Medicaid Demonstration Projects in Florida and Vermont Approved Under Section 1115 of the Social Security Act
B-309734, Jul 24, 2007
In response to a congressional request, we are evaluating Medicaid demonstration projects in Florida and Vermont approved by the Department of Health and Human Services (HHS) under section 1115 of the Social Security Act (the act). During the course of our work, we identified several issues that raise concerns about the consistency of these demonstration projects with federal law. With respect to Florida, our concerns center on HHS's decision to waive requirements to provide covered benefits and limit cost sharing without addressing statutory limitations on its authority to do so. In the case of Vermont, HHS authorized the state to operate its own Medicaid managed care organization and, through this arrangement, to apply federal Medicaid matching funds to programs previously funded by the state. Given our concerns with these demonstration projects, discussed in detail below, we are bringing them to Congress's attention. We recommend that Congress reexamine these projects in light of our concerns and, where appropriate, either modify the terms of these projects or seek statutory authorization for them to continue in their current form.
B-309734, Medicaid Demonstration Projects in Florida and Vermont Approved Under Section 1115 of the Social Security Act, July 24, 2007
The Honorable Michael O. Leavitt
Secretary of Health and Human Services
Dear Mr. Secretary:
In response to a congressional request, we are evaluating Medicaid demonstration projects in
Through the Medicaid program established by title XIX of the act, the federal government shares with states the expense of furnishing medical services to certain low-income individuals. States operate their Medicaid programs under HHS approved plans and must meet certain statutory requirements for covered services, eligibility, and beneficiary cost sharing, among other things. Section 1115 of the act, however, authorizes HHS to waive compliance with certain federal statutory requirements, as well as to authorize costs that would not otherwise be included as Medicaid expenditures, [i]n the case of any experimental, pilot, or demonstration project which, in the judgment of the Secretary, is likely to assist in promoting the objectives of [the Medicaid program].  By its own terms, section 1115 provides HHS with broad discretion to approve state initiatives that depart from federal statutory requirements, subject to a determination that they are experimental in nature and likely to assist in promoting program objectives. Describing these limitations, one court emphasized that section 1115 was not enacted to enable states to save money or to evade federal requirements, but to 'test out new ideas and ways of dealing with the problems' programs were designed to address.
In October 2005, HHS approved
In September 2005, HHS approved Vermont's 5-year demonstration project, Global Commitment to Health, under which the Office of Vermont Health Access (OVHA)—an office within Vermont's Medicaid agency, the Agency of Human Services (AHS)—operates the state's sole managed care organization to provide coverage to the vast majority of Vermont's Medicaid population, subject to a fixed dollar limit on federal Medicaid funds. To implement the demonstration, AHS entered into an intergovernmental agreement with OVHA under which AHS makes monthly capitation payments to OVHA. HHS approved the intergovernmental agreement as a comprehensive risk contract between the state and a managed care organization and found that it complied with federal regulations governing Medicaid managed care. Accordingly, AHS receives federal Medicaid matching funds for the capitation payments it makes to OVHA.
Under the demonstration, savings from the AHS payments to OVHA are used for programs previously funded by the state. For purposes of the demonstration,
For Florida Medicaid Reform, HHS waived a statutory requirement that states cover specific hospital and medical benefits for groups of individuals required to be covered under its state plan (referred to as mandatory populations). Specifically, HHS waived section 1902(a)(10)(A) of the act, which requires states to cover specific benefits, including inpatient hospital services, outpatient hospital services, and laboratory and X-ray services, for these individuals. HHS approved this waiver to allow
While HHS has broad authority under section 1115 of the act to waive requirements of section 1902, this authority is not unlimited. Section 1902(l)(4)(A) of the act expressly limits the agency's authority to allow states to curtail benefits through a section 1115 waiver, stating that HHS must require states providing services under such a waiver to cover the same benefits for certain pregnant women and children as would be required under a state plan. The pregnant women and children covered by section 1902(l)(4)(A) are: (i) pregnant women with family income at or below 133 percent of the federal poverty level (FPL), (ii) children under age 6 with family income at or below 133 percent of the FPL, and (iii) children aged 6 to 19 with family income at or below 100 percent of the FPL. Therefore, with respect to these pregnant women and children, HHS may not authorize a state to forego its obligation to cover the statutorily defined set of benefits described above through a waiver under section 1115.
