093009 Lewin Group Mandated Report to Congress on Four Medicaid Regulations

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Mandated Report to Congress:Analysis of Impacts and Issues Relating to Four Medicaid Regulations

Prepared for: The United States CongressUnder contract to: U.S. Department of Health and Human Services, Centers for Medicare

and Medicaid Services, Contract No. HHSM-500-2005-00024I

Submitted by: The Lewin Group

Date: September 30, 2009


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Table of Contents

ACKNOWLEDGEMENTS

I. EXECUTIVE SUMMARY .................................................................................................................. 1

Summary of Findings.............................................................................................................................. 1Comparisons with Prior Estimates.......................................................................................................... 4Methodology ........................................................................................................................................... 5Available Alternatives for Addressing Concerns.................................................................................... 6Conclusions............................................................................................................................................. 6

II. BACKGROUND AND PURPOSE OF THIS STUDY .................................................................. 8

III. METHODOLOGY............................................................................................................................... 11

A. Research Design.............................................................................................................................. 11B. Analytical Approach to Determine Prevalence and Assess Impacts............................................... 12

C. Limitations and Barriers to Research Methodology........................................................................ 15

IV. COST LIMIT ........................................................................................................................................ 17

A. Overview and Background.............................................................................................................. 17B. Prevalence of the Problems ............................................................................................................. 19C. Strategies States Use to Address these Problems............................................................................ 23D. Impact of the Cost Limit Regulation............................................................................................... 24E. Alternative Ways for CMS to Address the Problems...................................................................... 31F. Future Considerations ..................................................................................................................... 34

V. GRADUATE MEDICAL EDUCATION (GME)............................................................................ 35

A. Overview and Background.............................................................................................................. 35B. Prevalence of the Problems ............................................................................................................. 37C. Strategies States Use to Address these Problems............................................................................ 41D. Impact of the GME Regulation ....................................................................................................... 41E. Alternative Ways for CMS to Address the Problems...................................................................... 48F. Future Considerations ..................................................................................................................... 49

VI. REHABILITATIVE SERVICES........................................................................................................ 50

A. Overview and Background.............................................................................................................. 50B. Prevalence of the Problems ............................................................................................................. 53C. Strategies States Use to Address these Problems............................................................................ 57D. Impact of the Rehabilitative Services Regulation ........................................................................... 59

E. Alternative Ways for CMS to Address the Problems...................................................................... 70

VII.SCHOOL-BASED SERVICES .......................................................................................................... 72

A. Overview and Background.............................................................................................................. 72B. Prevalence of the Problems ............................................................................................................. 74C. Strategies States Use to Address these Problems............................................................................ 78D. Impact of the School-based Services Regulation ............................................................................ 82E. Alternative Ways for CMS to Address the Problems...................................................................... 91

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VIII. PROCESSING MEDICAID CLAIMS THROUGH MMIS ................................................. 95

A. Claims Not Processed through MMIS............................................................................................. 95B. Why Claims are Not Processed through MMIS.............................................................................. 97C. Recommendations for Increasing the Percentage of Claims Processed through MMIS................. 98

IX. CONCLUSION.................................................................................................................................... 99

APPENDICES

Appendix A: Interview Protocol and Data Request

Appendix B: Suggested Data Templates

Appendix C: Additional Details on Fiscal Impact Analysis

LIST OF ACRONYMS

REFERENCES

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Acknowledgements

I would like to thank the many state officials that contributed their time and expertise byparticipating in interviews, collecting and submitting data, responding to a variety of follow-uprequests, and reviewing drafts of our analysis. In many instances, these contributions coincidedwith particularly difficult and demanding state budget seasons, and our requests forinformation often required the time of the same state officials who were busy responding tothese budget challenges. In some cases, state officials were also working under additionalconstraints imposed by mandatory furloughs. I would also like to thank staff from the CMScentral and regional offices for their timeliness and responsiveness in responding to ourrequests for materials and clarifications.

Finally, I would like to acknowledge the contributors to this report. From The Lewin Group,Erika Ange, Roshni Arora, Adam Bloomfield, Kavita Choudhry, Tim Engelhardt, Moira Forbes,Kathi Frese, Thais Gregg, Allison Haley, Amy Herr, Wes Joines, Kathy Kuhmerker, JenniferLeone, Karen Linkins, Joshua McFeeters, Lauren Moldawer, Evelyn Murphy, Chris Park, MaryPohl, Jim Teisl, Christine Tolleris, Pete Welch, and Terry West all contributed to the data

collection, analysis, and report development. Our project team also included a number ofsubject matter experts including Tracy Brunner, Janet Corson, Trudy Fletcher, Peter Harbage,and Ron Preston.

While our project team did rely upon the accuracy of the data received from the states, anymisinterpretations or errors in calculation in this report are our own. Furthermore, while wesought information on the intent of the four regulations from CMS staff, we relied upon ourown judgment and interpretation in developing our methodology and estimates. This reportwas reviewed for accuracy by individuals on our project team and was submitted to CMS fortheir review. Minor technical and copyediting corrections have been made to this version of thedocument, which replaces the previous version. Any remaining errors, as well as all

interpretations, subjective judgments, and conclusions, remain the responsibility of The LewinGroup.

Terry SavelaProject Director


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I. Executive Summary

Beginning in early 2007, the Centers for Medicare and Medicaid Services (CMS) proposedseveral regulations affecting Medicaid financing and coverage. Given the controversysurrounding these rules, Congress took steps to prevent CMS from implementing the regulations

and requested additional analysis on the regulations and their potential impacts. In 2008,Congress directed the Secretary of Health and Human Services to describe further the problemsthat the regulations were intended to address and their impact. Secretary Michael O. Leavittsubmitted that report in December 2008. 1 Congress also directed the Secretary to commission anindependent study on the prevalence of these problems and the potential impacts of four of theregulations:2

Cost Limit for Providers Operated by Units of Government and Provisions to Ensure theIntegrity of Federal-State Partnership (CMS-2258-P) proposed rule published January 18,2007

Graduate Medical Education (CMS-2279-P) proposed rule published May 23, 2007

Coverage for Rehabilitative Services (CMS-2261-P) proposed rule published August 13,2007

Elimination of Reimbursement Under Medicaid for School Administration Expenditures andCosts Related to Transportation of School-Age Children Between Home and School (CMS-2287-F) final rule published December 28, 2007, final rule rescinded on June 30, 2009

Following a competitive bidding process, the Department of Health and Human Servicescontracted with The Lewin Group to conduct this study. This report describes our findings.

Summary of Findings

Overall, we found that states do in fact have difficulty, in some instances, tracking where theirMedicaid dollars go and the precise purposes to which these dollars are applied, which, in turn,creates oversight problems with CMS. There is no doubt that many of the issues raised by theSecretary and addressed in the regulations are ones that require continued focus from CMS andthe states. On the other hand, we found little evidence within the states to substantiate some ofthe specific problems expressed by the Secretary in his 2008 report. In addition, many of themore significant concerns identified in the Secretarys report arise from fundamentaldisagreements about the appropriate scope of Title XIX. In many cases, while we find that aproblem raised by CMS exists in a state, we do not find any indication that the state has actedinappropriately. Specific findings regarding each regulation are summarized below.

CMS 2258-P, Cost Limit for Providers Operated by Units of GovernmentThe proposed regulation would: clarify that entities involved in financing the non-federal shareof Medicaid payments must be units of government; establish minimum documentation requiredto support a certified public expenditure (CPE); limit reimbursement to governmentally-operated

1 Leavitt, Michael O., Secretary of Health and Human Services, Report to Congress on Medicaid Regulationsunder Section 7001(c)(1) of the Supplemental Appropriations Act, 2008.

2 Section 7001(c)(2) of the Supplemental Appropriations Act, 2008 (SAA, P.L. 110-252)


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health care providers to an amount that does not exceed the providers Medicaid cost; andrequire that governmentally operated providers retain the full amount of payment for servicescovered by the Medicaid State Plan.

