Kentucky, New York among states that misallocated federal grants to establish exchanges

Audit magnifying
The Department of Health and Human Services’ Office of Inspector General has published a series of reviews of how states handled federal grants to establish their health insurance marketplaces. (Getty/AGorohov)

Kentucky misallocated millions of dollars that the Affordable Care Act provided for establishing a health insurance marketplace, according to a new government report. And it is not the only state to have done so.

The Department of Health and Human Services’ Office of Inspector General published its latest report on Friday, as part of a series of reviews it has conducted of how states handled establishment grants for their marketplaces.

From Oct. 1, 2013, through April 15, 2014, Kentucky used a flawed methodology to allocate $23.6 million in costs to its establishment grants that did not comply with federal requirements, the report says. That methodology was flawed because it was based on the entire state’s population, rather than using just the portion of the population that stood to benefit from the state marketplace, including Medicaid, CHIP and qualified health plan enrollees.

Then, from April 16 through Dec. 31, 2014, the state misallocated $25.5 million in costs because it continued to use its flawed allocation methodology, even after the Centers for Medicare & Medicaid Services informed the state agency that its estimated enrollment projections differed considerably from actual enrollment activity, the report says.

The OIG issued several recommendations to Kentucky to fix the issues, suggesting that it work with the CMS to determine how much money was properly and improperly allocated to establishment grants, refund to the agency any misallocated funds, and issue a written policy that explains how to develop and perform cost allocations on the basis of relative benefits received.

In its response to the report, the state pointed out that not only did the CMS not provide a specific methodology for how states should develop cost-allocation methodologies for a marketplace, but the agency also “consistently” approved the method Kentucky came up with.

Kentucky is not the first state to be called out by the OIG for how it allocated marketplace establishment grant funds. In November, the agency issued a report reviewing New York’s marketplace, finding that the state misallocated $93.4 million, then $55.3 million, to establishment grants. The state also claimed unallowable costs of $1 million on an establishment grant after the funding period for that grant had ended, the report said.

Back in March 2015, meanwhile, the OIG said the federal government overpaid the state of Maryland $28.4 million in grant money for its health insurance marketplace.

Former CMS Acting Administrator Andy Slavitt, though, defended the agency’s oversight of state exchanges during a congressional hearing in December 2015. He noted that more than $200 million in funding from states' original grant awards have already been returned to the federal government.