Background Medicaid Section 1115 Demonstrations A total of 43 states operated at least part of their Medicaid programs under demonstrations, as of November 2018. State demonstrations can vary in size and scope, and many are comprehensive in nature, affecting multiple aspects of a state’s Medicaid program. Nationally, federal spending under demonstrations represented over 30 percent of all federal Medicaid spending in fiscal year 2016. (See app. II.) Demonstrations are typically approved by CMS for an initial 5-year period, but some states have operated portions of their Medicaid programs under a demonstration for decades. This can be achieved by a state requesting approval by CMS for one or more 3- to 5-year extensions of an existing demonstration (referred to as an extension). States often make changes to their demonstrations, either through the extension process or by requesting to amend a demonstration during the approval period (referred to as an amendment). From January 2017 through May 2018, CMS approved applications for a new demonstration, extension, amendment, or a combination of these in 23 states. (See fig. 1.) Each demonstration is governed by special terms and conditions (STCs), which reflect the agreement reached between CMS and the state, and describe the parameters of the authority granted to the state. For example, the STCs may define for what populations and services funds can be spent under the demonstration, as well as specify various state reporting requirements. The STCs also include a spending limit for the demonstration that is meant to ensure the demonstration is budget neutral to the federal government; that is, the federal government should spend no more under a state’s demonstration than it would have spent without the demonstration. Transparency Requirements for Demonstration Applications Requirements for new demonstrations and extensions. As required under PPACA, HHS issued regulations in 2012 to address transparency in the approval of applications for new demonstrations and extensions. The regulations include requirements for states to seek public input on their proposals prior to submitting an application to CMS, requirements for information states must include in their public notices and applications, and procedures that CMS would follow upon receiving the application. CMS reviews the submitted application to check for compliance with these regulations, before seeking additional public input through a 30-day comment period at the federal level. (See fig. 2.) The regulations also provide CMS discretion to engage in additional transparency activities on a case-by-case basis. Requirements for amendments. The 2012 regulations do not apply to states seeking to amend existing demonstrations. Instead, the transparency requirements for amendments are set by guidance HHS issued in 1994 and in the individual STCs that govern each demonstration. The requirements from the guidance and STCs include, for example, that the state seek public input prior to submitting its application and provide in its application an explanation of its process for notifying the public and a detailed description of what is being amended, including the impact on beneficiaries. Transparency Requirements Post- Approval CMS’s regulations also include monitoring and evaluation requirements to ensure that the outcomes of demonstrations are transparent. Monitoring. States must perform periodic reviews of the implementation of their demonstrations, and the STCs typically require states to report those outcomes to CMS periodically. The regulations also require states to conduct a public forum within 6 months after the implementation date of the demonstration, and annually thereafter, to solicit public comments on the progress of the demonstration project and summarize issues raised in monitoring reports submitted to CMS. The regulations require that states submit the annual monitoring reports to CMS. Evaluation. States are required to conduct evaluations to assess whether their demonstrations are achieving the state’s goals and objectives. After a demonstration is approved, states are required to submit an evaluation design to CMS for review and approval. The evaluation design must discuss the hypotheses that will be tested, the data that will be used, and other items outlined in the STCs. In the event that a state wishes to extend its demonstration, the state’s extension application must include, among other things, a report presenting the evaluation’s findings to date, referred to as an interim evaluation report. States are also required to submit final evaluation reports at the demonstration’s end. All evaluation designs and reports are to be made public. CMS Has Developed Procedures for New Demonstrations and Extensions to Improve Transparency of Approvals, but Weaknesses Remain CMS Has Developed Procedures to Improve the Transparency of Demonstration Approvals Transparency Requirements for New Demonstrations and Extensions The transparency requirements for new Medicaid section 1115 demonstrations and extensions of existing demonstrations are established in federal regulations at 42 C.F.R. part 431, subpart G. We found that CMS has developed procedures for assessing states’ applications for new demonstrations and extensions against the transparency requirements established in 2012 (see sidebar). Specifically, CMS’s procedures involve reviewing incoming applications for new demonstrations or extensions against detailed checklists the agency designed to align with transparency requirements in the regulations. (CMS refers to these as completeness checks.) For example, the checklist for new demonstrations includes checks for whether the application included a description of the demonstration; any proposed changes to the benefits, delivery system, or eligibility requirements; information on the public hearing(s) and public comment process the state conducted; and a summary of the issues raised in the state public comment process. (See fig. 3.) We found that CMS completed checklist reviews for each of the 11 applications for new demonstrations or extensions that CMS approved from January 2017 through May 2018. CMS has also developed and implemented procedures for seeking public input at the federal level and making that input publicly available. This includes CMS sending email notifications to individuals who have registered on the agency’s website when demonstration applications are open for public comment; posting the application on the website where the public can post comments during the 30-day comment period; and maintaining