Medicaid Demonstrations: Actions Needed to Address Weaknesses in Oversight of Costs to Administer Work Requirements

Section 1115 demonstrations are a significant component of Medicaid spending and affect the care of millions of low-income and medically needy individuals. In 2018, CMS announced a new policy allowing states to test work requirements under demonstrations and soon after began approving such demonstrations. Implementing work requirements can involve various administrative activities, not all of which are eligible for federal funds.

GAO was asked to examine the administrative costs of demonstrations with work requirements. Among other things, this report examines (1) states' estimates of costs of administering work requirements in selected states, and (2) CMS's oversight of these costs. GAO examined the costs of administering work requirements in the first five states with approved demonstrations. GAO also reviewed documentation for these states' demonstrations, and interviewed state and federal Medicaid officials. Additionally, GAO assessed CMS's policies and procedures against federal internal control standards.

Medicaid demonstrations enable states to test new approaches to provide Medicaid coverage and services. Since January 2018, the Centers for Medicare & Medicaid Services (CMS) has approved nine states' demonstrations that require beneficiaries to work or participate in other activities, such as training, in order to maintain Medicaid eligibility. The first five states that received CMS approval for work requirements reported a range of administrative activities to implement these requirements.

These five states provided GAO with estimates of their demonstrations' administrative costs, which varied, ranging from under $10 million to over $250 million. Factors such as differences in changes to information technology systems and numbers of beneficiaries subject to the requirements may have contributed to the variation. The estimates do not include all costs, such as ongoing costs states expect to incur throughout the demonstration.

GAO found weaknesses in CMS's oversight of the administrative costs of demonstrations with work requirements.

No consideration of administrative costs during approval. GAO found that CMS does not require states to provide projections of administrative costs when requesting demonstration approval. Thus, the cost of administering demonstrations, including those with work requirements, is not transparent to the public or included in CMS's assessments of whether a demonstration is budget neutral—that is, that federal spending will be no higher under the demonstration than it would have been without it.

Current procedures may be insufficient to ensure that costs are allowable and matched at the correct rate. GAO found that three of the five states received CMS approval for federal funds—in one case, tens of millions of dollars—for administrative costs that did not appear allowable or at higher matching rates than appeared appropriate per CMS guidance. The agency has not assessed the sufficiency of its procedures for overseeing administrative costs since it began approving demonstrations with work requirements.

GAO makes three recommendations, including that CMS (1) require states to submit projections of administrative costs with demonstration proposals, and (2) assess risks of providing federal funds that are not allowable to administer work requirements and improve oversight procedures, as warranted. CMS did not concur with the recommendations and stated that its procedures are sufficient given the level of risk. GAO maintains that the recommendations are warranted as discussed in this report.

Medicaid section 1115 demonstrations—which allow states to test and  evaluate new approaches for delivering health care services under the  federal-state Medicaid program—have become a significant feature of the  program. Section 1115 of the Social Security Act authorizes the  Secretary of Health and Human Services to waive certain federal  Medicaid requirements and approve new types of expenditures that would  not otherwise be eligible for federal Medicaid funds for experimental, pilot,  or demonstration projects that, in the Secretary’s judgment, are likely to  promote Medicaid objectives. As of November 2018, over three-quarters  of states operated at least part of their Medicaid program under a section  1115 demonstration; in fiscal year 2017, federal spending for  demonstrations was about $145 billion, or over one-third of federal  Medicaid program expenditures.

The Centers for Medicare & Medicaid Services (CMS), within the  Department of Health and Human Services (HHS), oversees Medicaid  section 1115 demonstrations (referred to hereafter as demonstrations)  and has approved states’ use of demonstrations for a variety of purposes.  For example, under demonstrations, states have extended coverage to  populations, offered services not otherwise eligible for Medicaid, and  increased beneficiary premiums and cost-sharing above statutory limits.

In January 2018, CMS issued guidance announcing a new opportunity for  states to use demonstrations to require certain beneficiaries to work or  participate in community engagement activities, such as vocational  training or volunteer activities, as a condition of Medicaid eligibility. CMS  gave states flexibility in designing the work requirements within certain  parameters. Medicaid beneficiaries not meeting these work requirements  can face suspension or termination of coverage if they do not meet—and  do not appropriately report having met—the number of hours of activity  required. CMS approved the first demonstration testing work  requirements in Kentucky in January 2018 and has since approved such  requirements in eight other state demonstrations, with seven more state  demonstration applications pending as of May 2019. While work  requirements have long been a feature of programs such as Temporary  Assistance to Needy Families (TANF), CMS has not previously approved  work requirements in state Medicaid programs. As of August 2019, there  is ongoing litigation challenging CMS’s approvals of such requirements in  three states that had implemented, or were preparing to implement, work  requirements: Arkansas, Kentucky, and New Hampshire.

Implementing work requirements—like other changes in Medicaid—can  increase Medicaid administrative costs, as states may need to change  eligibility and enrollment systems and conduct additional beneficiary  outreach, monitoring, and evaluation. In general, the federal government provides 50 percent of the funds for administrative costs, but pays for up  to 90 percent of certain costs, including those for information technology  (IT) system changes. CMS is responsible for overseeing Medicaid  administrative spending and ensuring that federal matching funds are  only provided for costs that are allowable under Medicaid rules.  Stakeholders have raised concerns that work requirements will increase  administrative costs.

Given the number of states opting to test work requirements, you asked  us to examine the administrative costs of demonstrations with work  requirements and CMS oversight of those expenditures. This report  examines  1.  characteristics of work requirements in states with approved  demonstrations and pending applications;  2.  selected states’ estimates of the administrative costs to implement  demonstrations with work requirements; and  3.  CMS’s oversight of the administrative costs of demonstrations with  work requirements.