During the initial phase of the demonstration, poverty-related children—that is, children whose family incomes fall within certain limits—were required to participate in the demonstration and either be enrolled in managed care plans or employer-sponsored or private health plans. There is significant overlap between these poverty-related children and the groups of children identified in section 1902(l)(4)(A). In addition, certain pregnant women included in section 1902(l)(4)(A) are expected to participate in the demonstration by its fifth year. Notwithstanding the requirements of section 1902(l)(4)(A), the terms and conditions governing the demonstration permit Florida to cover only emergency and nursing home level of care services for beneficiaries for up to 30 days pending enrollment in managed care plans and to not ensure the full range of benefits required under the state plan for those who enroll in employer-sponsored or private health plans.
In response to our inquiries, CMS confirmed that HHS had not waived section 1902(l)(4)(A) and stated that Florida was not actually limiting coverage for children and pregnant women for up to 30 days pending their enrollment in managed care plans. However, the terms and conditions governing the demonstration and the decision memorandum approving the demonstration state that beneficiaries will be eligible for only emergency services and nursing home level of care during this period. Since HHS may not waive section 1902(a)(10)(A) for the pregnant women and children identified in section 1902(l)(4)(A), it should take steps to ensure that the state does not improperly limit services to these individuals pending their enrollment in managed care plans under the demonstration.
The waiver of section 1902(a)(10)(A), and failure to maintain the protection required by section 1902(l)(4)(A), could have a more significant impact on those opting out of Medicaid and enrolling instead in employer-sponsored or private health plans since the package of benefits provided could be more limited than under the state plan. With respect to this issue, CMS stated in essence that those eligible for Medicaid decline Medicaid eligibility by choosing the demonstration benefit of employer-sponsored or private health plans under Florida Medicaid Reform. As a result, they are entitled only to the payment of premiums under the authority of section 1115(a)(2) of the act, under which expenditures that would not otherwise qualify for Medicaid matching funds are regarded as matchable expenditures.
The language of section 1902(l)(4)(A) does not support CMS's explanation. As noted above, section 1902(a)(10)(A) requires states to provide identified benefits to certain groups of individuals, including certain pregnant women and children. Section 1902(l)(4)(A) effectively prohibits states from denying those benefits to the same groups of pregnant women and children under demonstration projects. CMS acknowledged that section 1902(l)(4)(A) applied to Florida Medicaid Reform and did not dispute that individuals covered by that section were required to participate in the demonstration project. With respect to those enrolling in managed care plans, CMS stated that even under customized benefit packages, required services must be provided. In contrast, with respect to those choosing employer-sponsored or private health plans, CMS suggested that section 1902(l)(4)(A) did not apply because those at issue were a non-State plan population due to their choice of employer-sponsored or private coverage. However, section 1902(l)(4)(A) does not identify such a choice as a basis for not ensuring that states provide benefits to the children and pregnant women within the scope of that section.
Moreover, both the operation of the demonstration and information obtained from the state of
's 1115 Medicaid Reform Waiver does not change or affect Medicaid eligibility. An individual that opts out of Medicaid [under the demonstration] continues to be eligible for Medicaid. If a beneficiary is enrolled in an [employer-sponsored insurance] plan and later chooses to enroll in a [managed care] plan, then the beneficiary must wait until his/her open enrollment period . . . in order to request enrollment in the health plan. However, the beneficiary does not need to reapply to Medicaid. . . . If an individual were to opt out and enroll in the [employer-sponsored insurance] plan, but later lose Medicaid coverage due to excess income or assets, the beneficiary could reapply to Medicaid. Florida
The state of Florida's comments about the operation of the demonstration project also confirm that those who choose employer-sponsored or private health plans under Florida Medicaid Reform differ from individuals who effectively become eligible for Medicaid under a section 1115 demonstration project (referred to as expansion populations). The latter do not meet eligibility criteria for Medicaid under a state plan, but are treated as eligible exclusively by virtue of the demonstration project. Under section 1115(a)(2) of the act, states may claim federal matching funds for the costs of services provided to these individuals even though they otherwise are not eligible for Medicaid. If they were to lose coverage due to a change in status, they, unlike participants in Florida Medicaid Reform, would have to establish their eligibility under the state plan.