We identified a variety of practices used by states for certification of public expenditures and in

at least 17 states these practices do not appear to align with actual costs. We did not identifystates that clearly use tax revenue earmarked for other purposes as non-federal share, nor did weidentify states that used Medicaid funds returned by providers to draw down additional federalfunds or for non-Medicaid purposes. We did identify many states that make Medicaid paymentsto governmental providers in excess of their reported Medicaid costs, sometimes to a significantdegree; however, payments to governmental providers above their costs was not a specificproblem cited by the HHS Secretary in the 2008 report and payments above costs are currentlyallowed. States indicated that these payments were necessary to support their health care safetynets.

We estimate that the proposed regulation would potentially cause a nearly $4 billion reduction in

federal financial participation (FFP) in FFY10 and amount to nearly $23 billion from FFY10-14.We also found that the proposed regulation would have a significant administrative impact onstates as well as providers, primarily due to the requirement to collect cost reports and performcost reconciliations for all governmental providers, including non-institutional providers such asschools, clinics, and transportation providers. Reduced reimbursement and additionaladministrative requirements would also likely ultimately impact services to beneficiaries.

CMS-2279-P Graduate Medical Education

The proposed regulation would eliminate all federal payments for Medicaid GME and removethe Medicare GME payment from the Medicaid upper payment limit (UPL) calculation.

We found 44 states that currently make GME payments through their Medicaid programs. Weassessed the three main problems from the Secretarys 2008 report: lack of paymenttransparency; payments not related to providing services, and lack of evidence of the benefit ofGME programs. We identified lack of payment transparency as the most prevalent problem,present in more than half of the states. In the majority of states we found that GME paymentswere clearly linked to currently active residency programs and those payments were intended tosupport these programs. In eight states, we determined that GME payments were not clearlyrelated to improving Medicaid services.

We estimate a $2.5 billion potential reduction in FFP in FFY10 and more than $14.5 billion fromFFY10-14. While we do not expect a dramatic impact on state administration, the proposed

regulation would result in many states modifying rate setting formulas and UPL calculations aswell as submitting Medicaid State Plan amendments. The proposed regulation would be expectedto have a significant impact on providers due to reductions in payments, which in some caseswould be substantial. Also, because teaching hospitals are often important providers of care toMedicaid populations, the reduction in funding would likely impact services to beneficiaries aswell.

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CMS-2261-P Coverage for Rehabilitative Services

The proposed regulation would establish regulatory parameters for Medicaid coverage ofrehabilitative services and enact requirements for written rehabilitation plans and otherdocumentation.

The problems identified by the Secretarys 2008 report included: (1) covering services that donot meet CMS definition of rehabilitation; (2) bundling payment in ways that provideMedicaid funding for both allowable and non-allowable services; (3) covering services providedby individuals without appropriate qualifications; (4) failure by providers to maintain properdocumentation for services rendered; and (5) covering services that are intrinsic elements ofother government programs. The most prevalent problem, identified in 31 states, is coverage ofservices that do not meet CMS definition of rehabilitation. The other problems appear to be lessprevalent.

We estimate a reduction in FFP of $55 million for FFY 2010 and $1.2 billion from FFY10-14.The fiscal impact is mitigated by the fact that we estimate that states would shift approximately

$350 million in FFP in FFY 2010 ($3 billion from FFY10-14) from the rehab option to continueproviding services under alternate Medicaid authority. Because of this potential shift in services,we estimate that the proposed regulation would lead to major new administrative burdens forstate agencies. Administrative steps to protect FFP would include amending Medicaid StatePlans, developing and implementing new waiver programs, and complying with the ongoingreporting and quality assurance requirements for other benefit categories.

Because we believe that states could shift many of the affected rehabilitative services to alternateMedicaid authorities, the impacts on beneficiaries in most states would likely be minimal. In asmall number of states, however, Medicaid beneficiaries with chronic illnesses and disabilitieswould lose access to Medicaid-funded services in their communities. Medicaid providers would

experience new administrative requirements in many states. In seven states, providers would loserevenue ($2.4 billion over five years).

CMS-2287-F, Medicaid Reimbursement for School Administrative Expenditures and Costs

Related to Transportation between Home and School

The regulation would eliminate all federal payments for school-based Medicaid administrativeactivities and transportation to and from home to school for children with an individualizededucation program (IEP) or an individualized family service plan (IFSP) established under theIndividuals with Disabilities in Education Act (IDEA). CMS published a final rule to rescindCMS-2287-F on June 30, 2009, to prevent implementation of the rule on July 1, 2009.

We assessed state reimbursement for two areas:

1. Elimination of FFP for school-based transportation between home and school. Weidentified 31 states that use Medicaid to cover school-based transportation, of which 29allow claiming for transportation between home and school. Based on our interviews andresearch we only identified one state with billing practices that do not appear to complywith prior CMS guidance.

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Five-Year Estimates of Federal Savings (FFP) for the Studies Regulations, in Billions

Source Period Cost Limit GME Rehab SBS

OMB (2008)3 FFY09-13 $5.7 $1.8 $2.7 $3.6

House Committee on Oversight and

Government Reform (2008)4

FFY09-13 $21.1 $9.8 $5.2 $3.2

The Lewin Group (2009) FFY10-14 $23.0 $14.5 $1.2 $4.9

There are a variety of explanations for the variance among these projections, including:5

Each projection was made at a different point in time and often for different time periods

We applied a standardized data collection and analysis process for each state

Our projections assume full compliance with the regulation immediately upon the effectivedate, unlike those that phase-in effectiveness

States have modified their programs across the different measurement periods

The regulations leave significant room for interpretation which likely resulted in variationsin approach and consistency between and among the estimates

As a result, there is no single correct estimate of the ultimate impact of these regulations.

Also, please note that the estimates for each regulation represent the impact of that regulatorychange alone, assuming no other changes. The estimates are not additive due to the interaction ofthe four regulations, and adding the projections together would overstate the total expectedimpact of the regulations.

Methodology

Our approach to conducting the study consisted primarily of the following steps:

Reviewing primary source documents, including the proposed regulations, each statesMedicaid State Plan, Administrative Claiming Plans, and other related materials

Interviewing state officials in all 50 states and the District of Columbia

Collecting Medicaid expenditure and utilization data directly from the states, and

Applying a consistent set of interpretations and assumptions to assess the prevalence of theproblems described in the Secretarys 2008 report and the financial and programmatic

impacts on each state

3 Office of Management and Budget, Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2009,Table 25-6 (February, 2008).

4 House Committee on Oversight and Government Reform. The Administrations Medicaid Regulations: State-by-State Impacts. (March, 2008).

5 Further explanations are discussed in each regulation-specific section.


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It is important to note that final interpretation of provisions of the regulation may differ from ourown or the states interpretations, and also that state decisions could mitigate the total impact inmany cases (for example, if a state decided to pursue a waiver to provide services otherwiseexcluded by the regulation). We were not likely to uncover problems that were not disclosed bystate officials or readily apparent from publically available documentation. A more

comprehensive assessment of prevalence would require detailed on-site audits of each statesprograms and financing arrangements, which were beyond the scope of this project.

Available Alternatives for Addressing Concerns

Throughout the report we offer a number of alternatives for CMS to consider as it continues toconfront the issues that led to the regulations under review. There are many alternatives,although no single approach will solve every problemMedicaid is too complex. We alsonote that there are challenges associated with making any kind of change; if these regulations arenot implemented as proposed, other guidance may still be necessary, with correspondingoperational and administrative implications. Throughout this report, we try to present

information on the challenges and alternatives available to states and the federal government, tohelp policymakers at all levels formulate approaches that are workable, minimize impacts onproviders and beneficiaries, and advance federal policy goals within the context of state programadministration. While CMS may continue to seek regulatory solutions, we offer the followingpoints to remember:

The states need ample lead time to prepare for new requirements

The states need guidance, procedures, and assistance to facilitate compliance

The diversity among the states and the complexity of the policy considerations would makeincremental steps easier to implement

Conclusions

Based on our analysis, we believe that there is compelling evidence for CMS to move forwardwith some of its policy objectives embodied in the four regulations, particularly those that wouldsupport clearer and more consistent claiming across states.