To examine the characteristics of work requirements in states that have  received approval and those with pending demonstration applications, we  reviewed demonstration documentation from CMS. Specifically, we  reviewed approval documents for the nine states that had received CMS  approval as of May 2019. As part of our review, we identified the extent  of variation across states in the beneficiary groups subject to the work  requirements, including the age and eligibility groups; the hours of work  required and frequency of required reporting; and the consequences for  non-compliance, including both the nature of the consequence— suspension or termination of coverage—and when it would take effect.  We also identified the extent of any variation in the populations states  exempted from the work requirements and the types of activities that met  the requirements. For the seven states with demonstration applications to  implement work requirements that were pending as of May 2019, we  reviewed application documents for these same characteristics.

To examine selected states’ estimates of the administrative costs of  demonstrations with work requirements, we reviewed state data and  documentation for the five selected states that had received approval as  of November 2018. These states—Arkansas, Indiana, Kentucky, New  Hampshire, and Wisconsin—had the most time to implement work  requirements or make significant preparations to do so during the time  that we conducted our review. Using a data collection instrument  provided to the selected states, we collected available estimates of the  administrative costs for implementing and administering work  requirements over the course of the demonstration approval periods (3 to  5 years), including the states’ estimates of federal and non-federal costs.  We also requested available information on the amounts of expenditures  for implementing and administering work requirements incurred from the  date the state submitted its application through the end of calendar year  2018. We asked the selected states to break those expenditures out  according to several types of administrative activities, such as  implementation and operation of IT systems, beneficiary outreach, and  staff training, as well as by expected federal and non-federal amounts.

Where states could not provide expenditure amounts for a given type of  activity, we asked them to affirm whether expenditures were incurred for  that activity. We also reviewed related state documentation detailing the  use of the these funds, including descriptions of changes to IT systems  and agreements state Medicaid agencies entered into with managed care  organizations (MCO) or other state agencies to carry out administrative  tasks related to work requirements. In addition, we interviewed Medicaid  officials in the five selected states and asked them about the  administrative activities they had undertaken or planned to take to  implement work requirements, expected ongoing annual costs, and  factors that affected implementation costs. We used our reviews of state  documentation and interviews with officials to identify any inconsistencies  or limitations in the data reported by the states. Based on these steps, we  found the data were sufficiently reliable for the purpose of our reporting  objectives.

To examine CMS’s oversight of the administrative costs of  demonstrations with work requirements, we reviewed documentation of  policies and procedures for approving, monitoring, and evaluating  demonstrations. This included the policies and procedures applied to all  demonstrations, as well as those applied to demonstrations with work  requirements. We also reviewed policies and procedures for approving  federal funds for changes to Medicaid IT systems. In addition, for our five  selected states, we reviewed state demonstration applications and  interviewed state Medicaid officials about information the states provided  to CMS during the approval process about projected administrative costs.

We also reviewed state documents detailing plans for obtaining and using  federal funds for the administrative costs associated with work  requirements and related CMS approval documents. We compared  states’ plans with CMS policy on allowable administrative activities— those eligible for federal Medicaid matching funds—and the appropriate  federal matching rates for those activities. We also interviewed CMS  officials about the extent to which CMS considers administrative costs  when approving demonstrations, how CMS oversees the administrative  costs of demonstrations through the approval of IT funds and other  processes, and how CMS ensures that states receive appropriate federal  matching rates for allowable administrative costs under Medicaid rules.  Finally, we assessed CMS’s policies and procedures against federal  standards for internal controls related to risk assessment.

We conducted this performance audit from August 2018 to 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.

As of November 2018, 43 states operated at least part of their Medicaid  programs under demonstrations. State demonstrations can vary in size  and scope, and many demonstrations are comprehensive in nature,  affecting multiple aspects of states’ Medicaid programs. In fiscal year  2017, federal spending on demonstrations accounted for more than one- third of total federal Medicaid spending and in eight states accounted for  75 percent or more of Medicaid expenditures.

CMS typically approves demonstrations for an initial 5-year period that  can be extended in 3- to 5-year increments with CMS approval. Some  states have operated portions of their Medicaid programs under a  demonstration for decades. Each demonstration is governed by special  terms and conditions, which reflect the agreement reached between CMS  and the state, and describe the authorities granted to the state. For  example, the special terms and conditions may define what  demonstration funds can be spent on—including which populations and  services—as well as specify reporting requirements, such as monitoring  or evaluation reports states must submit to CMS.

In January 2018, CMS announced a new policy to support states  interested in using demonstrations to make participation in work or  community engagement a requirement to maintain Medicaid eligibility or  coverage. CMS’s guidance indicates that states have flexibility in  designing demonstrations that test work requirements, but it also  describes parameters around the populations that could be subject to  work requirements and other expectations. CMS guidance addresses  several areas, including the following:

Populations. Work requirements should apply to working-age, non- pregnant adult beneficiaries who qualify for Medicaid on a basis other  than a disability.

Exemptions and qualifying activities. States must create  exemptions for individuals who are medically frail or have acute  medical conditions. States must also take steps to ensure eligible  individuals with opioid addiction and other substance use disorders  have access to coverage and treatment services and provide  reasonable modifications for them, such as counting time spent in  medical treatment toward work requirements. The guidance indicates  that states can allow a range of qualifying activities that satisfy work  requirements, such as job training, education programs, and  community service. The guidance also encourages states to consider  aligning Medicaid work requirements with work requirements in other  federal assistance programs operating in their states.

Beneficiary supports. States are expected to describe their  strategies to assist beneficiaries in meeting work requirements and to  link them to additional resources for job training, child care assistance,  transportation, or other work supports. However, CMS’s guidance  specifies that states are not authorized to use Medicaid funds to  finance these beneficiary supports.

