the 
Arizona and Texas demonstration spending limits. As is explained in 
more detail below, CMS' calculation of these states' spending limits 
was consistent with longstanding policy and was based on the most 
reasonable and documented cost assumptions available regarding the 
interventions operationalized under the demonstration. In addition, 
for the reasons discussed below, HMS does not believe GAO's assumption 
that using different numbers for the budget neutrality calculations 
would have produced additional savings. 

Arizona's section 1115 demonstration began in 1982, which coincided 
with the establishment of a Medicaid program in that state. Indeed, 
Arizona's Medicaid program is synonymous with the Arizona Health Care 
Cost Containment System demonstration. Because of the unique 
circumstances of the Arizona demonstration, CMS was not able to 
analyze expenditures during a pre-demonstration period to determine 
actual "without waiver" expenditures — there were no state Medicaid 
expenditures prior to 1982. In this situation, CMS determined that 
using the "without waiver" per member per month (PMPM) cost figures 
and corresponding trend rates approved under the previous 
demonstration was the best method for determining the "without waiver" 
PMPMs and trend rates for the new demonstration. HHS acknowledges 
GAO's recommendation that actual expenditures and trend rates could 
have been used, but they too would have raised issues because it is 
unclear whether these expenditures would have occurred absent the 
demonstration. CMS's approach to budget neutrality has been applied 
consistently-—and transparently-—for Arizona throughout the course of 
its demonstration. 

The GAO report also questions CMS's decision to include potential 
costs in the budget neutrality baseline for the Texas Healthcare 
Transformation and Quality Improvement Program demonstration. CMS 
believes that the adjustments made to Texas' historical data are 
justified. The state Medicaid agency was required by state legislation 
to take necessary action to preserve supplemental payments to 
hospitals as it moved to greater use of managed care. The legislation 
provided that without demonstration authority to provide supplemental 
payments, the state would carve out inpatient hospital services from 
the existing STAR program benefits and pay fee-for-service for those 
benefits. Texas already had a model for accomplishing this, as the 
state had previously carved out inpatient hospital benefits from some 
of its existing STAR+ managed care programs to allow the state to 
continue to make supplemental payments. Since this was the most likely 
scenario for program operations in the future (absent the 
demonstration), CMS determined this was a reasonable basis for setting 
the "without waiver" cost assumptions. We further note that the carve-
out would have been more costly for the federal government and would 
have led to fragmented care for beneficiaries. Instead, the Texas 
demonstration encourages integrated care and incentivizes significant 
delivery system reform. 

In both cases, we maintain that the integrity of the budget neutrality 
process is intact and we stand by our calculations. As noted above, 
CMS has significantly strengthened the scope of accountability in 
Texas, as well as other demonstrations by putting conditions in place 
that require CMS approval before expenditures can be drawn down and by 
instituting robust reporting requirements to ensure effective 
monitoring as the demonstration projects progress. 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Katherine Iritani, (202) 512-7114 or iritanik@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Tim Bushfield, Assistant 
Director; Susan Barnidge; Shirin Hormozi; Carolyn Feis Korman; Drew 
Long; Tom Moscovitch; Pauline Seretakis; and Hemi Tewarson made key 
contributions to this report. 

[End of section] 

Related GAO Products: 

High-Risk Series: An Update. [hyperlink, 
http://www.gao.gov/products/GAO-13-283]. Washington, D.C.: February 
2013. 

Medicaid: More Transparency of and Accountability for Supplemental 
Payments Are Needed. [hyperlink, 
http://www.gao.gov/products/GAO-13-48]. Washington, D.C.: November 26, 
2012. 

Medicaid: States Reported Billions More in Supplemental Payments in 
Recent Years. [hyperlink, http://www.gao.gov/products/GAO-12-694]. 
Washington, D.C.: July 20, 2012. 

Medicaid Demonstration Waivers: Recent HHS Approvals Continue to Raise 
Cost and Oversight Concerns. [hyperlink, 
http://www.gao.gov/products/GAO-08-87]. Washington, D.C.: January 31, 
2008. 

Medicaid Demonstration Waivers: Lack of Opportunity for Public Input 
during Federal Approval Process Still a Concern. [hyperlink, 
http://www.gao.gov/products/GAO-07-694R]. Washington, D.C.: July 24, 
2007. 

Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations 
Continue to Raise Cost and Oversight Concerns. [hyperlink, 
http://www.gao.gov/products/GAO-04-480]. Washington, D.C.: June 30, 
2004. 

Medicaid: Improved Federal Oversight of State Financing Schemes Is 
Needed. [hyperlink, http://www.gao.gov/products/GAO-04-228]. 
Washington, D.C: February 13, 2004. 

SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with 
Program Goals. [hyperlink, http://www.gao.gov/products/GAO-04-166R]. 
Washington, D.C.: January 5, 2004. 

Medicaid and SCHIP: Recent HHS Approvals of Demonstration Wavier 
Projects Raise Concerns. [hyperlink, 
http://www.gao.gov/products/GAO-02-817]. Washington, D.C.: July 12, 
2002. 

Medicaid Section 1115 Waivers: Flexible Approach to Approving 
Demonstrations Could Increase Federal Costs. [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-96-44]. Washington, D.C.: 
November 8, 1995. 

Medicaid: States Use Illusory Approaches to Shift Program Costs to 
Federal Government. [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-94-133]. Washington D.C.: August 
1, 1994. 

[End of section] 

Footnotes: 

[1] 42 U.S.C. § 1315(a). In this report, we refer to these Medicaid 
demonstrations as "section 1115 demonstrations" or "demonstrations." 

[2] Although the Secretary of Health and Human Services has delegated 
the administration of the Medicaid program, including the approval of 
section 1115 demonstrations, to the Centers for Medicare & Medicaid 
Services (CMS), we refer to HHS throughout this report because section 
1115 demonstration authority ultimately resides with the Secretary. 
Other HHS offices and agencies may be involved in the review and 
approval of these demonstrations. 

[3] HHS has implemented a budget neutrality policy for section 1115 
demonstrations since the 1980's. The most recent version of this 
policy was published in 2001. In this report, we refer to this budget 
neutrality policy as "HHS's policy." 

[4] In this report we refer to the President's budget Medicaid trend 
rate as the national growth rate. 

[5] GAO, Medicaid Section 1115 Waivers: Flexible Approach to Approving 
Demonstrations Could Increase Federal Costs, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-96-44] (Washington, D.C.: Nov. 8, 
1995); Medicaid and SCHIP: Recent HHS Approvals of Demonstration 
Waiver Projects Raise Concerns, [hyperlink, 
http://www.gao.gov/products/GAO-02-817] (Washington, D.C.: July 12, 
2002); Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations 
Continue to Raise Cost and Oversight Concerns, [hyperlink, 
http://www.gao.gov/products/GAO-04-480] (Washington, D.C.: June 30, 
2004); Medicaid Demonstration Waivers: Lack of Opportunity for Public 
Input during Federal Approval Process Still a Concern, [hyperlink, 
http://www.gao.gov/products/GAO-07-694R] (Washington, D.C.: July 24, 
2007); Medicaid Demonstration Waivers: Recent HHS Approvals Continue 
to Raise Cost and Oversight Concerns, [hyperlink, 
http://www.gao.gov/products/GAO-08-87] (Washington, D.C.: Jan. 31, 
2008). Since 2003 Medicaid has been on our list of high-risk programs 
in part because of concerns about inadequate fiscal oversight, 
including oversight of section 1115 demonstrations. A list of related 
GAO reports appears at the end of this report. 

[6] The Patient Protection and Affordable Care Act (PPACA) required 
the Secretary of Health and Human Services to issue regulations for 
section 1115 applications and extensions that address certain topics 
including a state and federal public notice and comment process, 
submission of reports on implementation by states and periodic 
evaluation by HHS. In response, on February 27, 2012, HHS published 
final regulations establishing these requirements for new section 1115 
Medicaid demonstration applications and extensions. Pub. L. No. 111-
148, § 10201, 124 Stat.119, 922 (2010); 77 Fed. Reg. 11,678 (Feb. 27, 
2012). 

[7] [hyperlink, http://www.gao.gov/products/GAO-02-817], [hyperlink, 
http://www.gao.gov/products/GAO-04-480]. 

[8] [hyperlink, http://www.gao.gov/products/GAO-08-87]. 

[9] [hyperlink, http://www.gao.gov/products/GAO-08-87]. 

