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Health > 27. Medicaid Demonstration Approved Spending

The Secretary of Health and Human Services could potentially curtail spending growth of Medicaid demonstrations, which have resulted in the authorization of billions of dollars in federal spending, by establishing specific criteria for assessing whether demonstration spending furthers Medicaid objectives and taking other steps to improve the transparency and accountability of the approval process.

Why This Area Is Important

Medicaid is a joint federal-state program that is now one of the largest sources of health care coverage and financing for tens of millions of low-income and medically needy individuals, with estimated spending over $500 billion in fiscal year 2015. Under the program, states claim federal matching funds for Medicaid expenditures from the Department of Health and Human Services (HHS), which oversees the program at the federal level. Within the Medicaid program, the Secretary of Health and Human Services has broad authority, provided under section 1115 of the Social Security Act, to waive certain federal Medicaid requirements and allow costs that would not otherwise be eligible for federal matching funds for experimental, pilot, or demonstration projects that in the Secretary’s judgment, are likely to assist in promoting Medicaid objectives.[1] Section 1115 demonstrations provide a way for states to test and evaluate new approaches to delivering services outside of Medicaid’s traditional rules, and they have become a significant and rapidly growing share of Medicaid expenditures. In fiscal year 2011, Medicaid demonstrations accounted for about one-fifth of Medicaid expenditures, rising to about one-fourth in fiscal year 2013, and increasing to almost one-third of Medicaid expenditures in fiscal year 2014, an estimated $89 billion in federal funds. Medicaid is on GAO’s list of high-risk programs, in part because of concerns about inadequate fiscal oversight, including fiscal oversight of section 1115 Medicaid demonstrations.

Historically, many states have sought section 1115 demonstrations to provide health coverage to individuals who could not be covered under traditional Medicaid rules; however, in recent years, HHS has approved demonstration spending for many other purposes not otherwise allowed under Medicaid. For example, states have obtained approval under demonstrations to claim federal matching funds for supplemental payments made to providers to help cover their uncompensated care costs associated with providing care to individuals without insurance. A key aspect of section 1115 demonstrations is that under HHS policy they must be budget neutral; that is, they should not increase the cost of the Medicaid program to the federal government.[2]

[1]42 U.S.C. § 1315(a). Although the Secretary of Health and Human Services has delegated the administration of the Medicaid program, including the approval of section 1115 demonstrations, to the Centers for Medicare & Medicaid Services, this report section refers to HHS throughout because authority for section 1115 demonstrations ultimately resides with the Secretary.

[2]To comply with HHS’s budget neutrality policy, generally a state must establish that the cost of the demonstration’s planned changes will be offset by savings or other available Medicaid funds. For example, individuals not previously eligible for Medicaid could be covered under a state’s demonstration without additional costs if the state were saving Medicaid funds through efficiencies under the demonstration, such as by implementing managed care. GAO has concerns about HHS’s process for ensuring that demonstrations will be budget neutral. In June 2013 and August 2014, GAO determined that spending limits approved by HHS for demonstrations in five states were tens of billions of dollars higher than what they would have been had HHS used methods to calculate spending limits that were consistent with its own budget neutrality policy.

What GAO Found

In April 2015, GAO reported that although section 1115 of the Social Security Act provides HHS with broad authority in approving expenditure authorities for demonstrations that in the Secretary’s judgment are likely to promote Medicaid objectives, HHS has not issued specific criteria for assessing whether demonstration expenditures meet this broad statutory requirement. Federal standards for internal control stress that management should ensure that there are adequate means of communicating with, and obtaining information from, external stakeholders, such as states in the case of Medicaid demonstrations, that may have a significant impact on the agency achieving its goals.[1] In GAO’s view, the criteria HHS uses for approving expenditure authorities would be subject to such a communication requirement. However, HHS officials told GAO that the agency has not issued specific criteria for assessing Medicaid demonstration expenditures. The officials said that for a demonstration to be approved, its goals and purposes must provide an important benefit to the Medicaid program, but they did not provide more explicit criteria for determining whether approved demonstration expenditures would provide an important benefit or promote Medicaid objectives. GAO reported that given the breadth of the Secretary’s authority under section 1115, explicit criteria are needed to illuminate how HHS determines that new demonstrations promote Medicaid objectives. Having such criteria would make the basis for HHS’s decisions to approve expenditure authorities in section 1115 demonstrations—which can result in billions of dollars of federal expenditures for costs not otherwise allowed under Medicaid—more transparent and could potentially achieve cost savings by avoiding spending on programs and purposes that do not promote Medicaid objectives.