About one-third of states have either received CMS approval or submitted  applications to CMS to test work requirements in their demonstrations.  Nine states have had work requirements approved as part of new  demonstrations or extensions of or amendments to existing  demonstrations as of May 2019. Also as of May 2019, seven more  states had submitted demonstration applications with work requirements,  which were pending CMS approval. (See fig. 1.)

States with approved work requirements were in various stages of  implementation as of August 2019, and three states faced legal  challenges to implementation. The requirements were in effect in  Arkansas for 9 months before a federal district court vacated the approval  in March 2019. Work requirements became effective in Indiana in  January 2019 and will be enforced beginning in January 2020. CMS’s  approval of work requirements in Kentucky was vacated in March 2019— several days before the work requirements were set to become effective  on April 1, 2019. As of August 2019, CMS was appealing the court  decisions vacating demonstration approvals in Arkansas and Kentucky.  Other states’ requirements are approved to take effect in fiscal years  2020 and 2021. (See fig. 2.)

Federal Funding for Administrative Costs to Implement Work Requirements

Implementing work requirements, as with other types of beneficiary  requirements, can involve an array of administrative activities by states,  including developing or adapting eligibility and enrollment systems,  educating beneficiaries, and training staff. In general, CMS provides  federal funds for 50 percent (referred to as a 50 percent matching rate) of  state Medicaid administrative costs. These funds are for activities  considered necessary for the proper and efficient administration of a  state’s Medicaid program, including those parts operated under  demonstrations. CMS provides higher matching rates for certain  administrative costs, including those related to IT systems. For example,  expenditures to design, develop, and install Medicaid eligibility and  enrollment systems are matched at 90 percent, and maintenance and  operations of these systems are matched at 75 percent.

States may also receive federal funds for administrative activities  delegated to MCOs. The amount of federal Medicaid funds states receive  for payments to MCOs that bear financial risk for Medicaid expenditures  is determined annually by a statutory formula based on the state’s per  capita income, known as the Federal Medical Assistance Percentage  (FMAP). The FMAP sets a specific federal matching rate for each state  that, for fiscal year 2019, ranges from 50 percent to 76 percent. There are  exceptions to this rate for certain populations, providers, and services.  For example, states that chose to expand Medicaid under the Patient  Protection and Affordable Care Act (PPACA) receive a higher FMAP for  newly eligible adults, equal to 93 percent in 2019. (See fig. 3.)

CMS has several different related processes under which the agency  oversees Medicaid administrative costs, including those for  demonstrations.

Demonstration approval, monitoring, and evaluation. States  seeking demonstration approvals must meet transparency  requirements established by CMS. For example, states must include  certain information about the expected changes in expenditures under  the demonstration in public notices seeking comment at the state level  and in the application to CMS, which is posted for public comment at  the federal level. In addition, CMS policy requires that demonstrations  be budget neutral—that is, that the federal government should spend  no more under a demonstration than it would have without the  demonstration. Prior to approval, states are required to submit an  analysis of their projected costs with and without the demonstration.  CMS uses this information to determine budget neutrality and set  spending limits for demonstrations. During the demonstration, CMS is  responsible for monitoring the state’s compliance with the terms and  conditions of the demonstration, including those related to how  Medicaid funds can be spent and the demonstration spending limit.  States must also evaluate their demonstrations to assess the effects  of the policies being tested, which could include impacts on cost.

Review and approval of federal matching funds for IT projects.

To request higher federal matching rates for changes to Medicaid IT  systems, including eligibility and enrollment systems, states must  submit planning documents to CMS for review and approval. States’  plans must include sufficient information to evaluate the state’s goals,  procurement approach, and cost allocations within a specified budget.  States may request funds for system development related to a  proposed demonstration before the demonstration is approved.  Funding can be approved and expended under the approved plan  while the demonstration application is being reviewed. States submit  updates to planning documents annually for CMS review, which can  include requested changes to the approved budget.

Quarterly expenditure reviews. In order to receive federal matching  funds, states report their Medicaid expenditures quarterly to CMS,  including those made under demonstrations. Expenditures associated  with demonstrations, including administrative expenditures, are  reported separately from other expenditures. CMS is responsible for  ensuring that expenditures reported by states are supported and  allowable, meaning that the state actually made and recorded the  expenditure and that the expenditure is consistent with Medicaid  requirements. With regard to consistency, this includes comparing  reported expenditures to various approval documents. For example,  CMS is responsible for comparing reported demonstration  expenditures against the special terms and conditions that authorize  payment for specified services or populations and establish spending  limits. CMS is also responsible for reviewing states’ reported  expenditures against budgets in states’ planning documents to ensure  that states do not exceed approved amounts.

A list of GAO reports related to these CMS oversight processes is  included at the end of this report.

States’ Work Requirements Varied in Terms of Target Population, Required Activities, and Consequences of Non-Compliance

States took different approaches to designing work requirements under  their Medicaid demonstrations. These requirements varied in terms of the  beneficiary groups subject to the requirements; the required activities,  such as frequency of required reporting; and the consequences  beneficiaries face if they do not meet requirements.

Beneficiaries Subject to Work Requirements and Required Activities

In the nine states with approved work requirements as of May 2019, we  found differences in the age and eligibility groups subject to work  requirements, and, to a lesser extent, the number of hours of work  required and frequency of required reporting to the state. For example:

Age and eligibility groups subject to work requirements. Four of  these states received approval to apply the requirements to adults  under the age of 50, similar to how certain work requirements are  applied under the Supplemental Nutrition Assistance Program  (SNAP). Among the other five states, approved work requirements  apply to adults up to the age of 59 (Indiana and Utah), 62 (Michigan),  and 64 (Kentucky and New Hampshire). States generally planned to  apply the requirements to adults newly eligible under PPACA or a  previous coverage expansion, but some states received approval to  apply the requirements to additional eligibility groups, such as parents  and caretakers of dependents.

