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    Statement by
    Dennis Smith
    Director, Center For Medicaid & State Operations Centers For Medicare & Medicaid Services
    Medicaid Financial Management
    before the
    House Government Reform Subcommittee on Government Efficiency, Financial Management and Intergovernment Relations

    June 13, 2002

    Chairman Horn, Congresswoman Schakowsky, distinguished Subcommittee members, thank you for the opportunity to discuss CMS's efforts to improve financial oversight and management of the Medicaid program. We share your concern for protecting taxpayer dollars and ensuring Medicaid's financial integrity. As Federal and State Medicaid spending continues to grow rapidly, it is increasingly important for us to make sure that taxpayer dollars are serving their intended statutory purposes of improving health care quality and access for Medicaid beneficiaries. As you know, improving financial performance is one of five government-wide initiatives that comprise the President's Management Agenda and reducing improper payments is a key component of the initiative. We believe that there are many opportunities for improving the fiscal integrity and management of the Medicaid program. This is a critical priority of mine as Chief Operating Officer for the Centers for Medicare & Medicaid Services (CMS). We appreciate the recommendations provided by the Office of Inspector General, the General Accounting Office (GAO) and others as to how we might strengthen and improve our oversight processes in the Medicaid program. We take these recommendations seriously and they provide a valuable roadmap for the future.

    We, along with the States, have a strong interest in strengthening financial oversight and ensuring payment accuracy. The States provide a crucial first line of defense in safeguarding Medicaid program dollars. At the Federal level, our primary roles are to exercise proper oversight and review of State financial practices and to provide guidance and support for States' program integrity efforts. While we have made substantial progress in helping States identify and reduce improper payments, we are now turning our attention to strengthening Medicaid Federal financial management activities. We have taken some initial steps to improve our financial management processes, but we know that more work can and must be done. As part of the President's FY 2003 Budget, we have dedicated $10 million from the Health Care Fraud and Abuse Control (HCFAC) account to develop a comprehensive Medicaid program integrity plan. Once developed, this plan will provide for a coordinated strategy of Federal financial management based on sophisticated risk management techniques. Among other things, this strategy will allocate resources based on a risk assessment methodology, more fully align Central Office and Regional Office efforts, capitalize on regional best practices, promote independence of the program integrity function, and continuously measure performance and monitor results. This plan will address the concerns raised by the GAO and others, and I am pleased to share with you today the progress we have made.


    Medicaid is a partnership between the federal government and the States. Each year the federal government and the States together spend $225 billion providing services to 40 million eligible Medicaid beneficiaries. While the federal government provides financial support to the States and is responsible for overseeing the Medicaid program, each State essentially designs and runs its own program. Beyond a core set of mandatory covered services, Medicaid programs vary widely among States. The States are responsible for establishing their own financial management internal control structures and plans to ensure that program dollars are spent appropriately. We are responsible for approving these plans and ensuring that they safeguard the fiscal integrity of the Medicaid program and meet other Federal requirements.

    CMS's Central Office in Baltimore, in collaboration with our 10 Regional Offices across the country, has responsibility for administering the Medicaid program and overseeing States' related financial activities. Under direction from the Central Office, our Regional Office staff work in close partnership with the States in performing a variety of financial oversight activities, such as reviewing State budget and expenditure reports for accuracy, identifying allowable and unallowable program costs, as well as providing advice and guidance to the States on Medicaid financial management matters. They also work collaboratively with Medicaid Agency Program Integrity Units to ensure Medicaid program integrity and minimize the potential for waste, fraud, and abuse within the Medicaid program. Furthermore, the Agency is responsible for reviewing the results of State Medicaid audits conducted in accordance with the Single Audit Act to ensure that States take corrective actions to address any identified weaknesses.