the public comments on the website, which are maintained indefinitely, according to CMS officials. We found that CMS conducted a federal comment period for all 11 of the new and extension applications in our review period. In addition to storing the federal public comments, CMS’s website contains a record of key decisions and documents for each demonstration (referred to as the administrative record). The administrative record includes states’ applications, as well as CMS’s approvals, denials, and decisions about the completeness of applications—a requirement under the 2012 regulations. CMS officials told us that they include additional documents as standard practice, though they are not required to be posted, such as a fact sheet on the demonstration and other official communication between the agency and the state, to support transparency. CMS first launched this section of its website in December 2011 with an aim to improve access to Medicaid program information, including information on demonstrations, and redesigned the website in 2013 to improve functionality. The administrative record provides a history, dating as far back as 2011, of what a state has tested, how the approach has evolved over time, and what has been learned from the approach. CMS’s Policies and Procedures for Ensuring Transparency of Demonstration Approvals Have Weaknesses We identified several areas of weakness in CMS’s policies or procedures for ensuring transparency in approvals of new demonstrations and extensions of existing demonstrations. These weaknesses related to the transparency of major changes made to pending applications, the transparency of changes to approved spending limits, and inconsistency in CMS’s review of applications for compliance with transparency requirements for new demonstrations and extensions. Transparency of Major Changes to Pending Applications CMS did not apply a consistent approach to ensuring transparency in two states that made major changes to their demonstration applications mid- review. Indiana and Kentucky submitted changes to pending applications, the first for an extension and the latter for a new demonstration that had substantial potential effects for some beneficiaries. Indiana’s changes included adding new eligibility requirements for some beneficiaries, and Kentucky’s changes included accelerating the effective dates of new requirements to maintain eligibility (see sidebar). CMS did not require either state to solicit public input, though both states opted to hold a public comment period on the proposed changes concurrent with CMS’s review. Further, CMS reviewed Indiana’s proposed changes against limited transparency requirements but did not do so for Kentucky. Indiana submitted a final version of its application summarizing public input and the state’s response, while Kentucky did not. Thus, the extent to which these comments were considered at the state and federal levels was not transparent to the public. Figure 4 shows a timeline of the events surrounding Indiana’s and Kentucky’s requests to make changes to their pending demonstration applications. Kentucky: In July 2017, Kentucky submitted changes to its pending application for a new demonstration, including: replacing a provision for a year-long phase-in of a proposed 20-hour per week work and community engagement requirement for beneficiaries with a 3- month phase-in of the requirement; and disenrolled for 6 months for failing to timely report changes in income or other circumstances affecting eligibility. CMS approved a significant increase in the spending limit for a portion of Florida’s demonstration—which appeared to reflect a change in the agency’s position on the allowable use of the funds—without making transparent the basis for this decision. Specifically, CMS increased the spending limit for a pool of funds for payments to offset providers’ uncompensated care costs by close to $1 billion in 2017 after having reduced the limit 2 years earlier. In its approval letter, CMS provided limited information on the basis for this change. CMS stated that the limit was based on the state’s most recent data on uncompensated care costs, but did not disclose a significant change in its methodology for setting these limits. In unpublished correspondence to Congress, CMS indicated that the calculation of the spending limit was broadly consistent with previous policy with one significant change. Specifically, the letter indicated that whether the state had opted to expand Medicaid coverage to low-income, childless adults as provided for under PPACA would no longer factor into the limit, thus allowing CMS to include uncompensated care costs for this population in setting the limit. This change led to increasing the state’s spending limit to $1.5 billion annually. (See text box.) Moreover, CMS noted plans to apply this change across all states going forward. CMS officials, however, did not indicate that they had publicly communicated this policy change to all states. In past reports, we have recommended that HHS make public the basis for demonstration approvals including the basis for elements used to set spending limits, and in 2008, we raised the issue as a matter for Congress to consider. CMS has taken a number of steps in the last several years to update and make public its policies for setting spending limits, but has not yet taken action to make public the basis of spending limits. CMS Decision to Increase Spending Limit for a Funding Pool in Florida’s Medicaid Section 1115 Demonstration In letters to Florida, CMS wrote: April 14, 2015: “…over time, CMS has had a number of concerns about the LIP , including its lack of transparency, encouragement toward overreliance on supplemental payments, and distribution of funds based on providers’ access to local revenue instead of service to Medicaid patients. Last year, CMS made clear that LIP would not continue in its current form….We will approach review of a LIP proposal from Florida based on several key principles. First, coverage rather than uncompensated care pools is the best way to secure affordable access to health care for low-income individuals, and uncompensated care pool funding should not pay for costs that would be covered in a Medicaid expansion.