Emergency Management: FEMA's Disaster Recovery Efforts in Puerto Rico and the U.S. Virgin Islands

In September 2017, two major hurricanes—Irma and Maria—struck Puerto Rico and the USVI, causing billions of dollars in damage to infrastructure, housing, and the economy. FEMA—a component of the Department of Homeland Security—is the lead federal agency responsible for assisting Puerto Rico and the USVI to recover from these natural disasters. Among other responsibilities, FEMA is administering the Public Assistance program in partnership with the governments of Puerto Rico and the USVI, providing them grant funding for response and recovery activities, including debris removal efforts, life-saving emergency protective measures, and the repair, replacement, or restoration of public infrastructure.

This statement describes (1) the status of FEMA's Public Assistance grant funding in Puerto Rico and the USVI in response to the 2017 hurricanes as of April 2019, (2) the establishment of recovery offices in Puerto Rico and the USVI, and (3) challenges in implementing the Public Assistance program and actions FEMA has taken to address them. This statement is based on GAO reports issued in February, March, and June 2019, and includes preliminary observations from ongoing GAO reviews of FEMA operations. For ongoing work, GAO analyzed program documents and data on obligations and expenditures; interviewed agency officials; and visited disaster-damaged areas in Puerto Rico and the USVI, where GAO also interviewed FEMA and local officials.

GAO's prior and ongoing work found that the Federal Emergency Management Agency (FEMA) obligated about $7.4 billion in Public Assistance grant funding to Puerto Rico and the U.S. Virgin Islands (USVI) as of April 2019, in response to the 2017 hurricanes. FEMA obligated about $6.2 billion in Public Assistance grants for emergency work—debris removal activities, power restoration, and other emergency measures—and about $965 million in Public Assistance grants for permanent work—including the repair or replacement of public infrastructure such as roads, electrical utilities, and damaged buildings. Further, FEMA is continuing to work with Puerto Rico and the USVI to develop additional permanent work projects to repair damaged public infrastructure, such as schools and hospitals (see figure).

In 2017, Puerto Rico established the Central Office for Recovery, Reconstruction, and Resilience and in 2019 the USVI established the Office of Disaster Recovery to coordinate and oversee federal recovery efforts. Among other things, these recovery offices are responsible for monitoring and overseeing the Public Assistance program and developing internal controls to ensure it is implemented in accordance with applicable laws, regulations, and FEMA requirements.

GAO's prior and ongoing work highlighted challenges with the Public Assistance program including concerns about the clarity of FEMA's guidance, and the time and resources needed to transition to a new Public Assistance delivery model in Puerto Rico. Further, Puerto Rico and USVI officials reported difficulties understanding FEMA's implementation of new flexibilities authorized by law as well as delays in jointly developing cost estimates for long-term recovery projects such as the repair or replacement of hospitals, buildings, and other public infrastructure. FEMA has taken some actions to help address these issues, including developing additional guidance and specific training. However, it is too soon to determine the effectiveness of FEMA's actions. GAO will continue to evaluate the Public Assistance program in the USVI and Puerto Rico and plans to report its findings in late 2019 and early 2020, respectively.

Thank you for the opportunity to discuss our work on the Federal  Emergency Management Agency’s (FEMA) recovery operations in Puerto  Rico and the U.S. Virgin Islands (USVI).

In the span of 14 days in September 2017, two major hurricanes—Irma  and Maria—struck Puerto Rico and the USVI, severely damaging critical  infrastructure and causing tens of billions of dollars in damage.  Specifically, on September 6, 2017, Hurricane Irma passed just north of  the USVI islands of St. Thomas and St. John and Puerto Rico as a  Category 5 hurricane, causing severe wind and rain inundation. Less  than 2 weeks later, on September 19, 2017, Hurricane Maria struck the  USVI island of St. Croix as a Category 5 hurricane and, hours later on  September 20, 2017, made a direct hit as a Category 4 hurricane on the  main island of Puerto Rico (see fig. 1).

The storms caused extensive damage to roads, bridges, and other public  infrastructure. Further, the hurricanes devastated Puerto Rico’s electrical  system—it took roughly 11 months for power to be restored to all of the  customers able to receive power, the longest blackout in U.S. history. In  its recovery plan, Puerto Rico estimated that $132 billion will be needed  from 2018 through 2028 to repair and reconstruct the infrastructure  damaged by the hurricanes.

In the USVI, the storms damaged more than half of the territory’s housing  units as well as its hospitals, schools, and water and wastewater facilities,  according to a 2018 report from the USVI Hurricane Recovery and  Resilience Task Force. Overall, this report estimated that the hurricanes  caused approximately $10.7 billion in total damages across the USVI.

The storms exacerbated the financial situations in the territories, which  were operating under severe fiscal constraints prior to the hurricanes.  See figure 2 for examples of hurricane damage to Puerto Rico and the  USVI.

FEMA—a component of the Department of Homeland Security (DHS)—is  the lead federal agency responsible for disaster preparedness, response,  and recovery, which includes assisting Puerto Rico and the USVI as they  recover from these natural disasters. Among other responsibilities,  FEMA administers the Public Assistance program through a partnership  with the governments of Puerto Rico and the USVI to provide grant  funding for a wide range of eligible response and recovery activities.  These activities include debris removal efforts; life-saving emergency  protective measures; and the repair, replacement, or restoration of  disaster-damaged publicly-owned facilities, electrical utilities, roads and  bridges; and more.

My testimony today discusses our prior and ongoing work on disaster  recovery efforts in Puerto Rico and the USVI following Hurricanes Irma  and Maria in 2017, including:  1.  the status of Public Assistance grant funding in Puerto Rico and the  USVI, as of April 2019;  2.  the recovery offices Puerto Rico and the USVI have established to  manage recovery efforts; and  3.  the challenges FEMA, Puerto Rico, and the USVI have faced in  implementing the Public Assistance program, and the actions FEMA  has taken to address them.

My statement is based on reports we issued in February, March, and  June 2019 as well as data and preliminary observations from our ongoing  reviews of FEMA’s recovery activities in Puerto Rico and the USVI for a  number of congressional committees and subcommittees. To perform our  prior work, we reviewed federal laws related to emergency management,  analyzed FEMA data and documentation, and interviewed relevant  agency officials. More detailed information on the scope and methodology  for our prior work can be found in the issued reports listed in appendix I.

To develop our preliminary observations from ongoing work, we reviewed  federal laws and documentation from FEMA, Puerto Rico, and the USVI,  including policies, procedures, and guidance specific to emergency  management. We also obtained and analyzed data from FEMA’s  Emergency Management Mission Integrated Environment and Integrated  Financial Management Information System on Public Assistance program  obligations and Puerto Rico’s and the USVI’s expenditures as of April  2019. We reviewed existing information about these systems,  interviewed data users and managers responsible for these data, and  cross-checked data across sources to ensure consistency. We  determined these data to be reliable for the purposes of this statement.  Moreover, we conducted site visits to Puerto Rico and the USVI to meet  with federal, territorial, and local government and emergency management officials to discuss disaster recovery efforts and associated  challenges. For a list of our ongoing emergency management reviews,  see appendix II.

We conducted the work on which this statement is based in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.

FEMA’s Public Assistance program provides grant funding to state,  territorial, local, and tribal governments as well as certain types of private  nonprofit organizations to assist with responding to and recovering from  presidentially-declared major disasters or emergencies. As shown in  figure 3, Public Assistance grant funds are categorized broadly as  “emergency work” or “permanent work.” Within these broad categories  are separate subcategories. In addition to the emergency work and  permanent work categories, the program includes category Z, which  represents indirect costs, direct administrative costs, and any other  administrative expenses associated with a specific project.

FEMA’s Public Assistance program also provides grant funding for cost- effective hazard mitigation measures to reduce or eliminate the long-term  risk to people and property from future natural and man-made disasters  and their effects. For example, a community that had a fire station  damaged by a disaster could use Public Assistance grant funding to  repair the facility and incorporate additional measures such as installing  hurricane shutters over the windows to mitigate the potential for future  damage.

FEMA, the state or territorial government (the recipient), and local or  territorial entities (the subrecipient) work together to develop projects  under the Public Assistance program. After a project has completed  FEMA’s review process and is approved, FEMA obligates funding for the  project by placing money into an account where the recipient has the  authority to draw down—or withdraw—funding to pay the subrecipient for  eligible work upon completion.

The Public Assistance Alternative Procedures Program in Puerto Rico and the USVI

The Sandy Recovery Improvement Act of 2013 authorized the use of  alternative procedures in administering the Public Assistance program,  thereby providing new flexibilities to FEMA, states, territories, and local  governments for debris removal, infrastructure repair, and rebuilding  projects using funds from this program. Unlike in the standard Public  Assistance program where FEMA will fund the actual cost of a project, the  Public Assistance alternative procedures allow awards for permanent  work projects to be made on the basis of fixed-cost estimates to provide  financial incentives for the timely and cost-effective completion of work.