[10] PPACA provides for the expansion of Medicaid eligibility to 
nonelderly individuals whose household income does not exceed 133 
percent of the federal poverty level (FPL). PPACA also imposes a 5 
percent income disregard when calculating modified adjusted gross 
income for determining Medicaid eligibility, which effectively 
increases this income level to 138 percent of the FPL for this 
population. Pub. L. No. 111-148, §§ 2001(a)(1), 2002(a), 124 Stat. 
119, 271, 279, as amended by Pub. L. No. 111-152, § 1004(e), 124 Stat. 
1029, 1034 (2010). This expansion is estimated to result in the 
enrollment of an additional 7 million individuals in 2014. 
Accordingly, beginning in 2014, states may provide coverage of these 
adults under their state plan as opposed to under a section 1115 
demonstration. 

[11] In this report, we use the term "state" to refer to the 50 states 
and the District of Columbia. 

[12] We did not review the implementation of these demonstrations 
after they were approved. In addition, we reviewed documentation 
related to amendments, when necessary. 

[13] The federal government matches state Medicaid expenditures for 
most services according to the state's FMAP. A state's FMAP is 
calculated using a statutory formula based on the state's per capita 
income in relation to the national per capita income. 

[14] Nationally in 2007, optional populations accounted for about 30 
percent of Medicaid enrollment and about 42 percent of all Medicaid 
spending in 2007; optional services accounted for about 33 percent of 
Medicaid expenditures. 

[15] Under a Medicaid managed care program, states contract with 
managed care organizations, to provide or arrange for medical 
services, and prospectively pay the plans a fixed monthly rate, or 
capitation payment, per enrollee. States receive federal reimbursement 
for capitation payments and the plans pay providers, such as hospitals 
and physicians, for services provided to Medicaid enrollees. 

[16] 42 U.S.C. § 1396r-4. In addition, under federal law, states may 
only claim federal matching funds for DSH payments made to qualifying 
hospitals up to the states' DSH allotments. DSH allotments are based 
on a statutory formula and allotment amounts vary across the states. 

[17] The UPL is based on a reasonable estimate of what Medicare--the 
federal health program that covers individuals aged 65 and over, 
individuals with end-stage renal disease, and certain disabled 
individuals--would pay for similar services. In addition, under UPL 
arrangements, payments are subject to aggregate limits by provider 
type, but there are not firm dollar limits on individual providers. 
See, for example, 42 C.F.R. §§ 447.272, 447.321. 

[18] Federal regulations prohibit payments by a state Medicaid agency 
to providers for services rendered under a contract with managed care 
organizations, with the exception of DSH and graduate medical 
education payments. This prohibition extends to UPL payments. See 42 
C.F.R. § 438.60. 

[19] As referenced above, in February 2012, HHS published a final rule 
that imposed new requirements for states seeking approval for section 
1115 demonstrations. In implementing some of these requirements, in 
October 2012, HHS made available an interim template that states may 
use in submitting their applications for section 1115 demonstrations. 
The application requirements are slightly different for new 
applications than for extensions. For example, applications for 
extensions must report evidence of how the objectives of the prior 
demonstration have or have not been met and must include an evaluation 
report with findings to date. 

[20] HHS's policy is specific to per person cost growth rates and does 
not explicitly address the application of enrollment growth rates; 
however, HHS considers state historical and nationwide enrollment 
growth rates in establishing spending limits. 

[21] DSH allotments are the maximum amount of federal DSH funding that 
is available for each state. They are based on a statutory formula, 
and allotment amounts vary across the states. 

[22] CHIP is a joint federal state program to finance health coverage 
for children in families with income too high to qualify for Medicaid. 

[23] The state reported that due to budget constraints, it could not 
continue its program of providing coverage to certain adults. To end 
the coverage, the state had to terminate the demonstration under which 
the coverage was provided. The adults the state would no longer cover 
were those without dependent children with family income up to and 
including 100 percent of the FPL as well as adults with income in 
excess of 100 percent of the FPL who had qualifying healthcare costs 
that reduce their income to or below 40 percent of the FPL. 

[24] Arizona's DSH allotment was capped at about $101 million in 2011. 

[25] Under federal law, hospitals that qualify for DSH payments are 
subject to hospital-specific limits, meaning hospitals have a 
calculated ceiling on the amount of DSH payments they may receive 
annually. Specifically, DSH payments to individual hospitals are 
limited to the hospital's uncompensated care costs for Medicaid and 
uninsured patients minus Medicaid payments and payments made by or on 
behalf of uninsured patients. 