This is an opportune moment to carefully consider the issues addressed by these regulations, asthe federal government contemplates major reforms to the health care system, and as statesstruggle to meet growing obligations in the face of a major recession. Each of these fourregulations impacts important components of the health care system. However, some of theregulatory strategies warrant reconsideration because their impacts would be broader than

articulated by the Secretary or by CMS. For example, physician and paraprofessional workforceshortages are receiving attention nationally, with strategies and funding mechanisms to expandmedical education under debate. Should Medicaid funding of GME be eliminated (and almost allstates currently paying for GME indicated that the state share of this funding would likelydisappear as well), federal policymakers may be put into the position of finding new fundingmechanisms to replace both the federal and state share of the lost GME payments.

In addition to projecting their impacts, reviewing these four regulations is useful in illuminatingthe range of financial, operational, and programmatic challenges faced by CMS and the states as

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they attempt to fund a complex set of services for needy beneficiaries while maintaining programintegrity. States will continue to face significant financial strains in making sure that the mostvulnerable populations are well served, and the arrangements affected by these four regulationshighlight the kinds of problems states are trying to solve.

This report will be followed by a comprehensive report that includes individual state summaries,describing specific state impacts in more detail. This follow-up report will be delivered to CMSin Spring 2010.

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II. Background and Purpose of this Study

The basic state-federal structure of the Medicaid program creates inherent tensions. The federaladministrative agency, the Centers for Medicare and Medicaid Services (CMS), is charged withissuing and interpreting regulations that promote an equitable distribution of federal funds

through a strict interpretation of the federal medical assistance percentages (FMAP) formula andreasonable interpretations of the intent of statutory language that governs Federal FinancialParticipation (FFP) and defines the purposes and due processes of Medicaid. The federalgovernment favors maximum transparency and fully auditable expenditures, while recognizingthe need for states to structure and fund their programs in a way that best meets the needs of thestate within the parameters established by federal law. However, states have an incentive and anobligation to state taxpayers to seek as much FFP as possible to support their Medicaidprograms. To further that goal, many states have sought to avail themselves of the flexibilitypermitted under reimbursement financing and benefit design rules to maximize their access tofederal funds. States desire flexibility in the design and operation of their programs to meet theirlocal needs, and have frequently sought both State Plan amendments and waivers to achieve this.

Title XIX of the Social Security Act, the statutory basis for the Medicaid program, requires thatthe federal share of Medicaid funds be allocated to states based on states expenditures and theirrelative economic condition as measured through the FMAP formula. This approach encouragesstates to invest in the Medicaid program and helps to ensure that when state expendituresincrease, the federal share increases accordingly. This match-based federal reimbursementmethodology encourages state investment, but also provides an incentive for states to developfinancing methods that maximize the federal match by, for example, moving wholly state-fundedservices into Medicaid whenever doing so can arguably meet Medicaid requirements. Therequirements of the Medicaid provisions of the Social Security Act also constrain CMS and thestates ability to explore innovative provider reimbursement strategies.

Title XIX and its implementing federal regulations also define minimum eligibility and coveragerequirements and specify optional eligibility groups and services that states can choose to cover.While these rules ensure a consistent minimum level of coverage for low-income beneficiariesacross states, the resulting trade-off is that states that seek to pursue alternate methods tostructure programs in ways that they deem most effective and efficient may be constrained intheir ability to do so, and CMS ability to approve alternate approaches is similarly limited by theframework of the program.

CMS concern over several specific Medicaid financing and coverage strategies that appeared tolead to inappropriate cost shifting from the states to the federal government resulted in CMSpromulgation of a number of specific regulations in 2007. Following concerns raised by statesand other stakeholders about the potential impacts of these rules on states, Medicaidbeneficiaries, and safety-net providers, Congress imposed multiple moratoria on four of the newregulations, three proposed and one final, to gather and review more specific information on thepotential impacts. This study was designed to systematically and thoroughly assess the potentialfinancial and operational impacts of these four regulations on states, evaluate the ability of statesto comply with the information requested, and provide recommendations for how claiming forthe affected items and services can be made more accurate and consistent with the Medicaidstatute.The four regulations addressed in this report are:

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Cost Limit for Providers Operated by Units of Government and Provisions to Ensure theIntegrity of Federal-State Partnership (CMS-2258-P) proposed rule published January 18,2007. This regulation would:

o Clarify what constitutes a unit of government for the purposes of supplying thenon-federal share of Medicaid payments

o Establish minimum documentation required to support certified public expenditures

o Limit reimbursement to a governmentally-operated health care provider to an amountthat does not exceed the providers Medicaid cost

o Require that providers retain the full amount of Medicaid payment for services

o Make conforming changes to the CHIP regulations

Graduate Medical Education (GME) (CMS-2279-P) proposed rule published May 23,2007. This regulation would:

o Eliminate all federal payments to state Medicaid programs for costs associated with

GME

o Remove Medicare direct GME payments from the calculation of the Medicaidinpatient upper payment limit (UPL) for both teaching and non-teaching private, stategovernment operated, and non-state government operated facilities

Coverage for Rehabilitative Services (CMS-2261-P) proposed rule published August 13,2007. This regulation would:

o Define key terms used to set parameters for coverage of rehabilitative services underthe Medicaid rehabilitation option

o Specify the scope of services, with a key focus on ensuring that all services are being

directed toward specific rehabilitation goals, in written rehabilitation planso Exclude Medicaid coverage under the rehabilitation option for services that are

intrinsic elements of programs other than Medicaid

o Exclude Medicaid coverage under the rehabilitation option for habilitative services,including for those states providing day habilitation and related services for peoplewith mental retardation or with related conditions that were previously protected byOBRA 89

Elimination of Reimbursement Under Medicaid for School Administration Expenditures andCosts Related to Transportation of School-Age Children Between Home and School (CMS-2287-F) final rule published December 28, 2007, rule to rescind the final rule published

June 30, 2009 (CMS-2287-F2). This rule would have:o Excluded Medicaid coverage for administrative activities (including outreach,

enrollment and support in gaining access to EPSDT services) performed by schoolpersonnel and contractors

o Excluded Medicaid coverage for transportation between home and school for school-age children receiving services under an Individualized Education Plan (IEP)

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Congress issued various moratoria to preclude CMS from implementing or enforcing any ofthese regulations and in the 2009 American Recovery and Reinvestment Act stated that it is nowthe sense of Congress that the HHS Secretary should not promulgate the regulationsconcerning cost limits, GME, and rehabilitative services.6 On June 30, 2009, HHS rescinded thefinal rule regarding school-based services to prevent it from becoming effective on July 1, 2009.

In June 2008, The Supplemental Appropriations Act (PL 110-252) required the HHS Secretary toproduce a report on the problems addressed by the regulations and required CMS to contract foran independent report to Congress on the prevalence of these problems and the impact of theregulations. Following a competitive bidding process, HHS selected The Lewin Group to preparethe report, which must include:

A description of the prevalence of the problems outlined in the Secretarys report

A summary of strategies in existence to address these problems

An assessment of the impact of each regulation on each state and the District of Columbia

An assessment of which claims for items and services related to the regulations are notprocessed through the states MMIS and the reasons for exclusion from MMIS

Recommendations for actions by the federal government and the states that can make claimsfor items and services not processed through MMIS more accurate and complete

This report is intended to fulfill the requirements of Section 7001(c)(2) of SAA, P.L. 110-252.We will also produce a comprehensive report with additional state-level detail in Spring 2010.