Number of hours of work required and frequency of required  reporting. Under approved demonstrations in seven states, Medicaid  beneficiaries must complete 80 hours of work or other qualifying  activities per month to comply with work requirements. Five states’  approved demonstrations require beneficiaries to report each month  on their hours of work or other qualifying activities, using methods  approved by the state, such as online or over the phone. (See table  1.)

We saw similar variation under the seven state applications that were  pending as of May 2019.

All nine states with approved work requirements as of May 2019  exempted several categories of beneficiaries and counted a variety of  activities as meeting the work requirements. For example, all nine states  exempted from the work requirements people with disabilities, pregnant  women, and those with certain health conditions, such as a serious  mental illness. In addition, depending on the state, other groups were  also exempted, such as beneficiaries who are homeless, survivors of  domestic violence, and those enrolled in substance use treatment  programs. States also counted activities other than work as meeting the  work requirements, such as job training, volunteering, and caregiving for  non-dependents. In addition to work requirements, eight of the nine states  received approval under their demonstrations to implement other  beneficiary requirements, such as requiring beneficiaries to have  expenditure accounts. (See app. I for more information on these other  beneficiary requirements.)

Beneficiary Consequences for Non-Compliance

The consequences Medicaid beneficiaries faced for non-compliance and  the timing of the consequences varied across the nine states with  approved work requirements. The consequences for non-compliance  included coverage suspension and termination. For example, Arizona  received approval to suspend beneficiaries’ coverage after 1 month of  non-compliance. In contrast, Wisconsin will not take action until a  beneficiary has been out of compliance for 4 years, at which time  coverage will be terminated. Three states (Arkansas, Michigan, and  Wisconsin) imposed or planned to impose a non-eligibility period after  terminating a beneficiary’s enrollment. For example, under Arkansas’  demonstration, after 3 months of non-compliance, the beneficiary was not  eligible to re-enroll until the next plan year, which began in January of  each year. Thus, beneficiaries could be locked out of coverage for up to 9  months. (See table 2.) For states with pending applications, suspension  or termination of coverage takes effect after 2 or 3 months of non- compliance.

For states that suspend coverage for beneficiaries, there are different  conditions for coming into compliance and lifting the suspension. For  example:

Arizona received approval to automatically reactivate an individual’s  eligibility at the end of each 2-month suspension period.

In other states, such as Indiana, beneficiaries must notify the state  that they have completed 80 hours of work or other qualifying  activities in a calendar month, after which the state will reactivate  eligibility beginning the following month. (See text box.)

Indiana’s Suspension Process for Non-Compliance with Medicaid Work  Requirements  At the end of each year, the state reviews beneficiaries’ activities related to work  requirements. Beneficiaries must meet the required monthly hours 8 out of 12 months of  the year to avoid a suspension of Medicaid coverage.

If coverage is suspended for not meeting work requirements, the suspension will start  January 1 and could last up to 12 months. During a suspension, beneficiaries will not be  able to access Medicaid coverage to receive health care.

Beneficiaries with suspended Medicaid coverage can reactivate coverage if they become medically frail; or  employed, enrolled in school, or engaged in volunteering.

Beneficiaries must contact the state to reactivate coverage.

To prevent suspension from taking effect, two states (Kentucky and New  Hampshire) require beneficiaries to make up required work hours that  were not completed in order to maintain compliance with work  requirements. For example, in Kentucky, if the beneficiary worked 60  hours in October (20 hours less than the required 80), the beneficiary  must work 100 hours in November to avoid suspension of coverage in  December.

Available Estimates of Costs to Implement Work Requirements Varied among Selected States, with the Majority of Costs Expected to Be Financed by Federal Dollars

Available estimates of the costs to implement Medicaid work  requirements varied considerably among the five selected states, and  these estimates did not account for all costs. These states estimated that  federal funding would cover the majority of these costs, particularly costs  to modify IT systems.

Selected States’ Estimates of Administrative Costs Associated with Work Requirements Ranged from Millions to Hundreds of Millions of Dollars

Selected states (Arkansas, Indiana, Kentucky, New Hampshire, and  Wisconsin) reported estimates of the costs to implement work  requirements that ranged from under $10 million in New Hampshire to  over $250 million in Kentucky. These estimates—compiled by states  and reported to us—did not include all planned costs. The estimates were  based on information the states had readily available, such as the costs  of contracted activities for IT systems and beneficiary outreach, and  primarily reflect up-front costs. Four selected states (Arkansas, Indiana,  Kentucky, and New Hampshire) had begun implementing work  requirements and making expenditures by the end of 2018. Together,  these states reported to us having spent more than $129 million in total  for implementation activities from the time the states submitted their  demonstration applications through the end of 2018. (See table 3.)

Several factors may have contributed to the variation in the selected  states’ estimated costs of administering work requirements, including  planned IT system changes and the number of Medicaid beneficiaries  subject to the work requirements.

IT system changes. Selected states planned distinct approaches to  modify their IT systems in order to administer work requirements. For  example:  Indiana, which implemented work requirements by expanding on an  existing work referral program, planned to leverage existing IT  systems, making modifications expected to result in IT costs of $14.4  million over 4 years.

In contrast, Kentucky planned to develop new IT system capabilities  to communicate, track, and verify information related to work  requirements. Kentucky received approval to spend $220.9 million in  fiscal years 2019 and 2020 to do that and make changes needed to  implement other beneficiary requirements in its demonstration.

Number of beneficiaries subject to requirements. The estimated cost  of some activities to administer work requirements depended on the  number of Medicaid beneficiaries subject to work requirements, which  varied across selected states. For example:

Kentucky estimated 620,000 beneficiaries would be subject to work  requirements—including those who may qualify for exemptions—and  estimated costs of $15 million for fiscal years 2019 and 2020 to  conduct beneficiary education, outreach, and customer service.