[26] The demonstration's terms and conditions identify 4 hospitals, 13 
clinics, and 3 hospital-based physicians groups as eligible to receive 
SNCP payments. 

[27] The terms and conditions of the demonstration state that for any 
provider receiving an SNCP payment, the total of Medicaid payments, 
DSH payments, SNCP payments, and any other payments the provider 
received for medical services delivered to Medicaid and uninsured 
individuals cannot exceed the actual cost of providing the services. 

[28] In order to qualify for these supplemental payments, providers 
needed to participate in a regional healthcare partnership that 
included local government entities or providers that could fund the 
nonfederal share of supplemental payments. These regional health care 
partnerships developed regional health plans that identified health 
care providers, community needs, and improvement projects to fund with 
supplemental payments. 

[29] Payments made from the UC pool in the first year of the 
demonstration were transition payments to hospitals and physician 
groups that previously received UPL payments under the Medicaid state 
plan for claims during fiscal year 2011. This transition period 
ensures that those providers are eligible to receive the level of 
Medicaid funding they received in prior years from UPL payments as the 
state developed how it would distribute funds from this pool under the 
demonstration. 

[30] Texas's DSH allotment was capped at about $957 million in 2011. 

[31] Although the level of federal funding for these new supplemental 
payments was significantly increased, the UC pool payments were held 
to a facility cost-based standard for reimbursement rather than the 
state's historic UPL program. 

[32] According to the terms and conditions, the state could not 
receive federal funding for expenditures from the DSRIP pool until key 
milestones are met including: HHS's approval of the state's plan for 
and status of forming regional health care partnerships; 
identification of the public hospitals directing each of these 
partnerships; and development of a list of projects related to the 
four main areas noted above. In addition, incentive payments from the 
pool would be based on successful completion of HHS-approved metrics 
submitted by the regional healthcare partnerships related to the four 
areas. 

[33] States that failed to provide Medicaid coverage to mandatory 
population categories were subject to the potential penalty of losing 
federal funding for their Medicaid program. 

[34] See National Federation of Independent Business, et al., vs. 
Sebelius, Sec. of Health and Human Services, et al., 132 S. Ct. 2566 
(U.S. June 28, 2012). 

[35] Prior to this however, the Governor of Texas sent a letter to HHS 
in July 2012 stating that the state did not intend to expand Medicaid. 

[36] These adults included uninsured adults who are custodial parents 
and caretakers of children eligible for Medicaid and CHIP. Also 
included were noncustodial parents or childless adults, ages 19 
through 64 with family incomes up to and including 200 percent of the 
FPL who were not otherwise eligible for Medicaid or Medicare, who did 
not have access to an employer-sponsored health plan, had been 
uninsured for 6 months, and whose health care expenditures did not 
exceed a $1 million lifetime maximum on benefits under the 
demonstration. The demonstration also allowed the continued coverage 
of about 600,000 Medicaid enrollees. 

[37] Under the previous program enrollees did not receive mental 
health and transportation benefits and they had a limited pharmacy 
network. 

[38] Prior to the demonstration, hospital systems in Missouri funded a 
system to pay for services provided to indigent individuals. For 
economic reasons, the hospitals stopped providing payments, and the 
state submitted its demonstration proposal in efforts to obtain 
federal matching funds for these payments. 

[39] These costs--both state and federal--could not exceed $75,000 for 
2 years of the demonstration or $300,000 for 3 years of the 
demonstration. 

[40] This program worked with uninsured individuals that come to the 
emergency rooms and educated them on available resources for primary/ 
non-emergent care, scheduled follow-up appointments with primary care 
providers, and arranged transportation to appointments. These services 
were coordinated while the individuals were in the emergency room. The 
costs--both state and federal--for this program could not exceed 
$175,000 per year for 2 years of the demonstration or $700,000 per 
year for 3 years. 

[41] Some of these populations were covered under a previous section 
1915(c) waiver. Under a section 1915(c) waiver, states may provide 
coverage of services for a targeted population that may not otherwise 
be available under the state's Medicaid plan. Specifically, states may 
provide home or community-based health care to beneficiaries who 
would, if not for the services provided under the waiver, require 
institutional care. 

[42] Under the demonstration, the state was required to categorize the 
types of changes it may make to the demonstration, and for certain 
categories the state was authorized to notify HHS of the change rather 
than submit an amendment to the Medicaid state plan or the 
demonstration. 

