Medicaid Waivers:

HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost and Oversight Concerns

GAO-04-480: Published: Jun 30, 2004. Publicly Released: Jul 30, 2004.

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Under section 1115 of the Social Security Act, the Secretary of Health and Human Services may waive certain Medicaid requirements for states seeking to deliver services through demonstration projects. By policy, these demonstrations must not increase federal spending. GAO has previously reported concerns with HHS's approval process. GAO was asked to provide information on a new Medicaid section 1115 demonstration initiative called Pharmacy Plus, intended to allow states to cover prescription drugs for seniors not otherwise eligible for Medicaid. GAO reviewed the (1) approval status of state proposals, (2) extent to which HHS ensured that demonstrations are budget neutral, (3) basis for savings assumptions, and (4) federal and state steps to evaluate and monitor the demonstrations.

From January 2002 through May 2004, HHS reviewed Pharmacy Plus proposals from 15 states and approved four: Florida, Illinois, South Carolina, and Wisconsin. These demonstrations offer prescription drug coverage to low-income seniors not otherwise eligible for Medicaid. HHS denied proposals from Delaware and Hawaii as inconsistent with demonstration guidelines; most of the rest were not under active review because HHS had not determined how new Medicare prescription drug legislation will affect proposed or operating Pharmacy Plus demonstrations. Over 5 years, the four approved demonstrations will provide prescription drug coverage to half a million low-income people age 65 or older, at a projected cost of about $3.6 billion, of which the federal share would be about $2.1 billion. HHS has not adequately ensured that the four approved demonstrations will be budget neutral, that is, that the federal government will not spend more with the demonstrations than without them. HHS approved the demonstrations' 5-year spending limits using projections of cost and beneficiary enrollment growth that exceeded benchmarks that HHS said it considered in assessing budget neutrality, specifically, states' recent average growth rates and projections for Medicaid program growth nationwide. Neither HHS's negotiations with the states nor its rationale for approving higher growth rates is documented. Using the benchmark growth rates, GAO estimates that none of the four demonstrations will be budget neutral and federal spending may increase significantly, for example, by more than $1 billion in Illinois and $416 million in Wisconsin over 5 years. Unrealistic savings assumptions also contribute to demonstration spending limits that are not likely to be budget neutral. States assumed that keeping low-income seniors healthy--thus preventing them from spending down their financial resources on health services and "diverting" them from Medicaid eligibility--would generate sufficient savings to offset the increased costs of providing a new drug benefit. GAO found neither state experience nor other research to support such savings. Without state-specific evidence, HHS approved savings assumptions for the four states ranging from $480 million to $2 billion per state over 5 years. Had more conservative assumptions been used to estimate demonstration savings, the proposals likely could not have been approved as budget neutral. Efforts by the states and HHS to evaluate and monitor the Pharmacy Plus demonstrations are in their early stages. The four states have taken few steps to put their own required evaluation plans into practice, and an independent evaluation contracted by HHS and started in October 2002 is scheduled to report in September 2005. In the interim, HHS has not ensured that all states meet requirements for progress reporting on the demonstrations. The information that states have submitted is often insufficient for determining whether the demonstrations are operating as intended, and this shortcoming will limit HHS's oversight capability.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To ensure that the Secretary and other stakeholders have the information needed to monitor approved Pharmacy Plus and other Medicaid section 1115 demonstrations to determine if they are functioning as intended, the Secretary of HHS should ensure that states provide sufficient information in their demonstration progress reports, in a consistent format, to facilitate the department's monitoring.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Implemented

    Comments: The agency concurred with this recommendation. Pharmacy Plus program directors stated that they provided the approved demonstrations with more complete progress reporting formats in summer 2004 and they are monitoring state spending relative to budget neutrality targets using the CMS 64 Medicaid expenditure reports.

    Recommendation: To ensure that approved Pharmacy Plus and other Medicaid section 1115 demonstrations fulfill the objectives stated in their evaluation plans, the Secretary of HHS should, on acceptance, make public the interim and final results of HHS's independent Pharmacy Plus evaluation.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Implemented

    Comments: The agency concurred with this recommendation. In July 2005, Pharmacy Plus program directors stated that a description of two of the demonstrations and a report on the implementation process had been completed by the independent evaluators and were made available on the CMS web site. The evaluators were continuing to analyze claims and survey data, with results expected in spring 2006. The program directors stated that these results will also be made available on the web site.

    Recommendation: To ensure that approved Pharmacy Plus and other Medicaid section 1115 demonstrations fulfill the objectives stated in their evaluation plans, the Secretary of HHS should ensure that states are taking appropriate steps to develop evaluation designs and to implement them by collecting and reporting the specific information needed for a full evaluation of the demonstration objectives.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Not Implemented

    Comments: The agency concurred with this recommendation. Pharmacy Plus program directors stated, however, that the four approved demonstrations will be terminated early due to implementation of the Medicare Part D prescription drug benefit. Consequently the agency did not plan to pressure the states to conduct internal evaluations of their demonstrations because such evaluations are costly and state resources could be better spent preparing for the transition of demonstration enrollees to the Medicare Part D program.

    Recommendation: To improve HHS's process for reviewing and approving states' budget neutrality proposals for Pharmacy Plus and other Medicaid section 1115 demonstrations, the Secretary of HHS should document and make public the basis for any section 1115 demonstration approvals, including the basis for the cost and enrollment growth rates used to arrive at the spending limits.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Not Implemented

    Comments: Although Pharmacy Plus program directors stated that the agency has made many waiver documents available on its web site, they acknowledged that the available documents do not include statements of the justification or basis for the specific growth rates that were approved in demonstration budget neutrality agreements.

    Recommendation: To improve HHS's process for reviewing and approving states' budget neutrality proposals for Pharmacy Plus and other Medicaid section 1115 demonstrations, the Secretary of HHS should consider applying these criteria to the four approved Pharmacy Plus demonstrations and reconsider the approval decisions, as appropriate.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Not Implemented

    Comments: The agency did not concur with this recommendation. Pharmacy Plus program directors confirmed that the agency has not reconsidered its decisions to approve four Pharmacy Plus demonstrations and the issue will become moot when the demonstrations are superseded by the Medicare Part D benefit and terminated by the states.

    Recommendation: To improve HHS's process for reviewing and approving states' budget neutrality proposals for Pharmacy Plus and other Medicaid section 1115 demonstrations, the Secretary of HHS should, for future demonstrations, clarify criteria for reviewing and approving states' proposed spending limits.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Not Implemented

    Comments: The agency did not concur with this recommendation. However, according to Pharmacy Plus program directors, the point is moot because no more waiver applications will be reviewed.

    Recommendation: To ensure that the Secretary and other stakeholders have the information needed to monitor approved Pharmacy Plus and other Medicaid section 1115 demonstrations to determine if they are functioning as intended, the Secretary of HHS should ensure that states submit required demonstration progress reports in a timely manner.

    Agency Affected: Department of Health and Human Services

    Status: Closed - Implemented

    Comments: The agency concurred with this recommendation. Pharmacy Plus program directors stated that following GAO's report and until the termination of the Pharmacy Plus program with the advent of the Medicare part D drug benefit, they had talked with state demonstration officials more frequently regarding the content and timeliness of progress reports.

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