Under these procedures, if the actual cost of the project exceeds the  fixed-cost estimate agreed upon by FEMA and the recipient, the recipient  or subrecipient is responsible for the additional costs at the time of the  close-out process. However, if the actual cost of completing eligible work  for a project is below the estimate, the recipient may use the remaining  funds for additional cost-effective hazard mitigation measures to increase  the resilience of public infrastructure. In addition, these funds may also be  used for activities that improve the recipient’s or subrecipient’s future  Public Assistance operations or planning.

In October 2017, Puerto Rico requested, and FEMA approved, the use of  the alternative procedures program for all large-project funding for Public  Assistance permanent work projects in categories C through G.  Although FEMA had approved alternative procedure grants in 30 states  as of April 2018, in these cases, alternative procedures were used on a  project-by-project basis. Puerto Rico’s recovery from the 2017 hurricanes  is the first recovery to use alternative procedures for all large permanent  work projects. In addition, in July 2018, FEMA approved a request from  the Governor of the USVI to transition to using the Public Assistance  alternative procedures program for permanent work in the territory. Unlike  in Puerto Rico, the USVI may pursue the alternative procedures on a  project-by-project basis.

FEMA Had Obligated $5.6 Billion and $1.8 Billion in Public Assistance Grant Funding in Puerto Rico and the USVI, Respectively, as of April 2019

As of April 2019, FEMA had obligated a total of about $7.4 billion in grant  funds for Public Assistance projects in both Puerto Rico and the USVI.  Specifically, as shown in figure 4, FEMA obligated approximately $5.6  billion for 1,264 Public Assistance projects in Puerto Rico, including  approximately $5.1 billion (90 percent) for emergency work (categories A  and B) and $377.7 million (7 percent) for permanent work in categories C  through G).

Puerto Rico had expended approximately $3.5 billion—about 61 percent  of total Public Assistance grant obligations in Puerto Rico—as of April  2019. Ninety-six percent of the expended amount went toward  emergency work projects in categories A and B while just over one  percent went toward permanent work projects. The majority of FEMA’s  obligations and the funding Puerto Rico expended as of April 2019 are for  emergency work because these projects began soon after the disasters  struck and focused on debris removal and providing assistance to  address immediate threats to life and property. In contrast, permanent  work projects take time to identify, develop, and ultimately complete as  they represent the longer-term repair and restoration of public  infrastructure.

In the USVI, FEMA had obligated approximately $1.8 billion for 583 Public  Assistance projects across the territory, as of April 2019. Similar to Public  Assistance grant funding in Puerto Rico, the majority of funding FEMA  obligated and the USVI expended was in emergency work categories A  and B. Specifically, FEMA obligated approximately $1.1 billion (63  percent) for emergency work (categories A and B) and $587.3 million (33  percent) for permanent work (categories C through G) in the territory (see  fig. 5).

Of the $1.8 billion FEMA obligated for Public Assistance projects, the  USVI had expended approximately $982.4 million as of April 2019.  Specifically, the USVI had expended about $808.1 million (82 percent) for  emergency work projects in categories A and B and $163.1 million (17  percent) for permanent work projects in categories C through G.

Emergency work. As of April 2019, FEMA had obligated a total of  approximately $6.2 billion for emergency work projects in Puerto Rico and  the USVI—including about $5.1 billion in Puerto Rico and $1.1 billion in  the USVI. These projects focused on debris removal activities and  providing assistance to address immediate threats to life and property.  For example, as of April 2019, FEMA had obligated $138.9 million for  projects focused on debris removal activities in the USVI under category  A. This included $45.9 million to the USVI Department of Public Works for  USVI-wide debris removal efforts and $39.1 million to the USVI Water  and Power Authority for these activities in St. Croix (see fig. 6).

In another example, FEMA obligated more than $140.0 million to the  Puerto Rico Aqueducts and Sewer Authority under category B to fund  emergency protective measures, including using back-up generators to  supply water to the island after Hurricane Maria, among other things.

Further, as of April 2019, FEMA had obligated $1.1 billion in Puerto Rico  and $278 million in the USVI to fund the Sheltering and Temporary  Essential Power pilot program. This program, which is implemented as a  subprogram under Public Assistance program category B, is intended to  provide essential repairs or restore power to private residences to allow  affected individuals to return or remain in their homes, thereby reducing  the demand for other shelter options. We are continuing to assess this  program as part of our ongoing work on recovery efforts in the USVI.

Permanent work. As of April 2019, FEMA had obligated approximately  $965.0 million for permanent work projects in Puerto Rico and the USVI— including about $377.7 million in Puerto Rico and $587.3 million in the  USVI. These projects focused on the restoration of disaster-damaged  infrastructure or systems. For example, under category C, FEMA  obligated $137.6 million for projects in Puerto Rico focused on the  permanent repair of roads and bridges, such as the severely damaged  road shown in figure 7 below.

In addition, under category E, FEMA obligated $39.2 million and $67.7  million for projects in Puerto Rico and the USVI, respectively, focused on  repairing and rebuilding damaged public buildings and equipment, such  as the schools shown in figure 8 below.

Further, under category F, FEMA obligated $504.9 million for projects in  the USVI to repair damaged utilities. Specifically, FEMA obligated $481.8  million—or 95 percent of this total—through the standard Public  Assistance program for projects focused on territory-wide permanent  electrical distribution system repairs. This includes replacing damaged  wooden utility poles with more resilient composite fiberglass poles that  can withstand 200 mile per hour winds as well as power transmission  lines and transformers (see fig. 9).

Puerto Rico and the USVI Have Established Recovery Offices to Oversee and Monitor Recovery Efforts

As the recipients of federal disaster funding, Puerto Rico and the USVI  are responsible for monitoring and overseeing the Public Assistance  program to ensure it is implemented in compliance with applicable laws,  regulations, and requirements as well as FEMA policies and guidance. To  address these responsibilities, Puerto Rico and the USVI established  recovery offices to manage recovery activities and funding, including  through the Public Assistance program.

Puerto Rico’s Central Office for Recovery, Reconstruction, and Resilience Has Developed Internal Controls to Oversee Recovery Funds

In March 2019, we reported that Puerto Rico, in accordance with  Amendment 5 to the President’s disaster declaration, established the  Central Office for Recovery, Reconstruction, and Resilience (COR3) to  oversee federal recovery funds. We also reported that COR3 was  developing an internal controls plan to help ensure better management  and accountability of the funds. According to FEMA officials, FEMA  instituted a manual reimbursement process due to Puerto Rico’s financial  situation, weaknesses in internal controls, and the large amount of  recovery funds, among other things, to mitigate risk and help ensure  financial accountability. However, from our ongoing work on Puerto Rico’s  disaster recovery efforts, we have learned that, on April 1, 2019, FEMA  removed the manual reimbursement process and began a transition to  allow the central recovery office to take responsibility for the review and  reimbursement approval of federal recovery funds.

We have also learned from our ongoing work that, in March 2019, COR3  released the Disaster Recovery Federal Funds Management Guide.  Among other things, the guide outlines COR3’s roles and responsibilities  and the internal controls COR3 put in place to oversee the recovery. For  example, COR3 will identify, procure, and administer all federal, territorial,  and private resources available to Puerto Rico related to recovery. In  addition, it will provide oversight of subrecipients using risk-based  monitoring, offer technical assistance, and advise Puerto Rico’s  governmental agencies and municipalities regarding any matter related to  recovery. COR3 continues to update its online transparency portal  intended to provide a breakdown of FEMA Public Assistance and other  federal funding obligated for disaster recovery in Puerto Rico.

The USVI Established the Office of Disaster Recovery to Monitor and Oversee Recovery Efforts

According to our preliminary observations, in February 2019, the USVI  established the new Office of Disaster Recovery. This office serves as the  primary territorial agency responsible for overseeing all disaster recovery  efforts and funding in the territory, and coordinates across all USVI  governmental agencies and other pertinent entities. According to USVI officials, following the 2017 hurricanes, key USVI agencies did not have  enough employees with the knowledge and expertise necessary to staff  recovery-related positions and effectively manage the implementation of  recovery efforts. To address this challenge in the short-term, the USVI  government hired two contractors in December 2017—Witt O’Brien’s,  LLC and Ernst & Young Puerto Rico, LLC—to assist the territory in  planning, developing, implementing, and overseeing Public Assistance  program projects, among other responsibilities. The Director of the Office  of Disaster Recovery told us that while contractor personnel had been  valuable in augmenting the USVI’s management capacity in the short  term, the territory’s longer-term vision included the establishment of the  Office of Disaster Recovery to centrally manage all aspects of federal  recovery in the territory.