6 The American Recovery and Reinvestment Act of 2009 (ARRA). Section 5003. H.R.1, 111th Congress (2009).


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III. Methodology

A. Research Design

Overview

We used several quantitative and qualitative sources to conduct our analysis and prepare thisreport. Source materials included:

The Supplemental Appropriations Act of 2008

The proposed and (when available) final versions of the four regulations

The 2008 HHS Secretarys report to Congress on the four regulations

Public comments on the regulations

The U.S. House of Representatives Committee on Oversight and Government ReformsMarch 2008 report The Administrations Medicaid Regulations: State-by-State Impacts,

and individual state responses to the Committees request for information

Medicaid State Plans,7 draft Medicaid State Plan amendments (when made available to us)

State-specific provider, billing, and coverage manuals, and other documentation provided byindividual states

Additional research sources included state regulations, state legislation, state school-basedMedicaid administrative claiming methodologies and training materials, policy documentation,and reports prepared by the U.S. Government Accountability Office (GAO) and HHS Office ofInspector General (OIG).

Between April and August 2009 we conducted approximately 200 interviews with Medicaidofficials and their representatives, using a standard interview guide and data request for eachregulation under study. We also provided each state with a suggested data template to assist themin understanding and responding to the data request. See Appendices A and B for the interviewguide and suggested data templates.

We analyzed primary documents, interviews with state officials, and data provided by the states.We compared this information to the specific problems outlined in the 2008 Secretarys report,and determined whether any of the problems articulated by the Secretary, as we interpreted them,were present. We also determined whether the regulation would result in changes to financing,services, or program administration, and estimated the impact the regulation would have on eachstate.

7 A Medicaid State Plan outlines the design of each states Medicaid program to CMS. It includes informationregarding who is eligible for Medicaid benefits, what services are to be covered and how they are to bereimbursed, and how the administration of the Medicaid program is to be organized. When a state wants tochange any of the Medicaid benefits it offers, or change the way in which services are offered, it must submit aState Plan amendment for CMS approval.


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The scope of this assessment is limited to that set by Congress: the prevalence of the problemsas outlined in the Secretarys report. Other potential related problems may exist and in somecases we discuss these without a full assessment of their prevalence.

We estimated the total amount of Medicaid funds and FFP impacted by the regulations, but note

that the net impact on many states will depend on state decisions. For example, a state maydecide to shift coverage of certain services to a waiver program if they are no longer allowedunder the rehabilitation option or a state may ultimately determine that a provider that does notcurrently appear to be governmental is, in fact, a unit of government. Therefore, the impactpresented should be viewed only as a high-level estimate of potential impact.

Impact Assessments

We estimated the direct impacts of each of the regulations on federal and state Medicaidexpenditures as well as state Medicaid program administration, providers, and beneficiariesusing a consistent methodology for each of the four regulations. When certain aspects of theregulations were ambiguous, we developed standard assumptions, discussed in the individualregulation sections, and applied these across states as consistently as possible.

Our analysis focused primarily on the specific issues and potential impacts deriving from theregulations as written. Secondary impacts, such as provider financial health or consumer accessto care, are discussed qualitatively. These secondary impacts are beyond the scope of the reportto Congress and difficult to objectively quantify; however, we discuss them where appropriate.We also identified some minor impacts (e.g., the regulation will require minor modification of adata collection form) that we characterized as routine or immaterial for purposes of this report,although we recognize that state staff may be impacted.

For our impact assessment and throughout this report, we did not make any determinations about

the legality or validity of any of the regulations and assumed, for purposes of this analysis, thatthe regulations would be implemented as proposed.

B. Analytical Approach to Determine Prevalence and Assess Impacts

Defining and identifying the problems

The Supplemental Appropriations Act (PL 110-252) required the HHS Secretary to produce areport on the problems addressed by the regulations. This report was submitted on December 3,2008. It must be noted that the problems, in many cases, describe situations permitted in the pastby CMS regional and/or central offices and are documented in CMS-approved Medicaid StatePlans. However, over time CMS became more concerned with certain practices. Critical reviewsby the GAO, OIG, and others led to increased scrutiny through Medicaid State Plan amendmentreviews and ultimately led to the proposed regulations. We highlight the problems cited inExhibit 1.

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Exhibit 1: Problems Cited by HHS Secretary in the December 2008 Report

Regulation Problems Cited

Cost Limit State and local governments have used funds returned by health careproviders to help draw down additional federal dollars or for costs

outside the Medicaid program The different CPE practices used by states often make it difficult to

align expenditures with services, properly identify actual costs, andaudit and review claims

Claims have been made based on tax revenues not actually availablefor Medicaid purposes

GME There is no clear statutory authority to pay for GME under Medicaid,GME is not a health service included in the authorized list of Medicaidcovered services, and such payments are not recognized by Medicaidstatute as an authorized component of the costs of care

Many state payment methodologies are not transparent in that GMEpayment amounts often cannot be identified and therefore cannot be

audited to ensure accountability There is no indication that payments benefit Medicaid beneficiaries or

strengthen training programs

RehabilitativeServices

States have covered services that do not meet CMS definition ofrehabilitation (e.g., recreational and social activities that are not tied torehabilitation goals and habilitative, rather than rehabilitative, services)

States have bundled payments in ways that provide Medicaidfunding for both allowable and non-allowable services, including non-allowable room and board

States have covered services provided by individuals who do not haveappropriate qualifications to provide the services

Providers have failed to maintain proper documentation for services

rendered

States have covered services that are intrinsic elements of othergovernment programs (services that are included in the normalprovision of other programs, such as juvenile justice or foster care)

School-BasedAdministrativeClaiming andTransportation

Medicaid payment for school administration shifts costs fromeducational programs to the Medicaid program

Medicaid payment for transportation between home and school shiftscosts from educational programs to the Medicaid program

Costs for Medicaid administration in schools have been improperlybilled

Costs for transportation to and from schools have been improperlybilled

Costs related to educational mandates have been improperly allocatedto Medicaid

We analyzed information from our primary source research, interviews with state officials, anddata provided by the states to assess whether any of the problems identified in the HHSSecretarys report were present within each state. We detail our findings within each regulationsection of the report.

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Methodology for assessing impacts

We assessed impacts of the regulations on state and federal funding, state administration,Medicaid beneficiaries, and Medicaid providers using both qualitative and quantitative methods.We developed fiscal impacts for one-year and five-year periods. This report was prepared in the

summer of 2009; therefore, we estimated the one-year impact for FFY10, and the five-yearimpact for FFY10 through FFY14. Except in a few circumstances in which a phase-in wasallowed in the proposed regulation, we assumed full implementation of the regulations inFFY10.

For the FFY10 and the FFY10 through FFY14 estimates of financial impact, we developed auniform projection methodology to apply a consistent trend across all states and regulationsbased on trends derived from the National Health Expenditures (NHE) Accounts data forMedicaid released by the CMS Office of the Actuary in 2009. We used the federal medicalassistance percentages (FMAP) published by CMS for all years for which we made estimates,and did not adjust the FMAP to reflect enhancements resulting from the American Recovery and

Reinvestment Act of 2009 (ARRA).

8

Additional detail on our financial projection methodologyis included in Appendix C.

We used a qualitative approach to assess the administrative impacts for the majority of states.While states would almost universally experience additional administrative workload as a resultof these regulations (e.g., modifying Medicaid State Plans, regulations, and MMIS), quantifyingthe costs associated with these responsibilities is difficult, because many of the tasks wouldbecome part of existing staff responsibilities (at the expense of other tasks and responsibilities, ata time when many states are losing Medicaid staff). Also, because many of the administrativeprocesses and changes would be new, states could not provide estimates of what these wouldcost. Using estimates from other states that already implemented similar changes (e.g., costsettling for all governmental providers) would be inadequate because of the great variability ofprograms, data collection and analysis tools, and reporting mechanisms among states.

For impacts on Medicaid beneficiaries and providers, we relied on a qualitative approach as well.We determined which aspects of the regulations, if any, would directly impact beneficiaries andproviders and we identified related concerns expressed by states (e.g., the loss of FFP created bythese regulations might eventually result in reduced services for beneficiaries or the reduction inprovider rates coupled with the increase in administrative requirements might lead providers towithdraw from the Medicaid program). In most cases, we did not attempt to quantify theseprovider or beneficiary impacts.