    We recognize the need to strengthen our Medicaid financial management efforts and, as part of the proposal in the FY 2003 President's Budget, are taking a number of proactive steps to address areas of concern and build strong protections for the future. We are increasing attention to, and emphasizing the importance of Medicaid financial management at all levels of our Agency and across all of our regions. This effort involves improving Federal oversight capabilities of State Medicaid financial practices, and focusing attention on program areas of greatest risk, so that our resources are targeted appropriately. We are redoubling our efforts to reach out to our partners at the State level to get their insight and expertise on how to best focus our financial management activities and improve information sharing between the HHS Inspector General, State agencies, and our Agency. Finally, we are building on our fraud, waste, and abuse efforts with the States and developing new and innovative approaches to identifying and measuring payment errors. The following are examples of improvements and progress we have made as part of our Medicaid financial management and program integrity redesign:

    Managing for Results. In 2002, we put a structured financial management work planning process in place for each of our Regional Offices, which are directly responsible for Medicaid oversight activities. These new work plans detail the specific financial management activities that each region is responsible for, and will provide the Agency with tangible results that we will use to measure our own performance in achieving our objectives on an ongoing basis. Moreover, these work plans will give our Regional Offices a clear picture of performance expectations, allow senior management to track performance results, and provide improved communication pathways for ensuring consistency in the guidance provided to our Regional Offices. In addition, these concrete work plans will allow us to align management priorities between our Central Office and the regions, which will, in turn, strengthen accountability at all levels. We also are working on several internal pilot projects to improve coordination between our Central Office and the Regional Offices in the areas of financial management resource allocation and goal setting, as well as to establish consistency in the application of Medicaid reimbursement policies across the nation.

    Working with our State Partners. We are taking steps to strengthen our partnership with the States and ensure that the financial management process is mutually beneficial for the States and our Agency. We know there is a great deal we can learn from one another. Therefore, we recently established a joint State-Federal technical advisory group in cooperation with the National Association of State Medicaid Directors (NASMD). This group will be responsible for a number of important information-sharing activities. They will help ensure that the recommendations made by the Inspector General in their annual audit of the Medicaid program, and that the advice provided by the GAO, are put into place as appropriate. This group also will serve as a sounding board for the States and allow them to provide feedback to us on how we can improve our management review activities. We want the States to advise us on issues such as expanding and improving the use of the Medicaid Management Information System or changing State reporting forms so that they highlight key activities and are clear and understandable. We also hope that the group will help us to identify significant financial trends in Medicaid and make changes to our reviews to address these areas. Finally, the group will help facilitate communication and information sharing between our other technical advisory groups that work on related activities like fraud and abuse and issues surrounding third-party liability.

    Focusing on Areas of Greatest Risk. A key element of our overall Medicaid financial management strategy is to focus our Regional Offices' financial reviews on high-risk areas of the Medicaid program. To identify these areas, we performed a nationwide risk assessment of improper claiming of Federal Medicaid funds last spring on a State-specific and service-by-service basis. The results provided us with a useful baseline by which we can measure future performance and improvements on the part of our Regional Offices, as well as the States. This effort also helped confirm and document in a systematic way what we already knew to be areas of risk.

    We are using the information we gathered to improve our own financial management oversight strategy, and methods, and to help States comply with the law. For example, we are refining our processes to focus our available resources on State reviews on those program areas that we know are of greatest risk. In addition, we have begun on-site reviews of States' quarterly expenditure reports where the magnitude of State spending or past history of Medicaid claiming issues warrant them. Also, we are working more closely with State and federal audit agencies to ensure that problems are remedied. Based on what we learned through the risk assessment process, we are re-examining our financial management guidance to the States. And we are making changes, where necessary, to ensure that our guidance and policies are articulated clearly and understood by the States, recognizing that the States are ultimately responsible for ensuring that their claims for federal reimbursement are appropriate.

    We also plan to explore the use of new data analysis techniques and look for new opportunities to incorporate data from different sources to better inform and focus our oversight processes. We currently are examining the use of information from the Medicaid Statistical Information System, a database containing Medicaid enrollment and paid claims data, to see if it may provide new sources of information to strengthen our review. This will help us to better understand the financial management environment as well as improve the techniques used by our Regional Office staff in performing their oversight activities.