In contrast, Arkansas had fewer beneficiaries subject to work  requirements (about 115,000 in February 2019, with about 100,000 of  those eligible for exemptions) and estimated fewer outreach costs.

The state estimated $2.9 million in costs from July 2018 through June  2019 to conduct education and outreach.

As noted earlier, states’ available estimates did not include all expected  Medicaid costs. For example, four of the five selected states planned to  use MCOs or other health plans to help administer work requirements,  but two of these four did not have estimates of the associated costs.  Indiana and Kentucky estimated additional payments to MCOs—$20.7  million in Indiana to administer work requirements in 2019 and $50.7  million in Kentucky to administer its demonstration from July 2018 through  June 2020. In contrast, officials in New Hampshire told us that no  estimates were available. In Arkansas, where beneficiaries receive  premium support to purchase coverage from qualified health plans on the  state’s health insurance exchange, plans were instructed to include the  costs of administering work requirements in the premiums, according to  Arkansas officials. State officials and representatives from a qualified  health plan we spoke with could not provide the amount that the state’s  premium assistance costs increased as a result.

States’ estimates also did not include all ongoing costs that they expect to  incur after the up-front costs and initial expenditures related to  implementation of the work requirements. States had limited information  about ongoing costs, but we collected some examples. For instance, New  Hampshire provided estimated costs of $1.6 million to design and  implement the evaluation of its demonstration, which all states are  required to perform. In addition, officials or documents in each selected  state acknowledged new staffing costs that may be ongoing, such as  Indiana’s costs for five full-time employees to assist beneficiaries with  suspended coverage to meet requirements or obtain exemptions.

Finally, states reported that administering Medicaid work requirements  will increase certain non-Medicaid costs—costs that are not funded by  federal Medicaid, but are borne by other federal and state agencies,  stakeholders, or individuals. For instance, New Hampshire officials  planned to use approximately $200,000 to $300,000 in non-Medicaid  funds for six positions performing case management for workforce  development. Similarly, in July 2017, Indiana estimated that providing  beneficiaries with job skills training, job search assistance, and other  services would cost $90 per month per beneficiary, although state officials  said these costs were uncertain after learning they were not eligible for  federal Medicaid funds. In addition, beneficiaries and entities other than  states, such as community organizations, may incur costs related to the  administration of work requirements that are not included in states’  estimates.

Selected States Estimated the Federal Government Would Pay the Majority of Administrative Costs Associated with Work Requirements

All five selected states expected to receive federal funds for the majority  of estimated costs and expenditures (described previously) for  implementing work requirements. For example, the four selected states  that provided data on expenditures to administer work requirements  through 2018 (Arkansas, Indiana, Kentucky, and New Hampshire)  expected the portion of those expenditures paid by the federal  government to range from 82 percent in Indiana to 90 percent in New  Hampshire and Kentucky. These effective matching rates exceed the 50  percent matching rate for general administrative costs, largely due to  higher matching rates of 75 and 90 percent of applicable IT costs. For  example, Kentucky received approval to spend $192.6 million in federal  funds for its $220.9 million in expected IT costs over 2 years to implement  work requirements and other beneficiary requirements, an effective match  rate of 87 percent.

In addition to higher federal matching rates for IT costs, the selected  states receive federal funds for the majority of MCO capitation payments,  which the states planned to increase to pay MCOs’ costs to administer  work requirements. Each of the three states that planned to use MCOs  to administer work requirements planned to increase capitation payments  in order to do so. For example, Indiana planned to increase capitation  payments to MCOs by approximately 1 percent (or $20.7 million in 2019)  to pay for a variety of ongoing activities to administer work requirements,  including requiring MCOs to help beneficiaries report compliance,  reporting beneficiaries who qualify for exemptions, and helping the state  verify the accuracy of beneficiary reporting, according to state officials.  The federal government pays at least 90 percent of capitation payments  to MCOs to provide covered services to beneficiaries who are newly  eligible under PPACA, the primary population subject to work  requirements among the five selected states. Indiana and Kentucky also  received approval to apply work requirements to other populations, and  capitation payments for these other populations receive federal matching  rates of 66 percent in Indiana and 72 percent in Kentucky in fiscal year  2019.

States’ approaches to implementing work requirements can affect the  federal matching funds they receive. For example, Arkansas officials told  us that the state decided to collect information on beneficiary compliance  through an on-line portal—the initial cost of which received an effective  federal matching rate of 87 percent, according to Arkansas. Officials told  us that the state avoided having beneficiaries report compliance to staff— costs of which receive a 75 percent matching rate. However, after  approximately 17,000 beneficiaries lost coverage due to non-compliance  with work requirements, Arkansas revised its procedures to allow  beneficiaries to report compliance to state staff over the phone.

Three of the five selected states sought to leverage other programs  funded by the federal government to help implement work requirements  or provide beneficiary supports, such as employment services. Kentucky  officials reported piloting elements of Medicaid work requirements using  its SNAP Employment and Training program. Similarly, Arkansas officials  sought a waiver to be able to use TANF funds to provide employment  services to individuals without children in order to serve Medicaid  beneficiaries subject to work requirements. New Hampshire also used  TANF funds to provide employment services to Medicaid beneficiaries  who were also enrolled in TANF.

Weaknesses Exist in CMS’s Oversight of Administrative Costs of Demonstrations with Work Requirements

CMS does not consider administrative costs when approving any  demonstrations—including those with work requirements—though these  costs can be significant. The agency has recently taken steps to obtain  more information about demonstration administrative costs. However, we  identified various weaknesses in CMS’s oversight of administrative costs  that could result in states receiving federal funds for costs to administer  work requirements that are not allowable.