As part of Florida Medicaid Reform, HHS also waived statutory limits on the imposition of cost sharing requirements on Medicaid beneficiaries so that
While section 1916(f) contemplates waivers of the cost sharing limits found in other parts of section 1916, it also establishes criteria for the imposition of other than nominal cost sharing under any waiver authority. It provides, for example, that cost sharing may not be imposed under any waiver authority unless the waiver is for a demonstration that tests a unique and previously untested use of co-payments and does not last longer than 2 years. HHS did not apply the criteria of 1916(f) to the waiver of cost sharing limitations in the Florida Medicaid Reform demonstration. CMS explained that since those who enroll in employer-sponsored or private plans elect not to apply for benefits under the state plan, they fall outside the scope of section 1916 and section 1916(f) and, accordingly, that the waiver of section 1902(a)(14) approved as part of the
Like CMS's response to our inquiry regarding the requirement to provide benefits to certain pregnant women and children, its comments here do not explain why the demonstration did not trigger section 1916 and therefore why the demonstration did not require a waiver of the cost sharing limitations contained in that section. To the extent that CMS made essentially the same point with respect to this issue—that is, that as a matter of eligibility, those enrolling in employer-sponsored or private health plans qualify only for benefits as defined by the terms of the demonstration project—the agency's comments raise similar concerns. Almost all of the individuals required to participate in the demonstration during the initial phase were also required to be covered under the state plan. While Florida will make premium payments on behalf of those who enroll in employer-sponsored or private health plans under the authority of section 1115(a)(2) of the act, these individuals differ from those who otherwise do not meet eligibility criteria under the state plan, but for whom the cost of services nonetheless gives rise to federal reimbursement, that is, expansion populations. While the limitations on cost sharing contained in section 1916 would not apply to such expansion populations, CMS's comments do not adequately explain why the cost sharing limitations would not apply to Florida Medicaid Reform participants who, though enrolled in employer-sponsored or private health plans, remain eligible under Florida's state plan.
To receive federal Medicaid matching funds for capitation payments made to a managed care organization, a state is required to enter into a contract with an entity determined to be a managed care organization.  This type of contract is generally referred to as a comprehensive risk contract and must meet specific statutory and regulatory requirements. HHS approved the interagency agreement between AHS and OVHA as such a contract. HHS also approved the planned use of savings from capitation payments under the contract for programs previously funded by the state.
HHS's approval of the Global Commitment to Health raises the question whether AHS and its component, OVHA, could enter into a contract as that term is used in the act because a contract implicitly requires an agreement between two parties. The statutory definition of the term managed care organization is very broad and does not specifically address whether state agencies may contract with their own components. Statutory provisions concerning one particular state, however, suggest that explicit authority would be needed for a state to contract with another state office or agency as a Medicaid managed care organization. Section 4113 of the Omnibus Budget Reconciliation Act of 1987 added a new paragraph to section 1903(m) of the act, expressly defining the term contract for purposes of the managed care provisions to include an arrangement under which
CMS acknowledged the specific provision regarding
Other statutory provisions applicable to Medicaid managed care contracts suggest that contractual arrangements are to involve an arms-length agreement between two parties. Specifically, a state may not enter into or renew a contract with a Medicaid managed care organization unless it has established a range of sanctions, which may include civil money penalties and the appointment of temporary management, to be imposed on the organization in certain circumstances, such as for failing to provide medically necessary items or services required to be provided to enrollees, or for misrepresenting or falsifying information provided to the state. In the case of
Concerns about whether the arrangement between AHS and OVHA qualifies as a contract raise related questions about the basis under which federal Medicaid matching funds are available for the capitation payments made to OVHA and whether the arrangement should be treated like an interagency agreement for the provision of services under OMB Circular A-87.  Under the circular, costs of services provided by one agency to another within a state may include allowable direct costs plus a pro rata share of indirect costs. Therefore, where services are provided under an interagency agreement, federal matching funds are available only for the costs incurred by the agency providing the services, or the expenditures made by that agency—here, OVHA—for its allowable direct and indirect costs of providing services. The circular does not provide for profit or other increments above cost—such as the savings in the AHS capitation payments to OVHA—and therefore does not provide a basis to treat savings as allowable costs for purposes of obtaining federal matching funds.