[43] This fee was not applicable to those residing in two counties, 
and the application of the fee was at the provider's discretion. 

[44] HHS's approval of this cost sharing, however, has been subject to 
legal challenges. On February 7, 2013, a court held that HHS's 
approval of this cost sharing for individuals only eligible under the 
demonstration was invalid. Specifically, the court determined that 
because HHS failed to consider expert opinions on the negative effects 
of cost sharing, the agency's decision to approve the cost sharing was 
arbitrary and capricious, in violation of the Administrative Procedure 
Act. The court required HHS to reevaluate this approval and develop a 
plan to address the deficiencies by May 2013. See Wood, et al. v. 
Betlach, et al., 2013 WL 474369 (D. Ariz. 2013). On April 8, 2013, the 
Secretary issued a new approval letter for Arizona, reaffirming the 
prior approval of increased cost sharing for certain segments of the 
demonstration population. In this letter HHS stated that, in light of 
the court's decision, HHS had reconsidered the state's request and had 
reanalyzed the administrative record, including objections raised by 
interested parties. 

[45] These states were required by federal law to discontinue using 
CHIP funds to cover childless adults, but were allowed to continue 
services for this population with Medicaid funds under a new section 
1115 demonstration. 

[46] The limit on per person spending included specific limits for six 
populations included in the demonstration: those eligible on the basis 
of receiving Supplemental Security Income, persons with developmental 
disabilities, elderly and physically disabled persons, children and 
families, childless adults, and participants in the family planning 
program. In addition to the per person limit on spending, Arizona's 
spending limit also included $1.7 billion for the state to finance 
uncompensated care, about $77 million to expand coverage to children 
up to age 19 with family income up to 175 percent of the FPL not 
otherwise eligible for Medicaid, and unspecified amounts for other 
activities such as payments to Indian Health Service facilities. 

[47] The exceptions were the per person spending limits for childless 
adults and for the family planning extension program. For childless 
adults, HHS approved a per person spending limit equal to the state's 
projection of per person costs in the first year of the demonstration 
and did not allow per person costs to grow for the population. For the 
family planning demonstration, HHS used the national growth rate, 
which was lower than the state historical growth rate. 

[48] The four populations include children, pregnant women, children's 
caretakers who have historically been eligible for Medicaid, and 
children's caretakers newly eligible for Medicaid under the 
demonstration. 

[49] As referenced above, states are generally prohibited from making 
supplemental payments for services delivered under a managed care 
payment and delivery model. 

[50] As referenced above, the federal share of UPL payments are 
limited to a reasonable estimate of what Medicare would pay for a 
similar service. 

[51] Although reviewing the accuracy of the state's calculation of the 
maximum UPL was not within the scope of our review, we have previously 
reported concerns with the different methods and data used by states 
to estimate the amount of UPL payments allowed. See GAO, Medicaid: 
Improved Federal Oversight of State Financing Schemes Is Needed, 
[hyperlink, http://www.gao.gov/products/GAO-04-228] (Washington, D.C: 
Feb. 13, 2004). Further, UPL supplemental payment calculations are not 
subject to annual independent audits that verify that states have 
accurately calculated the maximum allowable UPL payments using 
reliable data, which is required for DSH payments. See GAO, Medicaid: 
More Transparency of and Accountability for Supplemental Payments Are 
Needed, [hyperlink, http://www.gao.gov/products/GAO-13-48] 
(Washington, D.C.: Nov. 26, 2013). HHS officials said they did not 
review the state UPL calculation in reviewing and approving the state 
spending limits, and used the maximum payment amounts submitted by the 
state. 

[52] Use of DSH allotments to set demonstration spending limits does 
not require the use of growth rates to project future costs. 

[53] The remaining funds under the District of Columbia's and 
Missouri's allotments are available for the states to make DSH 
payments to hospitals. 

[54] CHIPRA required that HHS limit spending for fiscal year 2010 to 
the amount spent by the state for that population in fiscal year 2009 
increased by the percentage increase (if any) between 2009 and 2010 in 
the projected nominal per capita amount of the National Health 
Expenditures. The act further required HHS to increase annual spending 
limits for the remaining years based on the percentage increase, if 
any, in the projected nominal per capita amount of the National Health 
Expenditures as published for each calendar year. 

[55] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[56] This template was not in effect for the demonstrations we 
reviewed. 