Among other things, the Office of Disaster Recovery is responsible for  taking on the USVI’s monitoring and oversight responsibilities for the  Public Assistance program in the long term. This includes tracking and  reporting on the progress of projects and overseeing reimbursement  requests for completed work to ensure compliance with applicable laws  and FEMA policies. As of March 2019, the Director of the Office of  Disaster Recovery told us the priority is to quickly hire and train qualified  individuals to staff the new agency. FEMA officials in the USVI stated that  the establishment of the Office of Disaster Recovery and the USVI’s  ongoing efforts to hire local residents into recovery-related positions  represented a positive step forward in increasing the territory’s capacity to  oversee recovery efforts. We will continue to review the monitoring and  oversight of recovery efforts in Puerto Rico and the USVI in our ongoing  work.

Public Assistance Challenges Remain in Puerto Rico and USVI, However FEMA has Taken Some Actions to Improve Program Implementation

Our prior and ongoing work highlight the challenges with implementing  the Public Assistance program—and the alternative procedures—in  Puerto Rico and the USVI. In particular, our prior and ongoing work have  identified challenges related to (1) the clarity of FEMA’s guidance for the  Public Assistance program, (2) the time and resources needed to  transition to FEMA’s new Public Assistance program delivery model in  Puerto Rico, (3) the implementation of flexibilities provided by the  Bipartisan Budget Act of 2018, and (4) developing fixed-cost estimates.  FEMA has taken some actions, including issuing additional guidance and  developing specific training, among other things, to improve Public  Assistance implementation in Puerto Rico and the USVI. However, it is  too soon to assess their effectiveness in addressing these issues.

Clarity of Guidance. In March 2019, we reported that officials from  FEMA, COR3, and municipalities said they experienced initial challenges  with the recovery process, including concerns about lack of experience  and knowledge of the alternative procedures; and concerns about  missing, incomplete, or conflicting guidance from FEMA on the alternative  procedures. In addition, in our June 2019 testimony statement we  continued to report on these challenges and preliminary observations  from our ongoing work indicate that these challenges continue. For  example, officials from Puerto Rico’s government agencies told us they  did not feel they had sufficient guidance on the FEMA Public Assistance  program and where they did, written and verbal FEMA guidance was  inconsistent or conflicting. For instance, officials from one agency  expressed their desire for more FEMA guidance communicated in writing  as FEMA officials would frequently interpret existing guidance differently.  Similarly, officials from two agencies described situations where they had  initially been directed to follow one interpretation of a policy, only to be  directed to follow a different, conflicting interpretation in the subsequent  months. Puerto Rico agency officials also stated that the lack of sufficient  instruction led to a “back and forth” with FEMA for clarifications, which led  to delays in the phases of project development. For example, officials  from one Puerto Rico government agency stated that conflicting verbal  instructions from several FEMA officials contributed to delays in opening  the bidding process for recovery-related contracts. FEMA officials in  Puerto Rico stated that the agency has developed specific guidance for  disaster recovery in Puerto Rico and that there are various ways, such as  in-person meetings, where officials from Puerto Rico can obtain  clarification. FEMA officials also reported that they developed additional  training for new FEMA employees. We are continuing to examine this  issue as part of our ongoing review of Puerto Rico’s recovery.

FEMA’s new delivery model in Puerto Rico. In May 2019, FEMA’s  Federal Disaster Recovery Coordinator for Puerto Rico announced that  FEMA was transitioning to using the new Public Assistance program  delivery model in Puerto Rico beginning on June 3, 2019. Among other  things, the implementation of the new delivery model establishes a new  Consolidated Resource Center in Puerto Rico to support grant  development for disaster recovery across all recovery sectors and  geographic branches. Following the hurricanes, FEMA implemented a  program delivery model developed specifically for Puerto Rico which  included, among other things, a sector-based approach which  coordinated recovery resources across the federal interagency, private  sector, and nongovernmental organizations to identify and complete  proposed work. According to FEMA officials, the decision to transition  from the initial delivery model to the new delivery model in Puerto Rico  was due to improvements made since its nationwide deployment in 2017.  In response, COR3 officials raised concerns about the scope of the  changes and potential challenges with the amount of time and resources  needed to transition to the new delivery model.

The Bipartisan Budget Act of 2018. We reported in June 2019 that in  both Puerto Rico and the USVI, FEMA and local officials have reported  challenges with the implementation of the flexibilities authorized by  section 20601 of the Bipartisan Budget Act. This section of the Act  allows for the provision of assistance under the Public Assistance  alternative procedures to restore disaster-damaged facilities or systems  that provide critical services—such as medical and educational facilities— to an industry standard without regard to pre-disaster condition. Officials from Puerto Rico’s central government stated that they disagreed with  FEMA’s interpretation of the types of damages covered by section 20601  of the Bipartisan Budget Act of 2018. In response, FEMA officials in  Puerto Rico stated they held several briefings with Puerto Rico’s central  recovery office to explain FEMA’s interpretation of the section. In  addition, FEMA officials in the USVI told us that initially, they had difficulty  obtaining clarification from FEMA headquarters regarding how to  implement key components of section 20601 of the Act. Further, USVI  officials stated that at times, the appropriate process for implementing  components of the Act was not clear and that ensuring program  participants understood its key components was difficult. However, FEMA  officials in the USVI stated that they continue to move forward with  developing alternative procedures projects. USVI officials also told us that  FEMA had been responsive and helpful in identifying its options for using  the new flexibilities the Act provides.

Developing Fixed-Cost Estimates. Preliminary observations from our  ongoing work indicate that as of May 2019, FEMA had obligated funding  for four alternative procedures program projects in Puerto Rico and two  projects in the USVI. FEMA officials in Puerto Rico and the USVI stated  that the ongoing development of a “cost factor” for use in the fixed-cost  estimating process has slowed the pace of FEMA obligations for  permanent work projects. Specifically, these factors are intended to  ensure that the costs associated with implementing projects in Puerto  Rico and the USVI are sufficiently captured when developing the fixed- cost estimates for alternative procedures projects. Since incorporating the  cost factor into the fixed-cost estimating process will increase the amount  of funding obligated for any given permanent work project, FEMA officials  explained that Puerto Rico and the USVI have an incentive to delay the  obligation of individual projects until this factor is finalized. For example,  FEMA officials in the USVI told us in May 2019 that obligations for  permanent work projects in the territory were mostly on hold until the  USVI-specific cost factor was finalized. As of June 2019, the cost factors  for use in both Puerto Rico and the USVI had not yet been finalized.

According to FEMA guidance, the Puerto Rico-specific cost factor is being  developed by a third-party center of excellence comprising personnel  selected by FEMA and Puerto Rico, through COR3. In March 2019, we  reported that while FEMA had identified and chosen personnel, COR3  had not yet finalized its hiring of personnel to staff the center of  excellence, which resulted in delaying the cost estimation process.  Through our ongoing work we learned that, as of June 2019, COR3 had  identified and hired personnel to staff the center; however, FEMA and  COR3 have not come to agreement on a cost estimation approach.  Further, according to FEMA officials, no timeline has been established for  the completion of the center of excellence’s standard operating  procedures for developing fixed-cost estimates for permanent work  projects in Puerto Rico.

In addition, according to FEMA officials, the USVI-specific factor is being  developed by an independent contractor. FEMA officials told us that  territorial officials disagreed with the initial cost factors this contractor  proposed and contended the factors were insufficient in accurately  capturing the unique circumstances that influence construction costs in  the territory, such as the limited availability of local resources and the  need to import materials and labor. As of June 2019, these officials told  us the contractor was developing a third and final cost factor for potential  incorporation into the fixed-cost estimation process in the USVI. Despite  these delays, FEMA officials in the USVI stated that they continue to work  with territorial officials to develop alternative procedures projects in the  territory. They added that once the cost factor is finalized and  incorporated into FEMA’s fixed-cost estimating process, FEMA and the  USVI will be well positioned to quickly finalize these projects and obligate  funding. However, we reported in June 2019 that the territory plans to  take a cautious approach in pursuing permanent work projects using the  Public Assistance alternative procedures program. Specifically, USVI  officials we interviewed told us that developing fixed-cost estimates for  alternative procedures projects that accurately incorporate the future  impact of inflation and increases in materials and labor costs for certain  projects was difficult. Further, these officials stated that since the territory  is financially responsible for any costs that exceed these fixed-cost  estimates, the USVI plans to pursue alternative procedures projects that  do not include high levels of complexity or uncertainty to reduce the risk  of cost overruns, especially given its already difficult financial situation.