CMS’s Approval Process Does Not Take into Account How a Demonstration Will Affect Administrative Costs

CMS’s demonstration approval process does not take into account the  extent to which demonstrations, including those establishing work  requirements, will increase a state’s administrative costs. CMS policy  does not require states to provide projections of administrative costs in  their demonstration applications or include administrative costs in their  demonstration cost projections used by CMS to assess budget neutrality.  CMS officials explained that in the past demonstrations had generally not  led to increases in administrative costs, and as such, the agency had not  seen a need to separately consider these costs.

However, the officials told us and have acknowledged in approval letters  for demonstrations with work requirements, that demonstrations may  increase administrative costs. Kentucky provides an example of this,  reporting to us estimated administrative costs of approximately $270  million—including about $200 million in federal funds—to implement the  demonstration over 2 years. However, neither Kentucky nor the other four  selected states provided estimates of their administrative costs in their  applications to CMS, and CMS officials confirmed that no additional  information on administrative costs was provided by the states while their  demonstration applications were being reviewed.

By not considering administrative costs in its demonstration approval  process, CMS’s actions are counter to two key objectives of the  demonstration approval process: transparency and budget neutrality.

Transparency. CMS’s transparency requirements are aimed at  ensuring that demonstration proposals provide sufficient information  to ensure meaningful public input. However, CMS officials told us that  they do not require the information states provide on the expected  changes in demonstration expenditures in their applications to  account for administrative costs. This information would likely have  been of interest in our selected states, because public commenters in  each state expressed concerns about the potential administrative  costs of these demonstrations. In prior work, we reported on  weaknesses in CMS’s policies for ensuring transparency in  demonstration approvals.

Budget neutrality. The aim of CMS’s budget neutrality policy is to  limit federal fiscal liability resulting from demonstrations, and CMS is  responsible for determining that a demonstration will not increase  federal Medicaid expenditures above what they would have been  without the demonstration. However, CMS does not consider  administrative costs when assessing budget neutrality. For three of  our five selected states, the demonstration special terms and  conditions specify that administrative costs will not be counted against  the budget neutrality limit.

Even though demonstrations’ administrative costs can be significant,  CMS officials said the agency has no plans to revise its approval  process—either to (1) require states to provide information on expected  administrative costs to CMS or the public, or to (2) account for these  costs when the agency assesses whether a demonstration is budget  neutral. CMS officials explained that the agency needs more experience  with policies that require administrative changes under a demonstration  before making any revisions to its processes. Without requiring states to  submit projections of administrative costs in their demonstration  applications, and by not considering the implications of these costs for  federal spending, CMS puts its goals of transparency and budget  neutrality at risk. This is inconsistent with federal internal control  standards that call for agencies to identify, analyze, and respond to risks  related to achieving program objectives.

CMS Has Taken Steps to Collect New Information on Administrative Costs, yet Risks May Remain of CMS Providing Federal Funds for Work Requirement Costs that Are Not Allowable

CMS recently implemented procedures that may provide additional  information on demonstrations’ administrative costs. These included  implementing new procedures to identify costs specific to demonstrations  when approving federal matching funds for states’ planned IT costs and  issuing guidance on monitoring and evaluating demonstrations. However,  it is unclear whether these efforts will result in data that improve CMS’s  oversight. (See table 4.)

In addition to these new initiatives, states’ quarterly expenditure reports  provide CMS with some information on their demonstration administrative  costs, but this information also has limitations. States are required to  separately track and report administrative expenditures attributable to  their demonstrations in their quarterly expenditure reports. However, CMS  officials told us that states typically use the same resources, such as staff,  to administer their demonstrations and their regular Medicaid program,  which can affect the demonstration costs states report. We found that  about a quarter of states with demonstration expenditures in fiscal year  2017 reported no administrative expenditures related to their  demonstrations. CMS officials acknowledged that the data states submit  in their quarterly expenditure reports may not provide a meaningful  measure of states’ demonstration-related administrative costs.

CMS’s recently implemented procedures may provide more information  on the amounts states are spending on demonstration administrative  costs, but they do not address weaknesses we found in CMS’s oversight  of administrative costs. In four of the five selected states, we identified  examples of states requesting federal matching funds for costs to  administer work requirements that do not appear to be allowable, or at  higher matching rates than appropriate under CMS guidance. In some  cases, states received CMS approval for planned administrative costs  while in others it was unclear whether CMS would have identified the  issues through their oversight procedures. Areas of risk included funds for  planned IT costs, funds for beneficiary supports, and funds provided  under managed care contracts.

Federal funds for planned IT costs that may not be allowable or  eligible for higher matching rates. Three of our five selected states  requested and received funding approval for planned IT costs to  implement their demonstrations that did not appear to be allowable or at  higher matching rates than appropriate under CMS guidance.

Kentucky and Indiana requested and received funding approval for  planned IT costs that do not appear to be allowable under CMS  guidance. Kentucky requested and received CMS approval for funds  (at the 90 percent federal matching rate) for a contract that included  activities to assist Medicaid beneficiaries obtain employment. (See  text box.) However, CMS’s 2018 guidance states that Medicaid  funding is not available to finance beneficiary supports, such as job  training or other employment services. CMS officials said that the  agency did not review the contract and approved the request based  on Kentucky’s assertion that these costs were specific to technology.  Indiana received approval to receive IT funds to develop a website  that provides beneficiaries access to information and tools to seek,  acquire, and retain employment, costs that also appear related to  beneficiary supports.

Kentucky Received Approval of Information Technology Funding for Activities  Aimed at Helping Beneficiaries Obtain Employment  In 2018, in an update to its information technology budget request, Kentucky included  costs for a contract with the state’s Department of Workforce Services to assist Medicaid  beneficiaries in developing skills needed to obtain and retain employment. The  contracted services included activities such as  assessing beneficiaries’ eligibility for non-Medicaid programs,   providing services to beneficiaries at career assistance centers, and making referrals to other agencies and programs.