8 Federal Financial Participation in State Assistance Expenditures; Federal Matching Shares for Medicaid, theState Childrens Health Insurance Program, and Aid to Needy Aged, Blind, or Disabled Persons for October 1,2009 Through September 30, 2010. Federal Register: November 26, 2008 (Volume 73, Number 229, Pages72051-72052).


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C. Limitations and Barriers to Research Methodology

Because each state operates its own Medicaid program within broad federal guidelines, it isinherently difficult to assess impacts across states in a systematic fashion. There are several otherlimits to our approach, including:

Lack of clarity in the regulations: Each of the proposed rules contains a considerableamount of uncertainty regarding the interpretation and applicability of certain provisions.For example, the limited detail in the proposed GME rule leaves the impact on indirectGME payments and other cost-based supplemental payments (e.g., disproportionate sharehospital payments, cost reconciliation payments) to providers with teaching programsdifficult to estimate. In the rehabilitative services rule, states had questions about how CMSwould ultimately define habilitation, and in the cost limit rule, there is uncertainty regardingunit of government determinations, allowable costs, and documentation requirements. Itwas difficult, therefore, to determine how the regulations would ultimately be interpretedand implemented. Further, states have historically encountered variation across CMS

regional offices, and sometimes within the CMS central office, in the interpretation ofvarious regulations and policies.

Differing baselines across states: For all but the GME proposed regulation, we found thatCMS has been sporadically enforcing aspects of the proposed regulations for several years,and in some cases, longer. Consequently, states start from different baselines. Some stateshave had CMS reviews that led to the states adopting changes that were promulgated in theregulations. While we show no impact for these states, they have already incurred theimpact.

Interaction of regulations would further affect impact measurement: The impacts of each ofthe four regulations are multi-faceted and would affect individual states, beneficiaries, andproviders concurrently. Each of the regulations was reviewed and analyzed independently,but summing the impacts across regulations is not appropriate. For example, implementingeither the cost limit or the GME regulation would result in reduced payments to state-operated teaching hospitals, but summing the individual impacts might overstate the neteffect of the implementation of both regulations.

In addition, we faced several barriers to gathering the information needed to conduct ouranalysis. These barriers and our mitigation strategies included:

Inconsistent participation of state officials in our interviews: In our research design, weaimed to be as consistent as possible with our interviews and data collection. We developedinterview protocols (approved by OMB) for interviewing state officials that we sent to the

states in advance of the calls. Across 50 states and the District of Columbia, state officialsparticipated in varying manners. Some reviewed the interview protocols and preparedanswers in advance and our interviews were targeted and productive; others did not have achance to review state policies or consider their responses in advance and more time wasspent explaining provisions of the regulations. In some states we were able to interviewexperts on the topic; in others, the assigned staff were not able to provide completecontextual information and had limited experience with relevant issues. We mitigated the

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interview challenge by asking follow-up questions and seeking additional information fromthe Medicaid State Plan and other documents, but responsiveness varied.

Inconsistent data submissions: We asked states to report data on several specific itemsrelated to each regulation. The data received from states were inconsistent for many reasons,including whether some payments were in or out of the MMIS, the relative ease or difficultyof creating custom reports from MMIS data, and staff availability to respond to the datarequest. States reported data from varying time periods and some states were unable toreport on specific items (e.g., impacts on UPLs, Medicaid costs for non-institutionalproviders). There was also limited information available on managed care organization(MCO) payments.

We offered states the option to submit data using an Excel template that listed the specificinformation we sought. We asked states to report on a calendar year or fiscal year basis andto use the most recent complete 12-month period that was easiest for them to access. Tomake the data more consistent once it was received, we trended data forward to a commonyear before comparing it across states.

We describe our approach, data limitations, and mitigation strategies, along with our assessmentof the problems and impacts of the regulations in further detail for each of the four regulations inthe following sections.

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IV. Cost Limit

A. Overview and Background

In financing the non-federal portion of its Medicaid program, each state must provide at least 40

percent of the non-federal share, while up to 60 percent can be contributed by other units ofgovernment within the state. Congress has protected the ability of these units of government,including individual providers, to contribute non-federal share, as long as the funds contributedare not otherwise prohibited from use as Medicaid funds.9 One mechanism for contributing fundsis an intergovernmental transfer (IGT), a transfer of funds from one governmental entity toanother. Another mechanism is a certified public expenditure (CPE), by which a governmentalentity certifies that eligible funds were used to provide services legitimately covered byMedicaid.

The federal government has long been concerned about states use of these financingmechanisms to enhance federal Medicaid funding inappropriately, particularly by making largeoverpayments to governmental providers that then return a significant portion of the payment tothe state. Since 2000, CMS has taken a number of steps to limit opportunities for states to drawdown excessive FMAP and to use Medicaid funding for non-Medicaid services. First, in 2001,CMS (then the Health Care Financing Administration) issued a regulation that establishedseparate upper payment limits (UPLs) for private, state, and local government facilities. Byestablishing separate UPLs, CMS greatly curtailed states ability to overpay governmentally-operated providers.

In August 2003, CMS began to systematically review the manner in which individual statesfinanced their share of Medicaid funding. According to the GAO, 29 states ended 55 financingarrangements involving supplemental payments to government providers between August 2003and August 2006.10 CMS has indicated that, through the review of more than 1,000 State Plan

amendments between 2003 and 2007, it identified several strategies to ensure that payment andfinancing arrangements comply with statutory intent. This formed the basis for CMS to issue aproposed rule, believing that such a rule strengthens accountability to ensure that statutoryrequirements within the Medicaid program are met11 Specifically, CMS proposed rule 2258-P, Cost Limit for Providers Operated by Units of Government and Provisions to Ensure theIntegrity of Federal-State Financial Partnership, which seeks to:

Clarify what constitutes a unit of government for the purposes of supplying the non-federal share of Medicaid payments

Establish minimum documentation required to support a CPE

Limit reimbursement to governmentally-operated health care providers to an amount thatdoes not exceed the providers Medicaid cost

Require that providers retain the full amount of payment for services

9 42 USC 1396b (w)(6)(A).10 U.S. Government Accountability Office. Federal Medicaid Oversight Initiative is Consistent with Medicaid

Payment Principles but Need Greater Transparency. Publication No. GAO-07-214 (March, 2007).11 Leavitt, 2008.


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Make conforming changes to the CHIP regulations12

The proposed regulation would apply to all governmental providers: institutional providers, suchas hospitals and nursing facilities, and non-institutional providers, such as local healthdepartments, school districts, and municipal ambulance providers.

State officials, providers, and other stakeholders have been outspoken in their opposition to theproposed regulation and Congress has acted on several occasions to prevent its implementation.Particular points of contention that stakeholders have raised include:

The cost limit for governmental providers is unreasonable

The definition of a unit of government is overly restrictive and imposes on states abilityto make determinations regarding the identification of political subdivisions within theirbounds

Sources of non-federal share from governmental entities should not be restricted to thosederived from tax revenue (examples of other sources might include bond issuances andrental property)

The retention of payments provision is unnecessary and unenforceable in practice13

A U.S. District Court also prevented implementation on technical grounds.14 In May 2007, a finalcost limit rule was published. However, the court determined that CMS had violated themoratorium by working to finalize the rule. As a result, the final rule was vacated and returned toCMS. Our task was to analyze the proposed rule, not the final rule that was vacated.

Key points:

Up to 60 percent of the non-federal share of Medicaid can be contributed by

governmental units other than the state. Providers often contribute non-federal share through IGTs and CPEs.

CMS has long been concerned about misuse of these financing mechanisms toinappropriately enhance federal funding and has taken several actions, culminatingin the proposed regulation.

12 For a more detailed background, see Hearne, J. Medicaid Regulation of Governmental Providers, United StatesCongressional Research Service. CRS Report RS22848 (July, 2008).