As established in FEMA guidance, Puerto Rico’s deadline for finalizing  fixed-cost estimates for permanent work projects using the alternative  procedures—and the Bipartisan Budget Act, as applicable—is October  2019. Since Puerto Rico must use the alternative procedures for all  large permanent work, all fixed-cost estimates for Public Assistance  program permanent work projects in Puerto Rico must be finalized by this  date, or, according to FEMA officials, Puerto Rico must request that  FEMA extend this deadline on a project-by-project basis. In contrast, the  USVI has the flexibility to pursue either the alternative procedures or the  standard procedures on a project-by-project basis. As the USVI’s  deadline for finalizing these projects is in March 2020, it is too early  gauge the extent to which the alternative procedures will play a role in the  USVI’s long-term recovery strategy.

We will continue to evaluate these identified challenges and any efforts to  address them, as well as other aspects of recovery efforts in the USVI  and Puerto Rico, and plan to report our findings in late 2019 and early  2020, respectively.

Thank you, Chairman Payne, Ranking Member King, and Members of the  Subcommittee. This concludes my prepared statement. I would be happy  to respond to any question you may have at this time.

If you or your staff has any questions concerning this testimony, please  contact Christopher P. Currie at (404) 679-1875 or curriec@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this statement. Key contributors  to this statement were Joel Aldape (Assistant Director), Bryan Bourgault,  Aaron Gluck, Taylor Hadfield, Brian Lipman, and Amanda Prichard. In  addition, Eric Hauswirth, Susan Hsu, Tracey King, Taylor Matheson,  Amanda Miller, Heidi Nielson, and Kevin Reeves made contributions to  this statement. Key contributors for the previous work on which this  statement is based are listed in each product.

Appendix I: GAO Products Previously Issued on Emergency Management

2017 Disaster Relief Oversight: Strategy Needed to Ensure Agencies’  Internal Control Plans Provide Sufficient Information. GAO-19-479  (Washington, D.C.: June 28, 2019).

Emergency Management: FEMA Has Made Progress, but Challenges  and Future Risks Highlight Imperative for Further Improvements,  GAO-19-617T (Washington, D.C.: June 25, 2019).

Emergency Management: FEMA Has Made Progress, but Challenges  and Future Risks Highlight the Imperative for Further Improvements,  GAO-19-594T (Washington, D.C.: June 12, 2019).

Disaster Assistance: FEMA Action Needed to Better Support Individuals  Who Are Older or Have Disabilities. GAO-19-318 (Washington, D.C.: May  14, 2019).

Disaster Contracting: Actions Needed to Improve the Use of Post- Disaster Contracts to Support Response and Recovery. GAO-19-281  (Washington, D.C.: April 24, 2019).  2017 Hurricane Season: Federal Support for Electricity Grid Restoration  in the U.S. Virgin Islands and Puerto Rico. GAO-19-296 (Washington,  D.C.: April 18, 2019).

FEMA Grants Modernization: Improvements Needed to Strengthen  Program Management and Cybersecurity. GAO-19-164 (Washington,  D.C.: April 9, 2019).

Disaster Recovery: Better Monitoring of Block Grant Funds Is Needed.  GAO-19-232 (Washington, D.C.: March 25, 2019).

Puerto Rico Hurricanes: Status of FEMA Funding, Oversight, and  Recovery Challenges. GAO-19-256 (Washington, D.C.: March 14, 2019).

Huracanes de Puerto Rico: Estado de Financiamiento de FEMA,  Supervisión y Desafíos de Recuperación. GAO-19-331 (Washington,  D.C.: March 14, 2019).

High-Risk Series: Substantial Efforts Needed to Achieve Greater  Progress on High-Risk Areas. GAO-19-157SP (Washington, D.C.: March  6, 2019).

U.S. Virgin Islands Recovery: Status of FEMA Public Assistance Funding  and Implementation. GAO-19-253 (Washington, D.C.: February 25,  2019).  2017 Disaster Contracting: Action Needed to Better Ensure More  Effective Use and Management of Advance Contracts. GAO-19-93  (Washington, D.C.: December 6, 2018).

Continuity of Operations: Actions Needed to Strengthen FEMA’s  Oversight and Coordination of Executive Branch Readiness.  GAO-19-18SU (Washington, D.C.: November 26, 2018).

Homeland Security Grant Program: Additional Actions Could Further  Enhance FEMA’s Risk-Based Grant Assessment Model. GAO-18-354  (Washington, D.C.: September 6, 2018).  2017 Hurricanes and Wildfires: Initial Observations on the Federal  Response and Key Recovery Challenges. GAO-18-472 (Washington,  D.C.: September 4, 2018).

Federal Disaster Assistance: Individual Assistance Requests Often  Granted but FEMA Could Better Document Factors Considered.  GAO-18-366 (Washington, D.C.: May 31, 2018).  2017 Disaster Contracting: Observations on Federal Contracting for  Response and Recovery Efforts. GAO-18-335 (Washington, D.C.:  February 28, 2018).

Disaster Recovery: Additional Actions Would Improve Data Quality and  Timeliness of FEMA’s Public Assistance Appeals Processing.  GAO-18-143 (Washington, D.C.: December 15, 2017).

Disaster Assistance: Opportunities to Enhance Implementation of the  Redesigned Public Assistance Grant Program. GAO-18-30 (Washington,  D.C.: November 8, 2017).

Climate Change: Information on Potential Economic Effects Could Help  Guide Federal Efforts to Reduce Fiscal Exposure. GAO-17-720  (Washington, D.C.: September 28, 2017).

Federal Disaster Assistance: Federal Departments and Agencies  Obligated at Least $277.6 Billion during Fiscal Years 2005 through 2014.  GAO-16-797 (Washington, D.C.: September 22, 2016).

Disaster Recovery: FEMA Needs to Assess Its Effectiveness in  Implementing the National Disaster Recovery Framework. GAO-16-476  (Washington, D.C.: May 26, 2016).

Disaster Response: FEMA Has Made Progress Implementing Key  Programs, but Opportunities for Improvement Exist. GAO-16-87  (Washington, D.C.: February 5, 2016).

Hurricane Sandy: An Investment Strategy Could Help the Federal  Government Enhance National Resilience for Future Disasters.  GAO-15-515 (Washington, D.C.: July 30, 2015).

Budgeting for Disasters: Approaches to Budgeting for Disasters in  Selected States. GAO-15-424 (Washington, D.C.: March 26, 2015).

High-Risk Series: An Update. GAO-15-290 (Washington, D.C.: February  11, 2015).

Emergency Preparedness: Opportunities Exist to Strengthen Interagency  Assessments and Accountability for Closing Capability Gaps. GAO-15-20  (Washington, D.C.: December 4, 2014).

Fiscal Exposures: Improving Cost Recognition in the Federal Budget.  GAO-14-28 (Washington, D.C.: October 29, 2013).

Federal Disaster Assistance: Improved Criteria Needed to Assess a  Jurisdiction’s Capability to Respond and Recover on Its Own.  GAO-12-838 (Washington, D.C.: September 12, 2012).

Opportunities to Reduce Potential Duplication in Government Programs,  Save Tax Dollars, and Enhance Revenue. GAO-11-318SP (Washington,  D.C.: March 1, 2011).

Appendix II: Ongoing GAO Reviews on Emergency Management

1.  Review of U.S. Virgin Islands recovery planning and progress;  2.  Puerto Rico disaster recovery planning and progress;  3.  2017 wildfire response and recovery;  4.  Puerto Rico electricity grid recovery after the 2017 hurricane season;  5.  Mass care sheltering and feeding challenges during the 2017  6.  Department of Transportation highway and transit emergency relief  7.  Drinking water and wastewater utility resilience;  8.  Review of disaster death count information in selected states and  9.  Department of Health and Human Services disaster response efforts;  10. Disaster and climate change impacts on Superfund sites;  11. FEMA Public Assistance program fraud risk management efforts;  12. Wildland fire fuel reduction efforts;  13. Preparedness challenges and lessons learned from the 2017  14. FEMA workforce management and challenges;  15. Small Business Administration response to 2017 disasters;  16. Development of the GAO disaster resilience framework;  17. FEMA Individuals and Households Program operations and  18. National Flood Insurance Program post-flood enforcement;  19. Emergency alerting capabilities and progress;  20. National Flood Insurance Program buyouts and property acquisitions;  21. Economic costs of large-scale natural disasters and impacts on  22. Community Development Block Grants – disaster recovery; and  23. Disaster Housing Assistance Program.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

In the span of 14 days in September 2017, two major hurricanes—Irma and Maria—struck Puerto Rico and the U.S. Virgin Islands. Puerto Rico estimated repairs will cost $132 billion. The USVI estimated $10.7 billion.

We testified about FEMA’s response and recovery efforts through its Public Assistance program, which funds projects like debris removal and road repairs.

As of April, FEMA provided about $7.4 billion for projects in Puerto Rico and USVI, with most of that going to reduce immediate threats to life and health. Work is ongoing to determine how to fund large projects, like repairing hospitals and schools.