In response to our inquiries about the operation of the AHS-OVHA arrangement, CMS advised that it may be viewed as either a comprehensive risk contract or as an intra-governmental cost reimbursement arrangement, or a hybrid of the two. A hybrid of these two types of arrangements does not seem possible, however, because one is capitation-based and the other is cost-based, and, in any case, CMS pointed to no authority for such a hybrid. More importantly, the arrangement appears problematic viewed as either a comprehensive risk contract or a cost-reimbursement arrangement. Under a comprehensive risk contract, federal Medicaid matching funds are available for capitation payments made to a managed care organization on an actuarially sound basis for services provided to Medicaid eligible individuals. Federal regulations require states to document the actuarial soundness of the rates and to provide assurance that the rates are based only on services covered under the state plan (or costs directly related to providing these services, including administrative costs) provided under the contract to Medicaid eligible individuals. Notably, the intent of this regulatory limitation was to prevent states from obtaining federal Medicaid matching funds for things such as State-funded services for which [matching funds] would not ordinarily be available, by including them in [a contract with a managed care organization]. However, under the Global Commitment to Health, HHS expressly approved the use of savings from capitation payments made to OVHA for programs previously funded by the state. These programs are generally carried out by other agencies and do not exclusively benefit those eligible for Medicaid so that federal Medicaid matching funds would ordinarily not be available for them. 
CMS also suggested that, since OVHA must fully expend the capitation payment for services for Medicaid-eligible individuals and the specified demonstration purposes, the arrangement between AHS and OVHA has more of the characteristics of a reasonable cost reimbursement payment methodology with the contract establishing the overall budget. However, the arrangement between AHS and OVHA allows OVHA to direct funds received in excess of costs (that is, savings) to programs of other state agencies. That is to occur only if capitation payments to OVHA yield excess funds, and then only to the extent of the excess. By definition, such savings represent an increment of payment above the direct and indirect cost of providing services and, thus, we see no basis to characterize this arrangement as one for reimbursement of costs.
Our analysis of Florida Medicaid Reform and the Vermont Global Commitment to Health raises several legal concerns. With respect to
Gary L. Kepplinger
cc: The Honorable Henry A. Waxman
Committee on House of Representatives
The Honorable John D. Dingell
Committee on House of Representatives
The Honorable Frank J. Pallone, Jr.
Subcommittee on Health
Committee on Energy and Commerce
House of Representatives
The Honorable Sherrod Brown
United States Senate
bcc: Mr. Kepplinger, GC
Mr. Gordon, GC
Ms. Gibson, GC
Ms. Shah, GC
Ms. Tewarson, GC
Ms. Desaulniers, GC
Ms. Whitworth, GC
Dr. Kanof, HC
Ms. Iritani, HC
Mr. Saiki, HC
 42 U.S.C. sect. 1315 (2000).
 We did not examine the extent to which arrangements in other states raise similar legal concerns.
By letter of
 See, e.g., Social Security Act sections 1902(a)(10)(A), 1905(a), 1916 (codified at 42 U.S.C. sections 1396a(a)(10)(A), 1396d(a), 1396o (2000)).
