CMS tightens oversight of Medicaid demonstration projects after GAO highlights ‘billions’ in excess costs

CMS Administrator Seema Verma speaking at a podium at the Commonwealth Fund on July 25, 2018
CMS Administrator Seema Verma said new guidelines for Medicaid demonstration projects will "keep federal spending under control." (YouTube)

The Centers for Medicare & Medicaid Services (CMS) is clamping down on finances tied to Medicaid demonstration projects, outlining new requirements to ensure programs remain budget neutral.

The change comes a day after GAO Comptroller Gene Dodaro told lawmakers that demonstration projects cost the federal government “billions” in excess payments.

“This is an area that needs to be worked on,” Dodaro said during Tuesday’s hearing before the Senate Committee on Homeland Security and Government Affairs, pointing out that GAO auditors found $11 billion in excess spending in Arkansas over a five-year period.

Medicaid demonstration projects, which give states more program design flexibility, are required to be budget neutral, meaning federal spending does not exceed spending without the demonstration project.

But states haven't estimated those expenditures accurately, and CMS has failed to hold them accountable. In June, GAO listed Medicaid demonstrations as one of three broad areas of risk. Demonstration projects accounted for more than one-third of Medicaid spending in 2015, according to the report (PDF). Over the past 15 years, GAO has identified “a number of questionable methods and assumptions that HHS has permitted states to use when estimating costs.”

In letter (PDF) to state Medicaid directors on Wednesday, CMS outlined for the first time how states should calculate budget neutrality. The agency also released a new monitoring tool for states to submit standardized expenditure reporting to CMS. States will be required to use the tool as a condition of demonstration approval.

RELATED: Medicaid wasted $37B on improper payments in 2017, CMS shrugs off GAO advice

“Today’s guidance is a comprehensive explanation of how CMS and our state partners can ensure that new demonstration projects can simultaneously promote Medicaid’s objectives and keep federal spending under control,” CMS Administrator Seema Verma said in a statement.

During Tuesday’s Senate hearing, Verma repeatedly criticized states for drawing down federal Medicaid funds. She lamented a projected $806 billion in spending from 2016-2026 attributed to Medicaid expansion alone, of which 90% will be paid by the federal government.

Medicaid’s fundamental structure, she argued, incentivizes states to spend more, not less.

“At the end of the day, with that 90% match rate, states have a strong incentive to draw down more federal dollars,” she said.

“Until we change the dynamic and structure of the Medicaid program from being an open-ended entitlement to one where states are responsible for a fixed amount of dollars, we’re always going to have these issues with program integrity,” she added.

In turn, Dodaro urged CMS to utilize state auditors to hold Medicaid programs accountable, calling the auditors a “tremendously untapped resource.”

“With Medicaid expenses expected to continue to rise dramatically ... we can’t afford to have state auditors on the sidelines," he said. "They need to get in the game and they need to have a substantive and ongoing role.”