Medicaid: Efforts to Identify, Predict, or Manage High-Expenditure Beneficiaries

Medicaid, a joint federal-state health care financing program, is one of the nation's largest sources of health care coverage for low-income and medically needy individuals. A 2016 report published by the National Governors Association noted that high-expenditure Medicaid beneficiaries typically have poorly managed chronic conditions and a host of unmet social needs that result in potentially preventable use of costly services, such as emergency department visits. The report also noted that identifying and better managing those beneficiaries are key to reducing costs and improving outcomes.

GAO was asked to examine state and federal efforts to manage costs and improve care coordination for high-expenditure Medicaid beneficiaries. This report describes (1) approaches selected states used to identify or predict high-expenditure Medicaid beneficiaries; (2) strategies selected states used to manage beneficiaries' health care costs while ensuring quality of care; and (3) resources CMS provided to states to help them identify, predict, or better manage high-expenditure beneficiaries.

GAO interviewed officials from CMS, as well as Medicaid officials from a nongeneralizable sample of seven states (Indiana, Nevada, Pennsylvania, South Carolina, South Dakota, Vermont, and Washington) and five MCOs. States were selected for variation in their total Medicaid enrollment, enrollment in Medicaid managed care, percentage of state population living in rural settings, and percentage of state population with disabilities. MCOs were selected based on state suggestions, and varied in terms of whether they operated nationally or on a state or regional basis.

GAO previously reported that in fiscal years 2009 through 2011, the most expensive 5 percent of Medicaid beneficiaries accounted for nearly half of the expenditures for all beneficiaries; others have also found that a small percentage of beneficiaries account for a disproportionately large share of Medicaid program expenditures. These high-expenditure beneficiaries are an extremely diverse population with varying needs. GAO found that the seven selected states identified or predicted high-expenditure Medicaid beneficiaries using statistics and other approaches. For example, states used risk scores, which estimate an individual beneficiary's expected health care expenditures relative to the average expenditures for beneficiaries in the group. Other approaches included examining service utilization data to identify statistical outliers and using diagnoses, service utilization and claims expenditure thresholds, or clinical judgment to identify or predict high-expenditure beneficiaries.

To manage costs and ensure quality of care for high-expenditure beneficiaries, the seven selected states used care management and other strategies.

Care management . All the selected states provided care management—providing various types of assistance such as coordinating care across different providers to manage physical and mental health conditions more effectively—for beneficiaries in their fee-for-service delivery systems. Five of the states also contracted with managed care organizations (MCO) to deliver services for a fixed payment and required the MCOs to ensure the provision of care management services to high-expenditure beneficiaries.

Other strategies . Some of the seven selected states used additional strategies to manage care for high-expenditure beneficiaries. For example, Indiana officials described a program to restrict, or “lock in,” a beneficiary who has demonstrated a pattern of high utilization to a single primary care provider, hospital, and pharmacy, if other efforts to change the beneficiary's high utilization were unsuccessful.

The Centers for Medicare & Medicaid Services (CMS), which oversees the Medicaid program at the federal level, offered optional tools and other resources to support states' efforts to identify or better manage high-expenditure beneficiaries. For example, CMS officials said states received access to resources and technical assistance on establishing health home programs—which seek to better coordinate care for those with chronic conditions—including how to focus on high-expenditure beneficiaries. CMS officials noted that they supported 23 states' and the District of Columbia's health home programs. CMS also offered several resources that, while not designed specifically to target high-expenditure beneficiaries, have been used to support states in identifying or better managing their care. For example, CMS's Medicaid Innovation Accelerator Program offered targeted technical support to states' Medicaid agencies in building their data analytic capacity as they designed and implemented delivery system reforms, which could be used to identify high-expenditure beneficiaries. Officials in two selected states reported that these tools were beneficial for managing the health care costs associated with high-expenditure beneficiaries. HHS provided technical comments, which GAO incorporated as appropriate.

Medicaid, a joint federal-state health care financing program, is one of the  nation’s largest sources of health care coverage for low-income and  medically needy individuals. In fiscal year 2018, Medicaid covered an  estimated 75 million beneficiaries and expenditures totaling about $629  billion. Annual expenditures are projected to reach $1 trillion by 2026 and  are placing a growing strain on federal and state budgets.

We and others have found that a small percentage of beneficiaries  account for a disproportionately large share of Medicaid program  expenditures. These high-expenditure Medicaid beneficiaries are an  extremely diverse population with varying medical, behavioral, and  psychosocial needs. For example, some high-expenditure Medicaid  beneficiaries may have chronic conditions, such as diabetes or behavioral health issues; some may be children staying in a hospital or elderly  receiving long-term services and supports; some may need housing or  food assistance. A 2016 report published by the National Governors  Association noted that high-expenditure Medicaid beneficiaries typically  have multiple poorly managed chronic conditions and a host of unmet  social needs that result in potentially preventable use of costly services,  such as emergency department visits. That same report noted that key  components of reducing costs and improving outcomes include identifying  high-expenditure beneficiaries whose needs are best served through well- coordinated services and linking those beneficiaries to appropriate  providers. Although federal Medicaid regulations do not require states to  identify high-expenditure beneficiaries, some states have taken steps to  do so.

In the context of these issues, you asked us to examine state and federal  efforts to manage costs and improve care coordination for high- expenditure Medicaid beneficiaries. This report describes  1.  approaches selected states used to identify or predict high- 2.  strategies selected states used to manage the health care costs while  ensuring quality of care for such beneficiaries; and  3.  resources the Centers for Medicare & Medicaid Services (CMS)  provided to states to help them identify, predict, or better manage  high-expenditure Medicaid beneficiaries.

To answer all three questions, we interviewed officials from a  nongeneralizable sample of seven state Medicaid agencies; specifically,  Indiana, Nevada, Pennsylvania, South Carolina, South Dakota, Vermont,  and Washington. We selected these states to obtain variation in (1) their  total Medicaid enrollment as of July 2016; (2) the degree to which the  state’s Medicaid population was enrolled in managed care as of July  2016; (3) the percentage of the state’s total population living in rural  settings based on 2010 Census data; and (4) the percentage of the state  population with disabilities based on the 2017-2018 Area Health  Resource File. We also interviewed officials from a nongeneralizable  sample of five managed care organizations (MCO) in five of the selected  states (Indiana, Nevada, Pennsylvania, South Carolina, and Washington);  Vermont’s all-payer accountable care organization (ACO); and officials  from CMS and its contractors. We selected these MCOs after asking the  officials from each of the five state Medicaid agencies to identify which of  their Medicaid MCOs might be able to provide good examples of  practices related to our objectives. We then selected the organizations to  provide us with variation in whether they operated nationally or on a state  or regional basis. South Dakota does not use managed care, so we only  spoke with state officials. In conducting this work, we relied on officials  from states and organizations to explain how they identified, predicted, or  managed beneficiaries they considered to be high-expenditure, and their  definitions and responses varied widely. For the purpose of this report, we  use the term “high-expenditure” to refer to beneficiaries who account for a  disproportionately large share of Medicaid expenditures, or are at risk for  doing so in the future.

We conducted this performance audit from August 2018 through  September 2019 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.

At the federal level, CMS, within the Department of Health and Human  Services, is responsible for overseeing the design and operation of states’  Medicaid programs, and states administer their respective Medicaid  programs’ day-to-day operations. As a comprehensive health benefit  program for vulnerable populations, each state Medicaid program, by law,  must cover certain categories of individuals and provide a broad array of  benefits. Within these requirements, however, states have significant  flexibility to design and implement their programs, resulting in more than  50 distinct state-based programs. These variations in design have  implications for program eligibility and services offered, as well as for how  expenditures are reported and services delivered.

In administering their own programs, states may provide Medicaid  services under a fee-for-service delivery model or a managed care  service delivery model. Under a fee-for-service model, states make  payments directly to providers for services provided, and the federal  government generally matches state expenditures for such services on  the basis of a statutory formula. Under a managed care model, states pay  MCOs a capitation payment, which is a fixed periodic payment per  beneficiary enrolled in an MCO—typically, per member per month. MCOs  pay health care providers for the services delivered to enrollees. In  contrast, ACOs are organizations of health care providers and suppliers  that come together voluntarily to provide coordinated care to patients with  the goal of reducing spending while improving quality. States vary in  terms of the types of managed care arrangements used, the populations  enrolled, and the parts of the state covered by managed care.

We previously reported that a small share of beneficiaries in each state  collectively accounted for a disproportionately large share of total  Medicaid expenditures. We found that in fiscal years 2009 through 2011,  the most expensive 5 percent of Medicaid beneficiaries consistently  accounted for almost half of the expenditures for all Medicaid  beneficiaries. (See fig. 1.)

Examining beneficiaries who were enrolled only in Medicaid, we also  found that the most expensive 5 percent of beneficiaries were much more  likely to have certain conditions—such as asthma, diabetes, and  behavioral health conditions—than all other beneficiaries enrolled only in  Medicaid. Examining 2009 data, we found that about 65 percent of the  total expenditures for high-expenditure beneficiaries enrolled only in  Medicaid were for hospital services and long-term services and supports,  with the remaining 35 percent of expenditures for drugs, payments to  managed care organizations and premium assistance, and non-hospital  acute care.