Kentucky budgeted $21 million for this contract at a 90 percent federal matching rate  ($18.9 million in federal funds) for fiscal year 2019 and another $21 million at a 75  percent matching rate ($15.8 million in federal funds) for fiscal year 2020. CMS approved  Kentucky’s budget request without reviewing the contract.

Indiana and New Hampshire received funding approval for federal IT  funds at the 90 percent matching rate for costs that do not appear  eligible for that rate. In 2018, CMS approved Indiana’s request for a  90 percent match rate to pay $500,000 in consulting fees to develop  work requirement policies, despite CMS guidance indicating that  policy research and development activities should be matched at 50  percent. New Hampshire requested and received CMS approval in  2018 for federal funds at a 90 percent matching rate for $180,000 in  costs to educate beneficiaries about work requirements, including  costs to place outreach calls through an existing contracted call  center. CMS guidance indicates that these costs should receive  funding at a lower matching rate.

Federal funds for beneficiary supports that are not allowable.  Wisconsin requested and planned to seek federal funds for beneficiary  support costs that are not allowable until our work identified the issue for  CMS. Wisconsin officials told us that it was their understanding during the  planning phase of the demonstration that administrative costs incurred by  state programs providing such services were eligible for federal matching  funds. State officials said that CMS officials told them on multiple  occasions that the state could receive a 50 percent federal match for  these costs. Based on this, the state requested budget authority from its  legislature for $51.2 million for employment and training services, of  which it anticipated $23.1 million would come from federal Medicaid  funds. CMS officials told us that such costs are not eligible for federal  matching funds and maintained that the agency’s guidance—which  indicates that beneficiary support costs are not eligible for federal  matching funds—was clear. In response to our inquiries, the agency  contacted the state in April 2019 and clarified this with officials.

Federal funds for costs to administer work requirements provided  through managed care contracts, which may not be allowable. As  noted earlier, three of the five selected states (Indiana, Kentucky, and  New Hampshire) required or planned to require MCOs to perform a  number of activities to implement work requirements. These activities  included, for example, providing information on options to satisfy work  requirements, assisting beneficiaries with reporting compliance with work  requirements, and providing referrals to state work requirement  resources. To fund these activities, officials in these states said that they  plan to increase their capitation payments. States will receive at least a  90 percent federal matching rate for most of these payments, because  the payments are largely for beneficiaries who are newly eligible under  PPACA. It is unclear, however, whether including these activities in  capitation payments is allowable. CMS regulations provide that states  may only include administrative costs that are related to the provision of  covered health care services in their MCO capitation payments. In  addition, CMS guidance notes that implementing work requirements will  not change the types of expenditures that are allowable. We provided  CMS with specific examples of activities states delegated or planned to  delegate to MCOs and asked if these types of activities met CMS’s  criteria to be included under capitation payments. CMS officials told us  that federal review of the related managed care contracts in Indiana and  New Hampshire had not been completed as of June 2019 and could not  make a definitive statement.

While CMS guidance requires states to carry out a range of activities to  implement work requirements—some of which are not eligible for federal  Medicaid funds—agency officials told us that CMS has not updated any  procedures for the various reviewers of these costs. Further, CMS has  not completed a risk assessment to determine whether current  procedures for overseeing administrative costs are sufficient, and agency  officials told us that there were no plans to do so. According to federal  internal control standards, agencies should identify, analyze, and respond  to risks related to achieving program objectives (in this case, ensuring  that administrative expenditures under demonstrations are allowable and  matched at the correct rate). Without identifying, assessing, and  addressing the risks posed by demonstrations that may increase  administrative costs, CMS may be providing federal funds for costs that  are not allowed or at inappropriately high matching rates.

A third of states have sought approval to implement work requirements in  their Medicaid programs. CMS has acknowledged that demonstrations,  including those with work requirements, may increase Medicaid  administrative costs—and therefore overall Medicaid spending. Yet, CMS  is not factoring these costs into its approval decisions, which is counter to  the agency’s goals of transparency and budget neutrality. Further, the  agency has not taken steps to assess and respond to risks of federal  funds being spent for administrative costs that are not allowable or  matched at rates higher than what is appropriate, risks we found in four of  the five demonstrations we reviewed. While administrative costs are a  relatively small portion of states’ Medicaid spending, the weaknesses in  CMS’s oversight of these costs could take on increased importance as  more states seek and receive approval to implement work requirements.

We are making the following three recommendations to CMS:  The Administrator of CMS should require states to submit and make  public projections of administrative costs when seeking approval of  demonstrations, including those with work requirements and all other  demonstrations. (Recommendation 1)

The Administrator of CMS should account for the administrative costs of  demonstrations, including those with work requirements and all other  demonstrations, when assessing whether demonstrations are budget  neutral. (Recommendation 2)

The Administrator of CMS should assess the risks of providing federal  funds for costs to administer work requirements that are not allowable  and should respond to risks by improving oversight procedures, as  warranted. This assessment should consider risks related to costs for  information systems, beneficiary supports, and managed care.  (Recommendation 3)

We provided a draft of this report to HHS for comments and its comments  are reproduced in appendix II. HHS also provided us with technical  comments, which we incorporated in the report as appropriate. HHS did  not concur with our recommendations. In general, HHS commented that it  expects administrative costs to represent a relatively small proportion of  total Medicaid spending and that its current approach to overseeing  administrative costs—including those incurred under Medicaid  demonstrations—is appropriate given the level of financial risk. HHS  commented that administrative costs were approximately 5 percent of  Medicaid expenditures. While these cost may represent a relatively small  share of total spending, CMS projected them to be $18 billion in federal  funds in fiscal year 2019—and this does not include all administrative  spending. In particular, it does not include amounts paid to MCOs for  administrative costs, which are likely considerable given that managed  care payments now represent about half of all Medicaid spending.  Further, demonstrations may represent a heightened financial risk given  our finding that they can result in additional administrative costs that  would not otherwise occur.