GAO also reported in April 2015 that how demonstration spending would further Medicaid objectives was not always clear in HHS’s approval documents. This was evident, for example, in recently approved demonstrations allowing expenditures for state programs, which were significant in terms of the amounts approved.[2] In five states, HHS approved demonstrations that allowed the states to spend $9.5 billion in Medicaid funding (federal and state) to support more than 150 state-operated programs.[3] While many of the state programs approved offered health-related services, overall they were wide-ranging in nature and included, for example, programs supporting health care workforce development and programs subsidizing private health coverage purchased through exchanges. The programs were operated or funded by a wide range of state agencies, such as state departments of mental health, public health, corrections, youth services, developmental disabilities, and aging and state educational institutions.[4]

GAO found that HHS’s approval documents for these state programs did not consistently include information indicating the specific purposes of the approved expenditures; therefore, how the programs would likely promote Medicaid objectives was not clear. The state programs were generally listed by program name in the approval documents but often without any further detailed information. Several state programs approved for Medicaid funds appeared, based on information in the approvals, to be only tangentially related to improving health coverage for low-income individuals and lacked documentation explaining how their approval was likely to promote Medicaid objectives. For example, the purposes of some approved programs included funding health insurance for fishermen and their families at a reduced rate, constructing supportive housing for the homeless, and recruiting and retaining health care workers. For two of the five states with approvals to cover their state programs under their demonstrations, HHS’s approval documents included additional details beyond the program names—including program descriptions and target populations—in what HHS calls claiming protocols. Such information can help explain how programs may promote Medicaid objectives; however, in some instances, even when such information was included, HHS’s basis for approving expenditure authorities for some state programs was not apparent. Approvals for three states, which accounted for nearly half of the more than 150 state programs approved, did not include claiming protocols for most programs and otherwise lacked clear information on how the programs would promote Medicaid objectives, such as how they would benefit low-income populations. Identifying the linkages between state programs and Medicaid objectives in approval documents could potentially help HHS avoid spending on programs that do not further Medicaid’s objectives. Without this information, HHS may be missing opportunities to achieve cost savings.

GAO also found that HHS’s approvals did not consistently provide assurances that Medicaid demonstration funding would not unnecessarily duplicate other federal funding received by states. In 2012, HHS established an application template that states could opt to use to apply for section 1115 demonstrations. The template included instructions for states to identify other federal funds used for the demonstration, in part to help HHS identify potential areas of duplicative effort. HHS’s approvals in five states reviewed, however, did not consistently document potential areas of duplicative efforts. In two of the five states reviewed, the approvals included claiming protocols that identified all other federal and nonfederal funding sources for each state program and included specific instructions on how states should “offset” other revenues received by the state programs related to eligible expenditures. The approval for a third state had a general program integrity provision requiring the state to have processes in place to ensure no duplication of federal funding. In contrast, the remaining two states did not identify other federal and nonfederal funding sources for approved state programs and lacked language expressly prohibiting the states’ use of federal funding for the same purposes. Furthermore, it was not always clear from HHS’s approval documents that it considered whether Medicaid demonstration funds would unnecessarily duplicate other federal funding sources. The resulting potential for duplicative federal funding may represent a missed opportunity to achieve cost savings.

[1]GAO, Standards for Internal Control in the Federal Government, GAO-14-704G (Washington, D.C.: September 2014).

[2]GAO raised similar concerns about approved demonstrations that allowed five states to make up to nearly $18.8 billion (federal and state) in supplemental payments to hospitals or their partners to make delivery system or infrastructure improvements. How this approved spending would likely promote Medicaid objectives was not consistently documented in HHS’s approvals.

[3]The $9.5 billion approved was for programs in all five states during their current demonstration approval periods, which ranged from 2.5 to 5 years.