    Improving Payment Accuracy Measurement. We are taking concrete steps to ensure that taxpayer dollars invested in the Medicaid program are managed and spent appropriately by developing tools to measure payment accuracy in Medicaid, similar to that of the Medicare program. We are committed to developing a solution to this. In fact, one of our Government Performance and Reporting Act goals is to assist States in developing this type of measurement tool, as well as conducting pilot tests of various approaches, and exploring the feasibility of measuring payment accuracy at the national level.

    We recognize, however, that given the diversity among State Medicaid programs, developing this tool will be challenging for our Agency and the States. Over the past several years, several States have pioneered projects on their own to measure payment accuracy within their Medicaid programs. We want to build on their experience and to share what these States have learned on a broader scale. We have already made substantial progress. This year, working collaboratively with nine States and an outside technical consultant, we developed a model for estimating payment accuracy in Medicaid fee-for-service and managed care programs at the State level. Next year, we plan to expand the accuracy project to up to fifteen States, most of which will test our model measurement methodology. It is a demanding, but important challenge, and we will work closely with the States to meet it.

    Strengthening State Program Integrity Efforts. We are making a strong and concerted effort, in cooperation with our State partners, to significantly strengthen State program integrity. And we are working closely with State and Federal law enforcement to improve their coordination and effectiveness. Our Agency's Southern Consortium, which consists of the Atlanta and Dallas Regional Offices, leads our National Medicaid Fraud and Abuse oversight efforts, what we call the Medicaid Alliance for Program Safeguards. Established in 1997, the Alliance has been successful in tackling some of the most daunting program integrity issues and has developed a strong and sustaining partnership with the States. By basing our efforts at the regional level, we are able to get closer to the "front lines" of State activity in tackling program integrity issues. Last October, the Alliance sponsored a focus group with a number of our State partners to develop new program integrity strategies for fighting waste and abuse and to examine how we might better coordinate our Medicaid program integrity efforts with those of Medicare. Many ideas have been generated from focus groups like this one, including our recently announced partnership with the California State Department of Health. Now, computers in the State of California will share Medicare and Medicaid program data and help us to detect fraudulent patterns in either program that might not be evident when viewed in isolation. We know when problems crop up in Medicare; they are likely to also be found in Medicaid. Through this data-sharing partnership, analysts and investigators will be able to see the "whole picture" instead of focusing on one program.

    The move in Medicaid from a predominantly fee-for-service mode to a managed care or capitated model presented a challenge for States to curb fraud and abuse in their Medicaid programs. Many States are still learning how to address the unique program integrity challenges posed by managed care, and some are fighting the misconception that managed care somehow does away with program integrity issues. In response to these concerns, the Alliance organized and sponsored a series of Fraud in Medicaid Managed Care Workshops, focusing on how fraud manifests differently within the managed care setting and how programs to address it should be structured. The workshops brought State program and Fraud and Abuse staff together with Federal law enforcement to better coordinate anti-fraud efforts. Forty-nine States participated. In addition, the Alliance released a document entitled, "Guidelines for Addressing Fraud and Abuse in Managed Care" to provide ideas and guidelines to assist States and other stakeholders in preventing, identifying, investigating, reporting, and prosecuting fraud and abuse in capitated managed care programs. The guidelines focused on:

    • Key components of an effective managed care fraud control program;
    • Data necessary to detect and prosecute managed care fraud;
    • How to report managed care fraud;
    • Suggested language for managed care contracts and waivers to help fight and prevent program integrity problems; and
    • Our role, along with the roles of State Medicaid agencies, State fraud control units, managed care organizations, and the HHS Inspector General.

    Also, the Alliance has instituted a multi-year program of State Medicaid Program Integrity Reviews. Our Regional Offices conduct these reviews in order to assess State fraud and abuse efforts in both fee-for-service and managed care, as well as to provide technical assistance and identify "Best Practices." These program integrity reviews, lauded by GAO, focus on State compliance with applicable program integrity statutes and regulations and may also include a detailed assessment of the States' strengths and vulnerabilities in this area. The information that we obtain from these reviews is very relevant to the financial management work planning process that I described earlier, particularly with respect to risk assessment and analysis, which ensures that the findings are considered as annual Regional Office and national financial management work plans are developed. Additionally, the Alliance developed a new section of the Program Integrity Review Guide for use in monitoring States' managed care plans.