 42 U.S.C. sections 1315(a)(1), (2)(A) (2000).
 Beno v. Shalala, 30 F.3d 1057, 1069 (9th Cir. 1994) (citations omitted).
 The demonstration period is from
 See Global Commitment to Health Section 1115 Demonstration, Special Terms and Conditions (GC STCs), #32, 51, pp. 16, 22. The demonstration period is from
 See Final Intergovernmental Agreement Between AHS and OVHA for the Administration and Operation of the Global Commitment to Health Waiver (
 Under a risk contract, the contractor assumes risk for the cost of covered services and incurs loss if the cost of furnishing the services exceeds the payments under the contract. 42 C.F.R. sect. 438.2 (2006). A comprehensive risk contract covers services identified in federal regulation.
 See GC STCs, #40, p. 17. These programs fall into four broad categories identified in the demonstration terms and conditions: (i) reducing the rate of uninsured and/or underinsured in Vermont; (ii) increasing the access of quality health care to uninsured, underinsured, and Medicaid beneficiaries; (iii) providing public health approaches to improve the health outcomes and the quality of life for Medicaid-eligible individuals in Vermont; and (iv) encouraging the formation and maintenance of public-private partnerships in health care.
 42 U.S.C. sect. 1396a(a)(10)(A) (2000); see also Social Security Act sections 1905(a)(1)-(5), (17), and (21) (codified at 42 U.S.C. sections 1396d(a)(1)-(5), (17), and (21) (2000)).
 Under the demonstration,
 42 U.S.C. sect. 1396a(l)(4)(A) (2000). Section 1902(l)(4)(A) states, In the case of any State which is providing medical assistance to its residents under a waiver granted under section 1115, the Secretary shall require the State to provide medical assistance for pregnant women and infants under age 1 described in subsection (a)(10)(A)(i)(IV) [of section 1902] and for children described in subsection (a)(10)(A)(i)(VI) or subsection (a)(10)(A)(i)(VII) [of section 1902] in the same manner as the State would be required to provide such assistance for such individuals if the State had in effect a plan approved under this title.
 Id.; see also Social Security Act sections 1902(l)(1), (2) (codified at 42 U.S.C. sections 1396a(l)(1), (2) (2000)). The statutory provisions contained in section 1902(l)(4)(A) refer to individuals described in sections 1902(l)(1) and (2). Subsection (l)(1) refers to pregnant women and children of varying ages and subsection (l)(2) provides corresponding family income levels. The scope of section 1902(l)(4)(A) is thus determined by reading the referenced provisions of section 1902(a)(10)(A) and sections 1902(l)(1) and (2) together.
 Poverty-related children are defined as (i) children up to age 1 with family income up to 200 percent of the FPL, (ii) children up to age 6 with family income up to 133 percent of the FPL, and (iii) children up to age 21 with family income up to 100 percent of the FPL.
 CMS Letter, pp. 2-3. According to the terms and conditions of the demonstration, once enrolled in managed care plans, children and pregnant women protected by section 1902(l)(4)(A) will receive required benefits. Managed care plans must cover all categories of mandatory services, including medically necessary services for pregnant women and early periodic screening, diagnosis, and treatment services for children under 21, as well as needed optional services covered under
 CMS suggested that very few individuals had exercised this option. CMS Letter, p. 2. We understand that as of
 Responding to our inquiries about HHS's apparent failure to ensure that benefits would be provided to certain children and pregnant women, CMS said that section 1902(l)(4)(A) would not extend to individuals who have chosen not to apply under the state plan, and instead have applied only for eligibility under the demonstration. CMS Letter, p. 2. In addition, in connection with the waiver of cost sharing limitations discussed below, CMS described those opting for employer-sponsored or private health plans as a non-State plan population and explained that they are eligible only for demonstration benefits authorized under Section 1115(a)(2) [of the act].
 CMS Letter, p. 2.