[4]Prior to the demonstrations, these programs could have been funded with state or other funding sources, including other federal funding sources. Under the demonstrations, federal matching funds could replace some of the states’ expenditures for the programs, freeing up state funding for other purposes, including addressing state budget shortfalls.

Actions Needed

To improve the transparency and accountability of HHS’s section 1115 Medicaid demonstration approval process, and to ensure that federal Medicaid funds for the demonstrations do not duplicate other federal funds, GAO recommended in April 2015 that the Secretary of Health and Human Services take the following three actions:

  • issue criteria for assessing whether section 1115 expenditure authorities are likely to promote Medicaid objectives;
  • ensure the application of these criteria is documented in all HHS’s approvals of section 1115 demonstrations; and
  • take steps to ensure Medicaid demonstration approval documentation consistently provides assurances—such as through claiming protocols—that states will avoid duplicative spending by offsetting as appropriate all other federal revenues received when claiming federal Medicaid matching funds.

The actual cost savings associated with these actions is unknown because HHS has not issued specific criteria upon which GAO could assess whether existing expenditure authorities should have been approved. Also, the cost of future proposed expenditure authorities that might be avoided as a result of HHS issuing specific criteria is unknown. As a result, GAO cannot quantify potential financial benefits associated with the recommended actions. GAO estimates that savings could potentially be significant, given the billions of dollars of spending approved under Medicaid demonstrations, including for new costs not otherwise eligible for federal Medicaid funds.

How GAO Conducted Its Work

The information contained in this analysis is based on findings from GAO’s April 2015 report noted in the related GAO products section. For this report, GAO examined new section 1115 demonstrations, as well as extensions or amendments to existing demonstrations, approved by HHS from June 2012 through mid-October 2013. GAO identified a total of 25 states that received such approvals during that time. GAO examined the approval documents for each demonstration, including the special terms and conditions, which set forth HHS’s conditions and limitations for the demonstration; interviewed HHS officials; and obtained additional documents from HHS to identify the criteria used for approval and how the department documented that states’ demonstrations met such criteria.

Table 16 in appendix V lists the program GAO identified that may have opportunities for cost savings.

Agency Comments & GAO Contact

In commenting on the April 2015 report on which this analysis is based, HHS partially agreed with GAO’s recommendation that it issue criteria for assessing whether Medicaid demonstration expenditure authorities are likely to promote Medicaid objectives. HHS stated then and in subsequent correspondence submitted in July 2015 that the Centers for Medicare & Medicaid Services (CMS) reviews all demonstrations against four “general criteria” to determine whether the objectives of the Medicaid program will be or are being met.[1] HHS has since posted these criteria on its website, indicating that these are the criteria used to determine whether Medicaid program objectives are met in demonstrations. While this is a positive step, GAO continues to maintain that more specific guidance is needed to improve transparency.

HHS agreed with GAO’s recommendations that it improve the documentation around the basis for new approved spending and consistently include in approval documentation assurances that the new demonstration spending for state programs will not duplicate other federal funding streams. HHS stated that since the release of the report, CMS has been identifying in approval documents which of its “general criteria” each approved expenditure authority promotes. While this may add some transparency, GAO still regards the general criteria as not sufficiently specific to inform stakeholders of HHS’s interpretation of its section 1115 authority. HHS also stated that CMS has plans to require all future section 1115 demonstration approvals to include claiming protocols for both new and previously authorized state programs and to verify that there is no duplication of federal funding. Since GAO’s report, HHS has taken action to improve transparency and oversight of demonstration approvals, including requiring states to submit claiming protocols as a condition of HHS’s approving spending for state programs. A review of selected approvals found that not all protocols had been submitted as of January 2016. GAO will continue monitoring the implementation of recommendations in this area.

GAO provided a draft of this report section to HHS for review and comment. The department did not provide comments on this report section.

For additional information about this area, contact Katherine Iritani at (202) 512-7114 or

[1]The four general criteria are whether the demonstration will (1) increase and strengthen overall coverage of low-income individuals in the state; (2) increase access to, stabilize, and strengthen providers and provider networks available to serve Medicaid and low-income populations in the state; (3) improve health outcomes for Medicaid and other low-income populations in the state; or (4) increase the efficiency and quality of care for Medicaid and other low-income populations through initiatives to transform service delivery networks.


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