GAO Report
Report to Congressional Requesters
United States General Accounting Office

Medicaid: HCFA Reversed Its Position and Approved Additional State Financing Schemes

Results in Brief

HCFA reversed its stated position that it would deny approval of any pending state plan amendments that would not comply with the new upper payment limit regulation. The position reversal resulted in its approval of new financing schemes for several states including Virginia and Wisconsin that had pending proposals mimicking the schemes identified last year. These schemes include funneling excessive Medicaid payments through local governments on behalf of nursing homes to secure federal matching funds.

HCFAs approval of Virginias and Wisconsin's new financing schemes enables these two states to generate an estimated $722 million in excessive federal payments. The agency's September regulation, which limited the length of time states can operate their newly approved excessive funding schemes, reduced these estimated excessive federal payments by about $483 million from an earlier estimate of $1.2 billion. HCFAs January regulation had established transition periods to allow states time to reduce their reliance on federal funds that state schemes had generated. The transition periods were of varying lengths, depending on how long a state had been receiving excessive federal payments from one of these schemes. Believing that states just starting to receive excessive federal payments such as Virginia and Wisconsin did not need the 2-year transition period established in the January regulation, HCFA decided to shorten the transition period in order to limit federal liability. While this September regulation will reduce the drain on federal Medicaid funds, we question HCFAs decision to approve additional financing schemes, given the explicit effort to curtail such schemes.

In commenting on a draft of this report, the Administrator of the Centers for Medicare and Medicaid Services (CMS) and the Virginia and Wisconsin state Medicaid directors disagreed with our conclusion that HCFAs decision in January 2001 to approve additional state financing schemes was unjustified. We continue to believe that HCFA had the authority, the discretion, and the responsibility to deny any proposed state plan amendments that were inconsistent with protecting the fiscal integrity of the Medicaid program.