Regarding our first recommendation to require states to submit and make  public projections of administrative costs, HHS commented that its  experience suggests that demonstration administrative costs will be a  relatively small portion of total costs and therefore HHS believes making  information about these costs available would provide stakeholders little  to no value. As noted, Medicaid is a significant component of federal and  state budgets. In each of the five states we reviewed, public commenters  expressed concerns about the potential administrative costs of Medicaid  demonstrations with work requirements, suggesting stakeholders would  value information about these costs. We maintain that requiring states to  make public information about administrative costs would help to ensure  that demonstration proposals provide sufficient information to ensure  meaningful public input.

Regarding our second recommendation to account for administrative  costs when assessing whether demonstrations are budget neutral, HHS  again commented that its experience suggests that demonstration  administrative costs will be a relatively small portion of total costs and that  it believed that its current approach is appropriate for the level of financial  risk. However, we found that demonstration administrative costs could be  significant and HHS’s current policy of not considering these costs in its  assessments of budget neutrality could increase federal fiscal liability. For  example, in Kentucky, we found estimated administrative costs for  implementing the demonstration exceeded $270 million over about 2  years. We maintain that including administrative costs in its assessments  will help HHS ensure that demonstrations are budget neutral.

Regarding our third recommendation to assess and respond to risks of  providing federal funds for costs to administer work requirements that are  not allowable, HHS commented that (1) all states’ requests for federal  Medicaid funding are subject to the same federal regulations and  requirements; (2) the expenditures reported by states to GAO had not  been reviewed against federal requirements or certified by states to be  accurate and permissible; and (3) HHS believes its existing approach is  appropriate for the low level of risk that administrative expenditures  represent. Our findings indicate that CMS’s oversight procedures—which  are designed to prevent state spending on costs that do not meet federal  requirements—have vulnerabilities, particularly given the types of  administrative activities associated with work requirements. Four of the  five states we reviewed were planning to seek federal funds for costs (1)  that did not appear allowable, or (2) at higher matching rates than appear  appropriate, and three states succeeded in gaining CMS approval to do  so. We agree with HHS that CMS may also identify inappropriate  expenditures during its reviews of state-reported expenditures. However,  our past work has identified weaknesses in that review process. In  2018, we reported that CMS officials indicated that resource constraints  have limited the agency’s ability to target risk during such reviews,  potentially allowing errors to go undetected. Finally, the basis for HHS’s  conclusion that its current approach is appropriate for the risks posed by  these administrative expenditures is unclear. As we note in our report,  CMS officials told us that they had not assessed whether current  procedures sufficiently address risks posed by administrative costs for  work requirements and had no plans to do so. We maintain that  assessing these risks of providing federal funds for costs that are not  allowable and improving oversight, as warranted, would help HHS to  ensure the integrity of the Medicaid program.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  Secretary of Health and Human Services, the appropriate congressional  committees, and other interested parties. In addition, this report is  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please  contact me at (202) 512-7144 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. Major contributors to this report are listed in  appendix III.

Appendix I: Other Beneficiary Requirements in States with Approved Medicaid Work Requirements

Eight of the nine states that received approval for work requirements, as  of May 2019, also received approval under their demonstrations for other  beneficiary requirements, such as requiring beneficiaries to have  expenditure accounts. Some of these beneficiary requirements preceded  work requirements, while others were newly introduced with the work  requirements. For example, Kentucky was developing and implementing  work requirements at the same time as other beneficiary requirements,  such as the requirement for beneficiaries to have two expenditure  accounts and make premium payments. (See table 5.)

Appendix II: Comments from the Department of Health and Human Services

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Susan Barnidge (Assistant  Director), Russell Voth (Analyst in Charge), Linda McIver, and Matt  Nattinger made key contributions to this report. Also contributing were  Giselle Hicks, Drew Long, Ethiene Salgado-Rodriguez, and Emily Wilson  Schwark.

Medicaid Demonstrations: Approvals of Major Changes Need Increased  Transparency. GAO-19-315. Washington, D.C.: April 17, 2019.

Medicaid: CMS Needs to Better Target Risks to Improve Oversight of  Expenditures. GAO-18-564. Washington, D.C.: August 6, 2018.

Medicaid Demonstrations: Evaluations Yielded Limited Results,  Underscoring Need for Changes to Federal Policies and Procedures.  GAO-18-220. Washington, D.C.: January 19, 2018.

Medicaid Demonstrations: Federal Action Needed to Improve Oversight  of Spending. GAO-17-312. Washington, D.C.: April 3, 2017.

Medicaid: Federal Funds Aid Eligibility IT System Changes, but  Implementation Challenges Persist. GAO-15-169. Washington, D.C.:  December 12, 2014.

Medicaid Demonstration Waivers: Approval Process Raises Cost  Concerns and Lacks Transparency. GAO-13-384. Washington, D.C.:  June 25, 2013.

Medicaid Demonstration Waivers: Recent HHS Approvals Continue to  Raise Cost and Oversight Concerns. GAO-08-87. Washington, D.C.:  January 31, 2008.

For the first time, some states are requiring Medicaid beneficiaries to report work or other activities like training in order to keep their Medicaid coverage. As of July, the Centers for Medicare & Medicaid Services (CMS) had approved 9 states’ requests to test these requirements.

We found that costs to administer work requirements may range from millions to hundreds of millions of dollars per state. However, CMS does not consider these costs when approving work requirements, which are not supposed to increase Medicaid spending.

We made 3 recommendations, including that CMS require states to make any projected administrative costs public.