    Creating A National Institutional Reimbursement Team. In an effort to improve national consistency in the issuance and application of Medicaid reimbursement policy, we have put together a team of Central and Regional Office staff, the National Institutional Reimbursement Team, who are responsible for reviewing all institutional reimbursement State plan amendments, providing technical assistance to the States, and developing Medicaid institutional reimbursement regulations and policy. For example, the team is currently creating a standard set of questions that must be answered by States before a State plan amendment can be approved and will help ensure that the payment methodology is clear. As a result of this effort, we will better know what we are paying for and how we are paying for it. The team's work will help ensure consistency in the application and review of our Medicaid policies.

    Making Federal Matching Payments Only When State Plan Amendments Are Approved. In the past, States have been allowed to draw down federal matching payments for State plan amendments that were submitted, but not yet approved. This allowed States to assume a financial risk if their plan amendment was subsequently disapproved. Since federal matching payments were readily available while their State plan amendments were being considered, States had little incentive to ensure their plan amendments were approved. In fact, some State plan amendments were pending for years while the States continued to draw down federal matching payments. In January 2001, we issued a State Medicaid Director letter informing the States that we would no longer make federal matching payments until State plan amendments were approved, thus removing the previous incentive for States to keep plan amendments pending. For our part, we have changed our policy so that we will either approve or disapprove plan amendments within 90 days.

    Prohibiting Federal Matching Payments for Contingency Fee Contracts. In addition, we have a longstanding policy that federal matching payments can only be made for professional services contracts related to the filing and collection of Medicaid claims that provide payment on a fixed-price basis and not on contingency. Additionally, our policy provides that contracts must be competitively awarded, except under very limited circumstances. Our Regional Offices recently surveyed all States to ensure that this policy was being followed. In a few limited cases, we found that States were incorrectly claiming federal matching payments under contingency fee arrangements. As a result, we issued a memorandum this past month to the States, reiterating our policy that federal matching payments cannot be made on contingency fee contracts.

    Partnership with State and Federal Oversight Agencies. Another key element of our new financial management strategy is to strengthen our working relationships and our exchanges of information with several State entities. Every State has one or more audit entities responsible for ensuring that State expenditures, including those in the Medicaid and State Children's Health Insurance Programs, are properly made and documented. Furthermore, every Medicaid Agency has a surveillance and utilization review staff to pinpoint and pursue questionable provider claims and Agency payments. Finally, as you know, virtually all States operate a Medicaid Fraud Control Unit, typically housed in the Attorney General's office, to pursue instances of suspected Medicaid fraud. By better cultivating our relationships with State agencies that perform these types of functions, we believe we can continue to enhance our oversight of the Medicaid program nationwide. In addition, over the last several years, at the Federal level, we have developed a close collaboration with the Department of Health and Human Services Office of the Inspector General. We intend to continue this relationship. Finally, in cooperation with the American Public Human Services Association, we plan to survey State Medicaid agencies this year in order to identify specific ways to improve the usefulness of the annual Single Audits performed by every State pursuant to the Single Audit Act Amendments of 1996.


    We are strongly committed to protecting taxpayer dollars and ensuring the sound financial management of the Medicaid program. As evidenced by our testimony today, we are taking a number of proactive steps to reach out to our State partners to get their insight and expertise on how to best focus our financial management activities and improve information sharing. Going forward, we are developing a comprehensive strategy that will also strengthen Federal oversight of State financial practices. We have made a great deal of progress and we look forward to continuing to work cooperatively with you, Chairman Horn, Congresswoman Schakowsky, this Subcommittee, and the Congress as we work to strengthen and protect the Medicaid program for the future. I thank you for the opportunity to discuss this important topic today, and I am happy to answer your questions.

Last Updated: January 22, 2003