Other studies have also found similar patterns of service utilization and  expenditures within the Medicaid population. For example, a January  2018 report noted that while beneficiaries who are dually eligible for  Medicare and Medicaid constituted about 15 percent of Medicaid  beneficiaries in 2013, they accounted for nearly one-third of Medicaid  spending. A study examining data on children’s use of behavioral health  services in Medicaid found that in 2005, about 10 percent of children in  Medicaid received behavioral health services, but those services  accounted for about 38 percent of spending on the overall Medicaid child  population.

Care management programs can be used as efforts to manage the cost  and quality of health care services delivered to high-expenditure Medicaid  populations, with the aim of improving outcomes and achieving cost  savings. Generally, care management programs seek to assist  consumers manage physical and mental health conditions more  effectively, for example, by assessing patient needs and coordinating  care across different providers. The general goal of care management is  to achieve an optimal level of wellness and improve coordination of care  while providing cost effective, non-duplicative services. Specific  definitions for care management and other related terms such as care  coordination, case management, and disease management vary. For the  purpose of this report, we use care management to refer to these  activities unless otherwise specified.

Selected States Identified or Predicted High-Expenditure Medicaid Beneficiaries Using Statistics and Other Approaches

Officials from most state agencies, MCOs, and the ACO said they used  risk scores to identify or predict high-expenditure beneficiaries. Officials  from four of the seven selected states, four MCOs, and the ACO said they  used software or hired vendors who computed beneficiaries’ risk scores  based on Medicaid service utilization data. Washington state officials  said that in addition to Medicaid service utilization data, they used  utilization data from Medicare Parts A, B, and D to compute risk scores  for their dual-eligible population. Officials also discussed using the risk  scores they computed in different ways. For example, Washington  officials said they considered beneficiaries with a risk score of 1.5 or  greater to be high expenditure, and they used that risk score as one of  the eligibility criteria that must be met to receive certain care management  services. In contrast, officials from an MCO in Nevada said they  considered risk scores alongside other contextual information, such as  the recent diagnosis of a chronic condition, to predict whether the  beneficiary would likely generate high expenditures in the future and  should be assigned care management services. Officials from three  states, an MCO in South Carolina, and the ACO we interviewed said their  software or vendors identified or predicted high-expenditure beneficiaries  by using the risk scores they computed to stratify beneficiaries into risk  tiers, such as low, medium, and high risk.

Officials from South Carolina’s state Medicaid agency and two MCOs  from Pennsylvania and Washington said they identified high-expenditure  beneficiaries by examining service utilization data to identify statistical  outliers or trends. Officials from the two MCOs said they looked for  statistical outliers for various types of service utilization, such as  emergency department visits, inpatient stays, and pharmacy use. Officials  from South Carolina said they built internal software tools to help them  easily examine service utilization for various subsets of beneficiaries and  services. These officials said they looked for beneficiaries whose  utilization appeared to be significantly higher or lower compared with  other beneficiaries with similar characteristics, such as among children  with Type 1 diabetes or among children in foster care. The officials also  said that after they identified those outliers, they examined the reasons  for those beneficiaries’ utilization patterns to better understand why those  beneficiaries were outliers and to take corrective action if appropriate.  The officials explained that they did not simply focus on a discrete list of  beneficiaries with the highest overall expenditures, because many of  those beneficiaries have medical needs that are inherently expensive and  cannot be meaningfully improved through intervention.

Officials from three of the seven state Medicaid agencies and four MCOs  said they identified high-expenditure beneficiaries based on diagnoses or  other group categorization. Officials commonly said they used chronic  conditions, such as end-stage renal disease, the human  immunodeficiency virus or acquired immune deficiency syndrome, chronic  obstructive pulmonary disease, diabetes, or Hepatitis C. Pennsylvania  officials said their list was developed based on clinical experience.  Officials from South Carolina said their list of diagnoses was based on a  review of conditions associated with high expenditures.

Service Utilization and Claims Expenditure Thresholds

Officials from two state Medicaid agencies—Indiana and Nevada—and all  five MCOs said they identified high-expenditure beneficiaries as  beneficiaries who exceed certain service utilization or claims expenditure  thresholds. Indiana officials said they used service utilization thresholds,  such as visiting the emergency room six or more times in the past 6  months. Nevada officials said one of their programs identified high- expenditure beneficiaries as those whose treatment costs exceeded  $100,000 over a 12-month period. Officials from the five MCOs offered  varying thresholds, such as claims exceeding $100,000 over a 6-month  period; claims exceeding $40,000 during a state fiscal year; or stays in a  neonatal intensive care unit exceeding 15 days.

Officials from two state Medicaid agencies—Nevada and Pennsylvania— four MCOs, and the ACO said they relied on clinical judgment to decide  whether a beneficiary was likely to be high expenditure. Officials from  one MCO in Washington said the MCO conducted health assessments of  new members to obtain a baseline understanding of their clinical states,  which were then used to stratify beneficiaries and identify appropriate  staff to address their needs. Similarly, officials from Pennsylvania and  three MCOs said clinical reviews of beneficiaries’ needs or histories were  triggered by providers, caregivers, or self-referrals for care management  or other services. Officials from the ACO said that while risk scores made  initial predictions about beneficiaries’ risk for generating high  expenditures, those predictions could be overridden by clinical judgment.

Selected States Used Care Management and Other Strategies to Manage Costs for High-Expenditure Medicaid Beneficiaries

Officials from all seven selected states, all five MCOs, and the ACO we  interviewed said they used care management to manage the costs and  quality of care for high-expenditure Medicaid beneficiaries. In addition,  some states used other strategies, such as strategies involving coverage  policies, payment incentives, and restrictions on the number of providers  certain beneficiaries could use. Across states that evaluated these efforts  to manage costs and quality of care, results were mixed.

All Selected States Used Care Management to Manage Costs for High- Expenditure Medicaid Beneficiaries

Officials from all of the seven state Medicaid agencies we interviewed  reported that they provided care management for high-expenditure  beneficiaries in their fee-for-service delivery systems, for example, by  assessing patient needs and coordinating care across providers, in an  attempt to manage costs and ensure quality care. Further, the six  selected states with MCOs or ACOs required these organizations to  provide care management to high-expenditure beneficiaries enrolled in  managed care. Officials also reported barriers to their efforts to provide  care management.

Care Management in Fee-for- Service Medicaid

Officials from all of the seven state Medicaid agencies we interviewed  reported that they provided care management for high-expenditure  beneficiaries in their fee-for-service delivery system, to manage the cost  and quality of their care. The organization and scope of the care  management programs they described vary in some cases. For example:

Pennsylvania provided care management for beneficiaries in fee-for- service through the state’s “intensive case management” unit, a unit of  providers that contact beneficiaries by phone to ensure that they get  the care they need. Care management is provided to newly enrolled  Medicaid beneficiaries who are identified as high-expenditure until the  beneficiary selects a managed care plan, typically within 30 days, and  to certain other beneficiaries. State officials said that of the  approximately 150,000 beneficiaries in fee-for-service, they provide  care management to about 1,000 each month.

Nevada implemented mandatory care management services for high- expenditure fee-for-service beneficiaries in rural areas of the state  through a contract with a care management organization, which was  paid to reach out to high-expenditure beneficiaries, assess their  needs, and connect them with their medical providers. The  organization delivered care management through regional care teams  geographically located in beneficiaries’ communities, which  coordinated with the beneficiaries’ providers to implement  personalized care plans and manage follow-up appointments and  services. High-expenditure beneficiaries were assigned to one of eight  care management programs based on the beneficiary’s qualifying  condition, such as whether they had cancer, chronic kidney disease,  or a mental health diagnosis.

South Dakota implemented a health home program in 2013, which  paid local primary care clinics, community mental health centers, and  Indian Health Service facilities to provide care management to high- expenditure Medicaid beneficiaries. Each clinic or center had a care  coordinator who reached out to high-expenditure beneficiaries to  initiate care management and connect them with their primary care  providers. These beneficiaries were placed in one of four categories  indicating the level of care coordination they needed based on the  severity of their illness and risk of future costs. The program helped  beneficiaries create a care plan, set goals to address their particular  care needs, and manage their conditions. In state fiscal year 2018,  around 5,800 recipients received services through more than 100  health home clinics in South Dakota.

Washington State also implemented a health home program in 2013  in which care management activities were coordinated through “lead”  entities, such as Area Agencies on Aging and other community-based  organizations. These entities established networks of care  coordination organizations representing primary care, mental health,  long term care, chemical dependency providers, and specialty  providers. The lead entities conducted outreach to high-expenditure  beneficiaries to connect them with a care manager, who might be a  nurse, physician assistant, social worker, behavioral health  professional, or chemical dependency professional.