13 For examples and more detail, see Joint comments of the States of Alaska, Connecticut, Illinois, Louisiana,Maine, Maryland, Michigan, Missouri, New Hampshire, New Jersey, North Carolina, Oklahoma, Pennsylvania,Tennessee, Utah, Washington, and Wisconsin and Comments by the National Association of Public Hospitalsand Health Systems on Proposed Rule: CMS-2258-P.

14 U.S. District Court for the District of Columbia, Alameda County Medical Center, et al. v. Michael O. Leavitt,Secretary, U.S. Department of Health and Human Services, et al., Civil Action No. 08-0422 (May, 2008).


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Many states questioned whether the problems described in the 2008 report are substantial or evenexist. For example, CPE processes that may not clearly align certified amounts with actual costshave been used for years. Therefore, we emphasize that the identification of a problem in aparticular state is not necessarily an indication that the state has acted inappropriately and, infact, the state is likely to have acted in accordance with its CMS-approved Medicaid State Plan.

Assessment of prevalence

Exhibit 2 below identifies those states in which we found evidence of the problems identified inthe 2008 Secretarys report.16

Exhibit 2: States with Evidence of Problems Identified in the Secretarys Report

Funds Returned byProviders Draw Down

Additional Federal Dollarsor are Used for CostsOutside the Medicaid

Program

CPEs Do not Clearly Alignwith Providers Actual

Cost for Provision of StatePlan Service

Claims Made Based onTax Revenues that are

not Available forMedicaid

States WhereProblem Identified

17

None identified17 states AK, AZ, DC, DE,HI, KS, ME, MN, MT, NH,NJ, NM, RI, SC, SD, VT, WV

None identified

Funds returned by providers: Based on interviews with state officials, the problem that stateor local governments use Medicaid payments returned by Medicaid providers to draw downadditional FFP or use Medicaid payments for non-Medicaid purposes appears to havebecome very rare. These processes have been largely phased out over the past decade as aconsequence of CMS oversight under its interpretations of existing regulations. However,this study did not include a detailed accounting of the flow of funding within each state andinstead relied upon interviews with state officials.

State officials frequently indicated that funds were not returned to the state, but also notedthat they do not monitor arrangements at the county or local level. In these cases, while wewere not able to identify a problem, we cannot assert with certainty that a problem does notexist at any level. There is the possibility that certain schemes were not uncovered. Onechallenge stems from the fact that money is fungible and hard to track in the complexinteractions between public providers and various state and municipal agencies. It is difficultto identify whether a payment by a public provider is legitimately for services or facilitiesprovided by the state or local government or whether the payment is for another purposewhich CMS might find objectionable.

16 The problems listed here are based on Lewins review of Leavitt, Michael O., Secretary of Health and HumanServices, Report to Congress on Medicaid Regulations under Section 7001(c)(1) of the SupplementalAppropriations Act, 2008. Problems were identified based on interviews with state officials and review ofpublically available documentation. There is no feasible way to perform an accurate assessment without full-scale financial audits such as those performed by the OIG.

17 Alabama officials did not respond to requests for information. In addition to Alabama, there were 11 states forwhich it is uncertain whether current CPE documentation will satisfy requirements as implemented. There weretwo states for which it is uncertain if tax revenue would be deemed unavailable for Medicaid.


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In some instances, we raised questions regarding the return of payments, but were not ableto identify any clear instances of the problem as described in the 2008 report. Forexample, potential problems were discussed involving state accounting procedures requiringMedicaid payments, along with revenue received from other payers, to be repaid to agovernmental entity that had appropriated the full amount of funds in advance. In other

cases, FFP for state-owned providers that are fully funded through annual appropriationsmay be paid to the state general fund. State officials did not indicate that any of thesebusiness arrangements were Medicaid-specific, and we did not identify the problem asdescribed by the Secretary. In one case, some Medicaid payments to providers were used topay counties that performed administrative functions on behalf of the providers.18 Inresponse to comments on these issues CMS stated that, The retention of paymentsprovision was not designed to interfere with the normal operating expenses of conductingbusiness, such as payments related to taxes (including health-care provider-related taxes),fees, business relationships with governments unrelated to Medicaid in which there is noconnection to Medicaid payment.19 Therefore, we did not identify these arrangements asproblems.

A number of states also indicated that some or all of the FFP associated with provider CPEsis retained by the state. For example, a certain percentage may be retained as anadministrative fee. Many of these states were concerned that the proposed regulation wouldrequire that all FFP be paid to the certifying providers. Our interpretation is that a CPE, bydefinition, represents an expenditure that has already been made. As a result, there is norequired payment to the provider for services rendered and therefore no amount that must beretained. FFP received by the state is, instead, repayment of federal share that has alreadybeen spent at the governmental provider level. This is consistent with CMS statement thatFederal matching funds are effectively repayment of the Federal share of the totalcomputable expenditure initially satisfied at a State or local government level. 20

Alignment of CPEs with actual cost: Of the problems cited in the 2008 report, the mostprevalent is a lack of clear alignment between the amount cited as a CPE and actualexpenditures for providing Medicaid services or administration. States use a variety ofcertification processes that do not necessarily align to actual costs, including requiringproviders to:

o Certify the amount of payment due based on a Medicaid State Plan rate for services

o Certify that sufficient non-federal share was available to draw down matchingfederal funds

18 According to state officials, this particular arrangement was reviewed and permitted by CMS.19 Medicaid Program; Cost Limit for Providers Operated by Units of Government and Provisions To Ensure the

Integrity of Federal-State Financial Partnership; Final Rule. Federal Register: May 29, 2007 (Volume 72,Number 102, Page 29799).

20 Medicaid Program; Cost Limit for Providers. Federal Register: May 29, 2007 (Volume 72, Number 102, Page29799).


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o Submit claims for services provided that are not paid, but are used to draw downfederal matching funds21

In assessing the prevalence of this problem regarding CPEs, we assumed that any CPEs thatwere not directly based on cost documentation that clearly align the certified amount with

the actual cost of services would be considered problematic by CMS. In 11 cases, stateofficials indicated that cost documentation was available, but they were uncertain whetherthe CPEs aligned with expenditures in the manner that CMS would ultimately require underthe proposed regulation. In these cases, above and beyond the 17 states identified in theabove table, we did not identify a clear instance of the problem as described in the report.However, these programs may still be impacted if a final regulation requires states to clearlyalign CPEs to amounts spent in a manner that is different from current practice.

Over the past decade a number of states have modified their CPE processes through closecollaboration with CMS. These modified CPE processes typically require the submission ofcost reports and final reconciliations to ensure that the amount certified matches the actual

amount spent. These features are largely consistent with the terms of the proposedregulation, but have been gradually implemented through existing Medicaid State Planamendment review and approval processes. In at least one case, a state abandoned its plan toutilize CPEs after the state could not come to agreement with CMS regarding the reportingof costs.

Tax revenue earmarked for other purposes: The problem cited by the Secretary of using taxrevenue that is earmarked for non-Medicaid purposes was also challenging to assess. CMSofficials agreed that this would be difficult to identify directly, but that if the problemexisted we would likely uncover it through discussions of providers governmental status.We identified only two instances where claims may be made based on tax revenue that hasbeen earmarked for other purposes. Even in these cases, however, we were unable toconclusively determine that there was a problem as described in the 2008 report, and insteadwe consider these cases uncertain. For both of these cases, funds that are used forMedicaid were originally appropriated for purposes including providing care to the indigent,though it is not clear if indigent care was the only intended purpose. Based on our interviewswith state officials, we do not believe that this is a prevalent problem.

Payments above cost to government providers: We identified 24 states that make Medicaidpayments to governmental providers in excess of the providers Medicaid costs. Many ofthese states have pointed out that payments in excess of cost help subsidize other operatingshortfalls and allow for operational improvements, and are permitted to occur for bothprivate and governmental providers. It should be noted that, in response to comments on the

proposed regulation, CMS indicated that We do not find it appropriate that units of State orlocal government would profit from Federal taxpayer dollars that are intended to match apercentage of the cost of providing services to Medicaid individuals.22

21 This is not technically a certification, but a similar arrangement by which a state claims FFP based on thestandard Medicaid rate for services provided by a governmental provider.