[57] We excluded from our review demonstrations that were not 
comprehensive, that is, they were limited to one category of services. 
We also excluded demonstrations that extended coverage to new 
populations in response to Medicaid expansion, as provided for under 
the Patient Protection and Affordable Care Act (PPACA). 

[58] The review times we report are based on the number of calendar 
days between the date when HHS received an official application and 
the date HHS made its final decision on whether to approve or not 
approve the application. Review times do not include any preliminary 
discussions and reviews of concept papers. 

[59] Section 1115 of the Social Security Act does impose time frames 
for the review of certain extensions. Specifically, states are 
required to submit applications for extensions at least 120 days prior 
to the expiration date of the demonstration. HHS is required to either 
approve or disapprove these extensions within 120 days after 
submission of the applications. 42 U.S.C. § 1315(f). This process, 
however, only applies to extensions that do not seek to change the 
terms and conditions of the original demonstrations. HHS officials 
informed us that all of the extensions referenced in table 5 contained 
significant changes to the terms and conditions and therefore were 
treated as new applications, which do not have any applicable time 
frames for review. 

[60] Review times may be affected in the future by recent HHS 
regulations. PPACA, enacted in 2010, required the Secretary of Health 
and Human Services to issue regulations for section 1115 applications 
that address certain topics including a state and federal public 
notice and comment process, submission of reports on implementation by 
states, and periodic evaluation by HHS. In response, on February 27, 
2012, HHS published final regulations establishing these requirements, 
some of which may affect HHS review times. For example, after receipt 
of a completed application, HHS must provide for a 30-day public 
comment period and has to wait at least 45 days before making a final 
decision. These requirements apply to applications submitted on or 
after April 27, 2012, and therefore do not apply to the applications 
we are addressing in this report. 

[61] We reported the estimated number of people covered and the 
approved spending limit when it was clearly stated in the approval 
documents. When it was not clearly stated, we estimated these figures 
using information from the approval documents. 

[62] Coverage is for children up to age 19 with family income up to 
175 percent of the FPL not otherwise eligible for Medicaid and 
pregnancy coverage is extended for up to 24 months after birth. 

[63] Nonemergency use of the emergency room can cost enrollees $30. 

[64] The cost for a brand-name drug is $10 compared to $4 for a 
generic drug. 

[65] We estimated the total federal and state costs using the 2012 
federal medical assistance percentage (FMAP). 

[66] Idaho was required by federal law to discontinue using the State 
Children's Health Insurance Program (CHIP) funds to cover childless 
adults, but was allowed to continue services for this population with 
Medicaid funds under a new section 1115 demonstration. 

[67] The contribution amounts range from 2 to 5 percent of income 
based on household income. 

[68] We estimated the total federal and state costs using the 2012 
federal medical assistance percentage (FMAP). 

[69] Michigan was required by federal law to discontinue using CHIP 
funds to cover childless adults, but was allowed to continue services 
for this population with Medicaid funds under a new section 1115 
demonstration. 

[70] Information to estimate the number of people covered was not 
provided in the approval documentation. 

[71] The state estimated that the demonstration would continue 
coverage for about 29,000 childless adults. However, information to 
estimate the number of people covered for the first and last year of 
the demonstration was not provided. 

[72] New Mexico was required by federal law to discontinue using CHIP 
funds to cover childless adults, but was allowed to continue services 
for this population with Medicaid funds under a new section 1115 
demonstration. 

[73] These populations were previously covered under the state plan, a 
different section 1115 demonstration, and other waivers including 
1915(c) waivers. 

[74] The incentive payments were intended to help the state and health 
care providers prepare for the expected increase in population after 
the Medicaid expansion under the Patient Protection and Affordable 
Care Act (PPACA) is fully implemented in 2014. At the time Texas's 
demonstration was approved, PPACA required all states to expand 
Medicaid coverage to a broader category of low-income individuals 
beginning in January of 2014. However, subsequent to this approval, a 
ruling by the U.S. Supreme Court essentially made the expansion a 
choice for the states. See National Federation of Independent 
Business, et al., vs. Sebelius, Sec. of Health and Human Services, et 
al., 132 S. Ct. 2566 567 (U.S. June 28, 2012). In July of 2012, the 
Governor of Texas sent a letter to HHS stating that the state did not 
intend to expand Medicaid. In addition, in June 2013, a state law was 
enacted that would prohibit the state Medicaid agency from expanding 
Medicaid coverage. 

[End of section] 

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