State Medicaid officials who have MCOs and ACOs within their states  said that they required these organizations to provide care management  to high-expenditure beneficiaries to manage the cost and quality of their  care. Examples of states’ care management requirements included  steps such as beneficiary and provider outreach, conducting screenings  or health assessments, and developing care plans (see sidebar). Some  requirements specified the minimum frequency for conducting outreach  and what information and data must be reported to the state regarding  care management activities (see sidebar).

Beneficiaries with excessive utilization or  under-utilization for conditions other than  those specified diseases in the contract  must also be eligible for disease  management services. beneficiaries are categorized for different  levels of care coordination.   (Indiana Medicaid) standard model of care management for high-risk beneficiaries, but  each clinical department in the MCO—for example, Obstetrics or  Cardiology—established specific plans for care management within  their area of care. Care managers in these departments—nurses or  social workers—were responsible for coordinating with a beneficiary’s  primary care provider to ensure that the beneficiary is appropriately  referred to specialists. Care managers can contact beneficiaries by  phone, but they are also based in the community, such as at hospitals  and state mental health clinics.

Officials from the ACO in Vermont said that the ACO paid providers  that were part of their network—such as primary care offices, home  health agencies, and mental health agencies—to serve as  beneficiaries’ care managers. Beneficiaries select one provider to be  their “lead care coordinator” based on who they have the strongest  relationship and trust with, and this provider receives enhanced  payments from the ACO to support coordination with other providers  in the beneficiary’s care team. Care team members communicate with  each other through a software tool provided by the ACO, which  maintains updated information on beneficiaries’ conditions and the  care received.

Barriers to Care Management for High-Expenditure Beneficiaries

Officials we spoke to from the selected states, MCOs, and the ACO  identified barriers to implementing care management for some high- expenditure Medicaid beneficiaries, including the inability to contact  beneficiaries, the lack of social supports—that are part of what is referred  to as “social determinants of health”—and shortages of providers or care  management staff in rural areas.

Difficulties contacting beneficiaries. The lack of valid contact  information can result from missing or outdated information,  transiency and homelessness, and beneficiary reliance on cell phones  with limited minutes. Officials described efforts they had taken to  address this barrier, including asking pharmacies to confirm and get  updated information when beneficiaries pick up prescriptions; using e- mail, which officials stated is more consistent than physical  addresses; and conducting direct outreach in emergency rooms.

Addressing Social Determinants of Health  Officials at most of the selected states,  managed care organizations (MCO), and the  accountable care organization said they took  steps to help beneficiaries address social  determinants of health, for example, by  gathering data to identify which beneficiaries  needed help with social supports, helping  beneficiaries obtain transportation to medical  appointments, assisting beneficiaries in  accessing social services, providing short- term housing, and meeting other needs.    For example, officials from one MCO  described a beneficiary with diabetes, who,  despite consistently filling his prescription and  adhering to his care plan, regularly visited the  emergency department in insulin shock.   Through outreach they discovered that the  beneficiary could not appropriately store his  prescribed insulin, which needed to be  refrigerated, because his home did not have  running electricity or a refrigerator. The MCO  identified resources in the community to  provide a refrigerator and restore electricity.

Social determinants of health. The effectiveness of care  management in addressing the health needs of high-expenditure  beneficiaries can be hindered by the lack of social supports. Officials  said that in order to help beneficiaries manage their medical needs,  care managers sometimes needed to address these social  determinants of health, such as lack of transportation to medical  appointments, lack of stable housing, and inconsistent access to food  and other basic resources (see sidebar). At the same time, states and  MCOs can face challenges to addressing social determinants of  health, such as lack of data on social determinants of health and a  lack of understanding about the effect of social determinants of health  on health care utilization, which if available could help bolster program  investments in those areas.

Staff shortages in rural areas. Efforts to provide care management  and medical services can be hindered by staff shortages in rural  areas. Officials with one state Medicaid agency’s health home  program said there was a shortage of individuals in rural areas willing  to provide care management to high-expenditure beneficiaries. MCO  officials in another state said their ability to care for beneficiaries in  rural areas was also affected by a shortage of care managers.

In Addition to Care Management, Some Selected States Used Other Strategies to Manage High-Expenditure Beneficiaries

Other strategies, in addition to care management, reported by selected  states—South Carolina, Nevada, Pennsylvania, and Indiana—to manage  the cost and care for high-expenditure Medicaid beneficiaries included  coverage policy changes, payment incentives, and restrictions on the use  of providers.

Coverage policy changes. South Carolina Medicaid officials said that in  certain cases they reviewed their coverage policy to see if changes could  reduce costs and improve health outcomes for high-expenditure  beneficiaries. For example, according to officials, the state had a small  number of high-expenditure beneficiaries with Type 1 diabetes that  officials thought could benefit from continuous glucose monitoring, which  was not covered by their state Medicaid program. The officials said that  they wrote a proposal into their state budget and drafted state plan  amendment language to address this, though they noted that the  proposal had not been implemented as of January 2019.

Payment incentives. Medicaid officials in Nevada and Pennsylvania  described efforts to use payment incentives to manage costs for high- expenditure beneficiaries.

Nevada officials told us that the state’s arrangement with its care  management organization for high-expenditure beneficiaries included  payment incentives related to reductions in cost, as well as  performance on certain quality measures, such as immunization rates  and treatments for specific conditions such as asthma, coronary artery  disease, and heart failure. However, state officials said that they faced  difficulties measuring these outcomes. The care management  organization did not receive incentive payments for the first year of  operation of the program (2014-2015) and state officials said they did  not have results on incentive payments for subsequent years.

Pennsylvania officials told us that in response to the high cost of  drugs to treat Hepatitis C, Pennsylvania’s Medicaid agency created a  risk-sharing arrangement with MCOs that had high-expenditure  beneficiaries with Hepatitis C. According to state officials, the MCOs  were required to submit their enrollees’ Hepatitis C test scores to  show whether beneficiaries were obtaining treatment and  experiencing improvement. The state then allocated additional funds  to MCOs that demonstrated positive quality outcomes, thus saving the  cost of re-treating beneficiaries who failed to follow through on  treatment.

The Pennsylvania officials also told us that the state provided  payment incentives to MCOs in its Integrated Care Plan Program, in  which physical health and behavioral health MCOs coordinate with  each other in the care of high-expenditure beneficiaries with persistent  serious mental illness, such as schizophrenia, depression, or  psychosis. To quality for incentive payments, these MCOs had to  create an integrated care plan for each beneficiary with a qualifying  condition. The state’s Medicaid agency identified outcome measures  that MCOs were held accountable to in calendar year 2018 related to  emergency department utilization, inpatient admissions, inpatient  readmissions, prescription medication adherence, and engagement in  treatment for substance use disorders. As metrics improved, MCOs  become eligible for incentives. According to state officials,  Pennsylvania allocated $10 million for Integrated Care Plan program  incentive payments for calendar year 2018.

Restrictions on the use of providers. Indiana Medicaid officials  described their program to address over-utilization of services by certain  high-expenditure beneficiaries who may be engaged in doctor or  pharmacy shopping—a strategy of using multiple providers that results in  over-utilization or improper utilization of prescription drugs or other  services. According to the officials, if other efforts to address a  beneficiary’s over-utilization fail over a 2- to 4-month period, the  beneficiary may be enrolled in Indiana’s Right Choices Program. This  program restricts, or “locks in,” the beneficiary to a single physician,  pharmacy, and hospital. Officials said that this program has helped to  ensure that the provider is aware of the beneficiary’s history and has  proven effective in getting beneficiaries to change their behavior. In  addition to using the program for Medicaid beneficiaries enrolled in fee- for-service, MCOs are provided with a report of their beneficiaries who  have high-utilization levels so that the MCO can determine if any of these  beneficiaries should be enrolled in the program.

Across Selected States that Assessed the Effect of their Strategies on Medicaid Expenditures and Other Outcomes, Results Were Mixed

While some of the selected state Medicaid agencies reported that their  efforts to manage costs and care for high-expenditure beneficiaries  showed positive results, officials in other states reported mixed or  inconclusive findings. Medicaid officials in four states—Pennsylvania,  South Dakota, Vermont, and Washington—said their assessment of  efforts to manage costs and care for high-expenditure beneficiaries  showed positive results, such as cost savings or reductions in the use of  expensive services.

Pennsylvania Medicaid officials said that their Integrated Care Plan  Program for high-expenditure beneficiaries with persistent serious  mental illness resulted in improvements in utilization, including  reductions in inpatient hospitalizations and readmissions.

South Dakota Medicaid officials found that for 2017, health home  participants cost $204 less per month than the comparison group, and  experienced an 8 percent decline in emergency room visits from the  prior year compared with a 10 percent increase in emergency room  visits for the comparison group. The state estimated $7.7 million in  costs were avoided.