22 Medicaid Program; Cost Limit for Providers. Federal Register: May 29, 2007 (Volume 72, Number 102, Page29810).


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Key points:

The most prevalent problem is that states use CPE processes that do not align certificationswith actual costs.

The use of tax revenue earmarked for other purposes is not prevalent.

Some states have already modified CPE processes in collaboration with CMS and arelargely consistent with the proposed regulation.

The return of Medicaid payments to the state is not prevalent; however, Medicaid paymentabove cost to Medicaid providers is relatively common.

C. Strategies States Use to Address these Problems

States have already engaged in a number of activities to address the identified issues, some ofwhich have been initiated independently, others at the direction of CMS.

Compliance with existing expectations: Throughout the state interview process, a recurring

theme was that states were already taking steps to be in compliance because CMS hasessentially implemented some provisions of the proposed regulation through the MedicaidState Plan approval process. A number of states referred to CMS Five Funding Questionsthat, beginning in 2003, have been required to be submitted along with a Medicaid StatePlan amendment. Under these questions, states must explain whether providers retain allMedicaid payments, how non-federal share is provided, and whether public providersreceive payment in excess of their costs. Through the review process, CMS is essentiallyrequiring states to comply with some provisions of the proposed regulation. In addition tothe Medicaid State Plan amendment process, some provisions of the regulation were alsoimplemented as a condition of approval of demonstration waivers, or through the fiscal auditprocess.

Enactment of legislation: We spoke with officials in a few states that have enactedlegislation intended to make providers more clearly units of government. For example,one bill granted direct taxing authority to public hospitals (although this authority couldonly be exercised through a public referendum). Clearly, many states were concerned aboutthe loss of federal share associated with providers not clearly meeting the unit ofgovernment criteria.

Affirmation of retention: A small number of states indicated that they require providers toaffirm that they do not return IGT funds, typically as part of an IGT contract.

Annual audit of public providers: In one case, the states chief auditor conducts an annualaudit of governmental providers to verify retention of payments as part of an approved

Medicaid waiver program.

Overall, we did not identify many current strategies designed to prevent providers from returningany portion of their Medicaid reimbursement to state or local government. To the contrary, themajority of states expressed concern that any unintended recycling would be impossible to trackand that once payments were made to providers, prohibitively expensive audit practices would berequired to track how the funding is used.

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Key points:

CMS has been essentially enforcing provisions of the proposed regulation throughexisting oversight authority.

Generally, states have not taken steps to address the problems other than discontinuingpractices that were deemed objectionable by CMS.

D. Impact of the Cost Limit Regulation

We estimated the impacts of the proposed regulation primarily through review and analysis ofstate data submissions and interviews with state officials. While there are data limitations,discussed below, we found that there is a high likelihood that the regulation will impose asignification burden on:

State funding: As the table below demonstrates, the regulation would have a dramatic impacton Medicaid funding in many states.

State administration: Most states would be impacted administratively primarily due to therequirement to determine governmental status and to cost settle all government providers.

Medicaid beneficiaries: The reduction in reimbursement and increased administrativerequirements are likely to have an indirect negative impact on services.

Medicaid providers: Reduced reimbursement and increased cost reporting requirements fornon-institutional government providers will have a significant impact on providers.

Fiscal impacts

To assess the fiscal impacts of the proposed regulation, we asked states to provide Medicaid costand reimbursement data for each of their public providers, as well as the amount of IGTs or

CPEs contributed by each provider. We also asked states to determine whether each provider metthe unit of government criteria in the proposed regulation. As we discuss later, the ability ofstates to provide this information varied considerably. The impacts summarized below are basedon our review and analysis of the data that we were able to obtain from states and are reflectiveof the loss of federal funds or of non-federal share, as discussed below:

The units of government impact (Sections 433.50 and 433.51) is based on the amount ofnon-federal share that is contributed by providers that may not meet the unit ofgovernment criteria (or, in one case, funds from counties that may no longer be eligible asnon-federal share).

The cost limit for units of government impact (Section 447.206) is based on the amount ofMedicaid reimbursement above Medicaid cost for governmental providers. It is important tonote that Medicaid cost data for non-institutional providers is rarely available and thus it wasnot possible to measure the full impact of the proposed regulation on these providers.

Estimates include the total amount of funds jeopardized by the regulation and do not accountfor state decisions to preserve federal funding through revised financing arrangements orincreased payments to other providers. Exhibit 3 shows state-specific fiscal impacts of theproposed cost limit regulation.

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Exhibit 3: State-specific Fiscal Impacts of the Proposed Cost Limit Regulation, Reduction inFederal Financial Participation, FFY10-14,in Millions23

State24

Units of Government Section 433.50

Funds from Units of

Government as State-share Section 433.51

Cost Limit for Unitsof Government

Section 447.206

Total

Alabama Uncertain Uncertain Uncertain

Alaska $0.0 $7.7 $7.7

Arizona $0.0 $0.0 $0.0

Arkansas $0.0 $56.8 $56.8

California $0.0 $0.0 $0.0

Colorado $1,040.9 $0.0 $1,040.9

Connecticut Uncertain $0.0 Uncertain

Delaware $0.0 $0.0 $0.0

District of

Columbia

$0.0 $0.0 $0.0

Florida $0.0 $0.0 $0.0

Georgia $802.3 $532.7 $1,335.0

Hawaii $0.0 $0.0 $0.0

Idaho $0.0 Uncertain Uncertain

Illinois $0.0 $0.0 $0.0

Indiana $485.7 $214.1 $699.8

Iowa $0.0 $0.0 $0.0

Kansas $2.2 $81.1 $83.3

Kentucky $0.0 Uncertain Uncertain

Louisiana $0.0 $177.3 $177.3

Maine Uncertain $2.8 $2.8

Maryland $0.0 $0.0 $0.0

Massachusetts Uncertain $13.5 $13.5

Michigan $0.0 $0.0 $0.0

Minnesota $0.0 $46.9 $46.9

Mississippi Uncertain $586.6 $586.6

Missouri $360.3 $62.8 $423.1

Montana $0.0 $3.3 $3.3

Nebraska $0.0 $0.2 $0.2

Nevada $0.0 $0.0 $0.0

New Hampshire $0.0 $0.0 $0.0New Jersey $0.0 Uncertain Uncertain

New Mexico $1,079.1 $0.0 $1,079.1

23 Federal share only based on FY2010 FMAP prior to application of enhancements implemented under ARRA.24 For North Dakota and South Dakota, we project no material impact. State officials acknowledged that, due to

prospective payments, some providers may be paid slightly above cost, but were not able to provide dataregarding reimbursement above cost.


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State24


Funds from Units ofGovernment as State-share

Section 433.51

Cost Limit for Unitsof Government Section 447.206

Total

New York $0.0 $9,774.4 $9,774.4

North Carolina $3,446.4 $0.0 $3,446.4

North Dakota $0.0 $0.0 $0.0

Ohio $0.0 $32.6 $32.6

Oklahoma $275.7 $0.0 $275.7

Oregon $0.0 $0.0 $0.0

Pennsylvania $23.3 $46.7 $70.0

Rhode Island $0.0 $0.0 $0.0

South Carolina Uncertain $67.9 $67.9

South Dakota $0.0 $0.0 $0.0

Tennessee Uncertain $0.0 Uncertain

Texas $0.0 $3,183.5 $3,183.5Utah $249.9 $41.2 $291.1

Vermont $136.8 $0.0 $136.8

Virginia $4.7 $117.7 $122.4

Washington $0.0 $0.0 $0.0

West Virginia $0.0 $0.1 $0.1

Wisconsin $0.0 $0.0 $0.0

Wyoming $8.9 $0.4 $9.3

Total $7,916 $15,050 $22,967

Exhibit 4 shows the total estimated reduction in Medicaid expenditures, including both state andfederal funds, for FFY10 and for FFY10 through FFY14. The table also includes rows that showthe total estimated reduction in federal funds only.

