Federal Investigators Discover Improprieties in Medicaid Work Requirement Spending

My father, a professor, used to always say the most interesting part of a paper can often be found in the footnotes. And a recent report from the Government Accountability Office (GAO) on administrative spending in Medicaid Section 1115 work requirement waivers support his claim.

I recently read every word of the report, including all of the footnotes, and found some very important news there. The report was released in mid-October and was a response to a request from Sen. Ron Wyden (D-OR), Ranking Member of the Senate Finance Committee, and Rep. Frank Pallone (D-NJ), Chair of the House Energy and Commerce Committee. Both of these committees have jurisdiction over Medicaid. One of the reasons this report was necessary is because states are not currently required to identify administrative costs in their Section 1115 Medicaid waiver applications – a flaw which I have long thought needs to be addressed.

We’ve written about the flaws of work requirements many times – they don’t help people get work, but they are good at cutting people off from their health insurance. Now you can add to the list of negatives both high administrative costs AND the very likely possibility that Medicaid dollars are being spent inappropriately in the work requirement waivers. So the GAO investigators referred their findings to the Inspector General of the Department of Health and Human Services for further review. (Depending on its findings, OIG can recommend that CMS disallow federal matching funds for inappropriate administrative costs.) This was the news from footnote 46.

The report audited Medicaid administrative spending in five states with approved waivers – Arkansas, Indiana, Kentucky, New Hampshire and Wisconsin – during the period between August 2018 and September 2019.  State estimates for administrative spending varied quite a bit (see table on page 20), with Kentucky clearly at the high end, projecting $271.6 million in federal/state spending to administer its complex waiver. This amounts to $438 per person using the state’s estimate of how many people would be affected. Actual state administrative spending for all four states through 2018 was $129 million (federal/state combined).

By the way, GAO pointed out that all of the states’ estimates of administrative costs are actually too low because they don’t include the cost of required evaluations among other things.[1] And it’s worth noting, of course, that states are spending all this money hiring consultants, vendors and managed care companies to facilitate a policy that is kicking people off health coverage that they need to help them work. But I digress.

You might think – wow that sounds like a lot of money for a state like Kentucky to spend, since the state cited the need to maintain fiscal sustainability in its Medicaid program in court as a reason for doing the waiver in the first place.[2] Kentucky’s high administrative costs have been known for some time; what was new in the GAO report was the finding that the state received a higher matching rate for these funds than was allowable – with the feds picking up 90% of the tab.

Typically, Medicaid administrative costs are reimbursed at a 50/50 matching level—regardless of a state’s regular matching rate (Kentucky’s was 71.67% in FY 2019). But states can receive a 90% federal match for the costs of new IT systems associated with new eligibility and enrollment systems.[3] Maintenance and operation of these systems are matched at 75%. So, to avoid putting in as few state dollars as possible, states had an incentive to claim as much spending in the IT bucket as possible. And that, according to GAO investigators, is exactly what happened:

“Three of our five selected states requested and received funding approval for planned IT costs to implement their demonstrations that did not appear to be allowable or at higher matching rates than appropriate under CMS guidance.” (P. 29)

GAO found that problems existed in Kentucky, Indiana and New Hampshire – including a contract in Kentucky that went to the state’s Department of Workforce Services to help beneficiaries obtain and retain employment that CMS approved without renewing it and likely represented an inappropriate use of funding.

And, in another issue that has also been referred to the Inspector General (see footnote 50) CMS approved Indiana’s request for a 90% match rate on a $500,000 contract with a consultant to develop work requirement policies – which should have been reimbursed at a 50% match rate. Interesting in light of Politico’s recent reporting that Administrator Verma (a former consultant for the state of Indiana) has spent millions of federal dollars for campaign consultants to burnish her image.

The final footnote bombshell for me was on a different topic. One of the reasons that states’ estimates of administrative costs described in Table 3 are too low, is because states (in addition to using IT vendors and consultants) also planned to use managed care plans to help administer the work requirements.  And managed care companies don’t generally do things for free, so states were planning to pay them more (P. 22) Kentucky estimated $50.7 million in additional spending going to managed care companies and Indiana estimated $20.7 million.  State payments to managed care companies on behalf of Medicaid enrollees aren’t considered administrative spending, although managed care plans typically use 15% of the payments for administrative costs and profits.

And the most interesting finding in this vein relates to the state of Arkansas and is found in footnote 36. State officials in Arkansas, which provides coverage to Medicaid expansion enrollees by purchasing it through the Marketplace, told qualified health plans to “include the cost of administering work requirements in the premiums “(P. 22). And one of these QHP’s told GAO that “administering work requirements would increase non-Medicaid members premiums.”

What was CMS’s response to these findings? Despite Administrator Verma’s recent speech outlining her pressing concern about Medicaid’s fiscal sustainability, agency officials told GAO that:

“CMS has not updated any procedures … CMS has not completed a risk assessment to determine whether current procedures for overseeing administrative costs are sufficient and agency officials told us there were no plans to do so” (P. 33).

There’s no need for a footnote.

[1] We don’t know precisely how much Kentucky actually spent to administer a program that was never implemented as a court order. GAO reports that AR, IN, KY, and NH actually spent more than $129 million in federal/state funds through the end of 2018. None of these states currently are implementing their waivers…

[2] It’s worth noting that not only is Kentucky’s waiver on hold due to court action, Governor elect Beshear has said he will pull out of the waiver agreement as soon as he takes office.

[3] GAO explains the different matching rates on p. 11.

Joan Alker is the Executive Director of the Center for Children and Families and a Research Professor at the Georgetown McCourt School of Public Policy.