Vermont Medicaid officials analyzed utilization of high-expenditure  beneficiaries in care management before and after they enrolled. The  state reported in 2018 that the rate of inpatient visits per thousand  beneficiaries decreased from 600 to 393, and the annual rate of  emergency visits per thousand beneficiaries decreased from 1,536 to  1,003.

An independent evaluation of a demonstration program for dually  eligible beneficiaries in Washington that incorporated its Health  Homes program found $107 million in Medicare cost savings over its  first 42 months. As part of the state’s Financial Alignment Initiative,  part of those savings went to the state Medicaid program.

In contrast with the results reported by the four states, officials from  Indiana and Nevada Medicaid agencies reported mixed or inconclusive  findings related to the impact on cost or quality of their programs for high- expenditure Medicaid beneficiaries.

Officials with Indiana’s Medicaid agency told us that an assessment of  the Right Choices Program found relatively low cost savings  generally, with the exception of pharmacy costs, where the program  curbed excessive drug use among beneficiaries with substance use  disorders and led to cost savings.

Nevada Medicaid officials said that their fee-for-service care  management organization appeared to achieve some cost savings,  but had little effect on quality of care after the program was  implemented in 2013. They also said that it was difficult to determine  the true effect of the program, because the state implemented several  other cost savings policies at the same time as the care management  organization. Nevada let the program expire in 2018 and is  researching other potential ways to manage high-expenditure  beneficiaries in the state’s fee-for-service program.

CMS Offered Optional Tools and Technical Assistance That Could Be Used To Identify or Better Manage High- Expenditure Medicaid Beneficiaries

CMS offered optional tools, as well as technical assistance and other  educational resources that state Medicaid agencies used to identify or  better manage high-expenditure beneficiaries.

CMS Offered Tools That Could Help States Manage High-Expenditure Medicaid Beneficiaries

CMS’s optional tools included the Health Home State Plan Option and the  Financial Alignment Initiative, though these are not specifically designed  for the purpose of identifying and managing high-expenditure  beneficiaries. Medicaid officials in two selected states said that these  programs improved their efforts to manage care for their high-expenditure  beneficiaries.

Health Home State Plan Option. The Medicaid Health Home State Plan  Option, authorized under the Patient Protection and Affordable Care Act,  allowed states to design health home programs to provide comprehensive  care coordination for Medicaid beneficiaries with chronic conditions.  CMS officials we spoke with said the states who chose the option  received access to resources including planning funds and technical  assistance from CMS. For example, CMS issued a brief illustrating how  states could focus their health home programs on high-expenditure  beneficiaries. CMS officials noted that they supported 23 states’ and the  District of Columbia’s health home programs. Among the state officials we  interviewed, South Dakota Medicaid officials said that when they were  establishing their health home program, CMS was helpful in connecting  them with other states that had created similar programs so that they  could learn from other states’ experiences. South Dakota Medicaid  officials stated they would like CMS to continue to bring health home  program managers from several states together to discuss their  successes, challenges, and innovations. Nevada Medicaid officials stated  they were considering establishing a health home program.

Financial Alignment Initiative. For the Financial Alignment Initiative,  CMS oversaw efforts by states to implement improvements in Medicaid  service delivery aimed at achieving savings for both Medicare and  Medicaid, with one state we spoke with using the initiative to target high- expenditure beneficiaries. As noted earlier, Washington established its  Health Homes demonstration program for dually eligible beneficiaries in  association with the Financial Alignment Initiative. Washington targeted  the demonstration to high-cost, high-risk Medicare-Medicaid beneficiaries  based on the principle that focusing intensive care coordination on  beneficiaries with the greatest need provided the greatest potential for  improved health outcomes and cost savings. Washington’s Financial  Alignment Initiative demonstration was approved through 2020, and  Washington officials stated they are hoping to get an extension, because  it has yielded cost savings for both Medicaid and Medicare. A feature of  the Financial Alignment Initiative is that any cost savings achieved by the  program are split between the state Medicaid program and Medicare.

CMS Provided Technical Assistance and Educational Resources to Help States Identify and Manage Care for High- Expenditure Medicaid Beneficiaries

CMS also offered state Medicaid agencies access to several resources  that, while not designed specifically to target high-expenditure  beneficiaries, have been used to support states in identifying or better  managing care for this population. These resources included the  Medicaid Innovation Accelerator Program, the State Data Resource  Center, and the Medicare-Medicaid Data Integration Initiative.

Medicaid Innovation Accelerator Program. The Medicaid Innovation  Accelerator Program is funded by the Center for Medicare and Medicaid  Innovation and run by the Center for Medicaid and CHIP Services, both  within CMS. The goals of the program were to improve care for Medicaid  beneficiaries and reduce costs by supporting states in their ongoing  payment and delivery system reforms through targeted technical support.  The program offered participating states targeted technical support to  Medicaid agencies in building their data analytic capacity as they design  and implement delivery system reforms for high-expenditure  beneficiaries, one of the program’s focus areas. The program worked  with five states on issues such as identifying and stratifying beneficiaries  with complex care needs and high costs, designing effective care  management strategies, and incorporating social determinants of health  into program design activities. In addition to working directly with five  states, the program also offered a national webinar series under the  broader topic of Medicaid Beneficiaries with Complex Care Needs and  High Costs. The webinar series covered a variety of topics, including a  webinar titled “Identification and Stratification of Medicaid Beneficiaries with Complex Care Needs and High Costs,” which provided information  about different approaches to targeting and assessing the needs of this  population. Vermont Medicaid officials we spoke with said it would be  helpful to have more information about how social determinants of health  impact beneficiaries’ ability to manage their own care. CMS hosted other  webinars on various technical support and data analytics topics for states.  Among the state Medicaid officials we interviewed, Nevada officials  mentioned participating in the Innovation Accelerator Program.

State Data Resource Center. State Medicaid agencies have traditionally  been hampered in managing the Medicaid portion of care for dually  eligible beneficiaries, because they lacked data on the Medicare services  these beneficiaries receive, such as hospitalizations, physician visits,  prescription drugs, and skilled nursing facility stays. To address this  challenge, CMS established the State Data Resource Center to facilitate  state access to and use of Medicare data on dually eligible beneficiaries.  Through the program, states had access to technical advisors when  working with CMS Medicare data, which have allowed states to better  predict and identify high-expenditure dually eligible Medicaid  beneficiaries, CMS officials told us. The officials said the State Data  Resource Center provided states with learning opportunities through  webinars and monthly “Medicare Data Workgroup” calls, during which  states shared their data use experiences. CMS officials and CMS  contractors we spoke with said 29 states have received Medicare data,  including all 10 states that participated in the Financial Alignment  Initiative, though not all had projects specifically linked to high- expenditure Medicaid beneficiaries. CMS officials said all states had  some contact with the State Data Resource Center, whether through data  inquiries or participation in webinars.

Medicare-Medicaid Data Integration Initiative. The Medicare-Medicaid  Coordination Office and the Center for Medicaid and CHIP Services’  Medicaid Innovation Accelerator Program, both within CMS, jointly  sponsored the Medicare-Medicaid Data Integration Initiative. The initiative  assisted states with integrating Medicare and Medicaid data in order to  enhance care coordination and reduce costs for the dually eligible  population, which may have included high-expenditure Medicaid  beneficiaries. CMS officials we spoke with said the Medicare-Medicaid  Data Integration Initiative had assisted 10 states—five participating in the  Financial Alignment Initiative (Colorado, Minnesota, Ohio, Rhode Island,  and Virginia) and five participating in the Medicaid Innovation Accelerator  Program from October 2015 to March 2019 (Alabama, the District of  Columbia, New Hampshire, New Jersey, and Pennsylvania).

We provided a draft of this product to the Department of Health and  Human Services for review. The department provided technical  comments, which we incorporated as appropriate.

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If you or your staffs have any questions about this report, please contact  me at (202) 512-7114 or yocomc@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix I.

Appendix I: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Lori Achman (Assistant Director),  Mary Giffin (Analyst-in-Charge), Matthew Dobratz, Drew Long, and  Brandon Nakawaki made key contributions to this report. Also  contributing were Julianne Flowers, Vikki Porter, Jennifer Rudisill, and  Eric Wedum.

Medicaid spending is projected to hit $1 trillion by 2026. Studies have found a small percentage of beneficiaries account for a large amount of its spending. Many high-cost beneficiaries have poorly managed chronic conditions that can result in costly services—such as emergency room visits—that are preventable.

We asked officials in 7 states what they do to manage health care costs and improve care for high-cost Medicaid beneficiaries. All of the states said they coordinate care across a patient's providers to better manage physical and mental conditions. Some states also tried to address beneficiaries’ basic needs, such as food and housing.