Exhibit 4: Total Estimates of Federal Savings and Reduction in Total State Medicaid Expendituresfor the Proposed Cost Limit Regulation, in Millions


Funds from Units ofGovernment as State-share

Section 433.51

Cost Limit for Units ofGovernment Section

447.206Total

Federal Fiscal Year 2010Estimated Reduction inMedicaid Expenditures

$2,130 $4,895 $7,025

Estimated Reduction in FFP $1,349 $2,615 $3,965

Federal Fiscal Years 2010 - 2014

Estimated Reduction inMedicaid Expenditures

$12,496 $28,132 $40,628

Estimated Reduction in FFP $7,916 $15,050 $22,967


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Potential for increased expenditures: Several states indicated that they believe that there is asubstantial likelihood that implementation of this regulation would increase Medicaidexpenditures for non-institutional providers. Officials are in general agreement thatreimbursement for these providers is well below their actual costs. However, should theseproviders be required to document their costs annually, several officials expressed their concern

that states will be pressured to reimburse these providers the full amount of their costs, possiblyincreasing both state and federal expenditures. Along these same lines, several states indicatedthat if non-institutional providers were required to report their full Medicaid costs, states wouldlikely implement CPE programs to certify the difference between current payment levels andactual costs. The net result would be increased federal expenditures without a correspondingincrease in non-federal outlays. Instead, states would essentially begin claiming match foreligible non-federal share that is already being spent. Because cost data for non-institutionalproviders is rarely available, it is not possible to quantify the potential increase in state or federalexpenditures that could result from this reimbursement modification.

Comparing different projections

There has been wide variability in the projected federal savings of the regulations. Exhibit 5shows various estimates for federal savings under the proposed cost limit regulation. The HouseCommittee on Oversight and Government Reform arrived at its estimate through written surveyresponses from state Medicaid programs.

Exhibit 5: Five-Year Estimates of Federal Savings (FFP) for the Proposed Cost Limit Regulation

Source Five-Year TimePeriod

Federal Savings (inBillions)

OMB (2008)25 FFY09-FFY13 $5.7

House Committee on Oversightand Government Reform (2008)26

FFY09-FFY13 $21.1

The Lewin Group (2009) FFY10-FFY14 $23.0

There are a variety of explanations for the variance among these projections, including:

The regulation leaves considerable room for interpretation and impacts a number of complexcomponents within state Medicaid financing systems. As such, there is no single correctfiscal projection, because it is subject to too many unknown variables about how CMSwould enforce the regulations and how states would react.

Several projections were made for different periods of time. Our estimates rely on data fromdifferent time periods, inflated to a common time period.

25 Office of Management and Budget, Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2009,Table 25-6 (February, 2008).

26 House Committee on Oversight and Government Reform. The Administrations Medicaid Regulations: State-by-State Impacts. (March, 2008).


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Our projections assume full compliance with the proposed regulation immediately upon theeffective date. CMS actuaries, for example, adjusted for phase-in of effectiveness, with fulleffectiveness achieved in the fourth year.

Compared to the Committee projection, which was compiled from survey responses fromthe states, we attempted to calculate impacts independently using state-submitted data, andto apply a consistent interpretation and methodology to develop estimates. The Committeeincluded estimated impacts for 32 Medicaid programs while our estimate includes 45programs. Our estimated impact for the states that submitted estimates to the Committee isabout $21.4 billion, very similar to the total Committee estimate. However, in some cases,states that had reported estimates of large impacts to the Committee were estimated by us tohave no impact and vice versa. There was no consistent pattern to differences between ourestimates and those obtained by the Committee. Based on our discussions with stateofficials, there was wide variation in understanding of the regulation and its applicability ineach state at the time that estimates were provided to the Committee.

Impacts on state administration

States will almost universally incur additional administrative requirements as a result of theproposed regulation. By far the most significant impact is the requirement that all governmentalproviders, both institutional and non-institutional, be cost settled annually. Only two statesindicated that they already conformed to the requirements of the proposed regulation, while thevast majority were extremely concerned about the anticipated level of effort that this wouldrequire. Concerns were magnified by the fact that many state Medicaid programs have lost staffin recent years and officials were not certain that they would be able to comply with therequirements of the proposed regulation given the level of effort required.

It appears that the administrative impact of collecting, auditing, and settling based on cost reports

for non-institutional providers would be significant. In a few cases where this approach hasalready been implemented, states reported years of effort, a steep learning curve for providers,and dramatically increased workload. Non-institutional providers nationwide are commonlyreimbursed based on a fee schedule that does not distinguish providers based on governmentalstatus. This is often true regardless of the source of non-federal share, including many caseswhere providers certify their expenditures equal to the standard fee. Non-institutionalproviders are typically unaccustomed to cost reporting procedures which are often quitecomplicated and may require new staff or the assistance of an accountant or other contractor.

Increased documentation and oversight of CPE processes will also impact state Medicaidagencies and sister agencies. Another impact will be the potential number of Medicaid State Plan

amendments to be approved to implement the new CPE programs and the resources required byCMS. In many cases, CMS has taken years to process CPE program approvals. An influx ofproposed amendments could, therefore, result in a tremendous backlog.

Impacts on beneficiaries

The proposed regulation does not directly impact beneficiaries. However, we anticipate thatreduced reimbursement and increased administrative requirements will ultimately impactservices to beneficiaries in many states. This will occur as states reduce overall program

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spending to reflect reduced federal participation or redirect funding to support increased statecosts to comply with administrative requirements. While this impact is not easily quantifiable,state officials routinely indicated that the biggest impact on services would be in more rural areasand among lower volume non-institutional providers.

For the unit of government provisions of the proposed regulation, we anticipate an impact onbeneficiaries in cases where non-federal share would be lost to the state Medicaid program. In afew cases where state officials either indicated some uncertainty regarding governmental status,or did not provide sufficient information, we reflected the impact as uncertain. Similarly, in caseswhere reimbursement would be reduced by the cost limit provisions, we anticipate some impacton services to beneficiaries. In cases without an anticipated fiscal cost limit impact where stateofficials indicated that increased administrative requirements could cause providers to withdrawfrom the program, we were unable to reach a conclusion regarding the anticipated impact onbeneficiaries.

Impacts on providers

The financial and administrative impacts of the proposed regulation on providers are likely to bewidespread, reducing reimbursement or increasing costs and thereby straining the ability ofproviders to continue to operate and provide services and to meet their missions of serving thosein need, whether or not they are covered by Medicaid. The cost limit provision would impactnearly every state, particularly because cost reporting is so infrequently required for non-institutional providers. Modifications to CPE processes would also impact providers in asignificant number of states.

The primary administrative impact on providers is the requirement for all governmentalproviders to submit cost reports annually. Cost reporting is often a complex process, requiringthe services of an accountant; non-institutional providers may not have the Medicaid volume to

make the investment worthwhile. Institutional providers would be less impacted by the costreporting requirements, as they are typically familiar with cost reporting and it is a routine part oftheir operations, with assigned staff and contractors. State officials often indicated that requiringnon-institutional government providers to submit cost reports may cause these providers withlow Medicaid volume to withdraw from the program. While the extent to which this would occuris not easily quantifiable, it is possible that some providers would withdrawalthough they maycontinue to provide some care to Medicaid beneficiaries without reimbursement, but it isreasonable to assume such practices would be quite limited. While state and local governmentscould require governmental providers to participate, the net result would be an increase inadministrative expense and a potential commensurate decrease in time spent providing care.

The provisions regarding non-federal share are also expected to impact providers using CPEs inmany states. Increased documentation requirements to support CPEs will increase theadministrative effort required and the loss of non-federal share from providers that are not unitsof government will likely reduce reimbursement. Many states reported that the additionalreporting requirements are likely to cause some providers to withdraw from the program,especially those that serve a small proportion of Medicaid patients. In some states officialsexpect the withdrawal of providers and commensurate reduction in access to be significant.

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Documents

093009 Lewin Group Mandated Report to Congress on Four Medicaid Regulations