 Letter from Thomas W. Arnold, Deputy Secretary for Medicaid, Florida Agency for Health Care Administration, to Marjorie Kanof, Health Care Managing Director, GAO, May 23, 2007.
 See Spry v. Thompson, 487 F.3d 1272 (9th Cir. 2007) (discussing the distinction between those eligible for Medicaid under a state plan and expansion populations, and overturning a district court holding that populations eligible for Medicaid only under the terms of a section 1115 demonstration project must be deemed to be eligible under a state plan and therefore subject to section 1916 of the act).
 42 U.S.C. sections 1396o(a)(2), (3) and (b)(2), (3) (2000).
 Under the demonstration,
 Social Security Act sections 1916(f)(1), (2) (codified at 42 U.S.C. sections 1396o(f)(1), (2) (2000)).
 CMS Letter, p. 4.
 See Spry at 1277.
 Social Security Act sect. 1903(m)(2)(A)(i), (iii) (codified at 42 U.S.C. sect. 1396b(m)(2)(A)(i), (iii) (2000)).
 See id. at 1903(m)(2)(A); 42 C.F.R. sections 438.1, 438.2, and 438.6 (2006).
 See, e.g., Taller & Cooper v. Illuminating Electric Co., 172 F.2d 625 (7th Cir. 1949); see also Restatement (Second) of Contracts sect. 9 (stating that a contract requires at least two parties as the law does not provide remedies for a breach of promise to oneself).
 See Social Security Act sect. 1903(m)(1)(A) (codified at 42 U.S.C. sect. 1396b(m)(1)(A) (2000)). The definition includes a health maintenance organization . . . , or any other public or private organization meeting specified requirements.
 HHS regulations define the term grantee as the entire state and, therefore, suggest that state agencies cannot enter into contracts with their components. See 45 C.F.R. sect. 92.3 (2006) (defining the term grantee to mean the government to which a grant is awarded and which is accountable for the use of the funds provided and noting that the grantee is the entire legal entity even if only a particular component of the entity is designated in the grant award document.).
 See Omnibus Budget Reconciliation Act of 1987 (OBRA), Pub. L. No. 100-203, sect. 4113, 101 Stat. 1330, 1330-150 (1987) (adding new section 1903(m)(6) to the act, codified at 42 U.S.C. sect.1396b(m)(6) (2000)). In 1987, section 1903(m) of the act required states to enter into contracts with health maintenance organizations in order for expenditures made for their services to qualify for Medicaid matching funds. Although section 1903(m) has been amended since that time, the requirement that a state and an organization enter into a contract has remained.
 CMS Letter, p. 5. The legislative history of section 4113 indicates that action was taken with the intent to address legal entity and contract problems of the
 CMS officials told us that the statutory provision regarding
 CMS Letter, p. 5. CMS did not elaborate or explain what constitutes a distinct unit of state government.
 Social Security Act sect. 1932(e)(1) (codified at 42 U.S.C. sect. 1396u-2(e)(1) (2000)).
 As a general matter, HHS regulations limit the use of grant funds to allowable costs, which are determined in accordance with OMB Circular A-87. 45 C.F.R. sect. 92.22 (2006).
 OMB Cir. No. A-87, Cost Principles for State, Local, and Indian Tribal Governments, Attachment A, sect. G, Interagency Services.
 OMB Cir. No. A-87 at para. 5.
 CMS Letter, pp. 7-8.
 Social Security Act, sect. 1903(m)(2)(A)(iii) (codified at 42 U.S.C. sect. 1396b(m)(2)(A)(iii) (2000)).
 42 C.F.R. sect. 438.6(c)(4)(i), (ii)(A), (B) (2006). The regulations also authorize managed care contracts to cover services for enrollees in addition to those services covered under the state plan, though the cost of such services may not be included when determining payment rates.
 According to state officials, in State Fiscal Year 2006, a total of $43 million was spent on managed care organization investments in a number of state agencies. Programs funded included those related to health profession education, health research and statistics, and public health laboratory services. We understand that
 CMS Letter, p. 6.