…” October 15, 2015: “…Pursuant to our June 23, 2015 agreement in principle, establishing the size, duration, and distribution methodology for the Low Income Pool (LIP)…The total computable dollar limit in demonstration year 10 (2015-2016) will be $1 billion. In demonstration year 11 (2016-2017) the total computable dollar limit will be $607,825,452…” August 3, 2017: “For the extension, CMS has established an amount for the low-income pool’s (LIP) uncompensated care pool to be approximately $1.5 billion annually, based on the most recent available data on hospitals’ charity care costs.” Inconsistency in CMS’s Review of Applications for Compliance with Transparency Requirements Finally, we observed some inconsistencies in CMS’s reviews of states’ applications for their compliance with the transparency requirements for new demonstrations and extensions. Expected changes in enrollment were not always included in state public notices. In two of the four applications for new demonstrations and extensions for which we conducted in-depth reviews (Florida’s extension and Washington’s new demonstration), estimates for the expected increase or decrease in enrollment were not included in the state’s public notice documents as required. CMS officials told us that they are revising procedures to resolve such inconsistencies, including making additions to written standard operating procedures. Evaluation information was not always included in state applications. Although states seeking extensions are required to submit an interim evaluation report, Florida only included a statement in its application that it had recently executed an evaluation contract and had no findings to report. According to CMS, Florida’s evaluation design was not approved until weeks before the extension application was due. Despite not having information on whether Florida’s demonstration was meeting its goals, CMS officials considered the state’s application complete, stating that Florida had met the intent of the regulation by providing its findings to date. In 2018, we reported that there were limitations in state evaluations of demonstrations, in part, due to how CMS sets requirements for evaluations, and we made a recommendation to improve CMS’s procedures. In line with our recommendation, CMS has since developed an enhanced set of STCs that specify when evaluation reports are due, and reported in November 2018 that it is in the process of developing protocols to ensure that these requirements are consistently included in the STCs. CMS Applies Limited Transparency Requirements in Approving States’ Amendments to Existing Demonstrations Transparency Requirements for Amendments Applications for amendments to Medicaid section 1115 demonstrations are subject to requirements for seeking public input outlined in guidance the Department of Health and Human Services (HHS) issued in 1994 and those included in the special terms and conditions governing each demonstration. CMS applies limited transparency requirements to states’ applications to amend existing demonstrations, despite the fact that states may propose significant changes to demonstrations through amendments (see sidebar). CMS does not place limits on what changes can be made through amendments. From January 2017 through May 2018, CMS approved 21 amendments in 17 states, and we found that at least 17 amendment applications were pending CMS approval as of January 2019. These 17 states made a wide range of changes to their demonstrations through amendments. For example, one state amended its demonstration to cover dental services for adults with disabilities, while other amendments included such changes as requiring beneficiaries to work or participate in community engagement activities as a condition of maintaining Medicaid eligibility, as was done through amendments in Arkansas and New Hampshire during the period we reviewed. As it does with applications for new demonstrations and extensions, CMS reviews amendment applications by using a checklist, conducting a federal public comment period, and posting state demonstration documentation on the CMS website. However, the transparency requirements for amendments applied during the checklist review are more limited than the requirements for new demonstrations and extensions. (See fig. 5.) The transparency requirements for amendment applications are more limited than those for new demonstrations and extensions in the following key areas, potentially limiting CMS’s ability to ensure public transparency for the approvals of amendments. No requirement to hold a state public comment process or provide CMS a summary of public input received. For amendments, states have a range of options for seeking public input and, unlike for new and extension applications, states are not required to submit a summary of the public input received on their applications and how they responded. Instead, in amendment applications, states are only required to describe the process the state used to solicit public input. Among the three amendment approvals for which we conducted an in-depth review, California did not hold a formal public comment period and did not provide CMS information on any public input it received, neither of which is required under the transparency requirements for amendments. No requirement to include expected changes in enrollment and costs. In contrast with requirements for new demonstrations and extensions, CMS does not require states to include in amendment applications the expected increase or decrease in enrollment, and the amendment applications we reviewed included limited or no information on changes to enrollment. (See text box.) CMS also does not require information on expected changes in costs for all amendments, and we found variation in the information included in amendment applications, including limited or no information on costs. No minimum requirements for information to be included in the public notice. Unlike the transparency requirements for new demonstrations and extensions, there are no requirements specifying what information states must include in their public notices for amendments. For example, Arkansas did not include in its public notice information on the changes to enrollment estimated from any of the amendment provisions. In addition to the differences in the transparency requirements for amendment applications, we identified inconsistencies in how CMS applied the transparency requirements for amendment applications across states, particularly the requirements related to describing changes to the demonstration evaluations. For amendments, as is similar to extensions, states are required to describe how the demonstration’s evaluation will be revised to incorporate amendment provisions. The following are examples of the inconsistencies: CMS determined that Massachusetts’s amendment application, which proposed to waive non-emergency medical transport, eliminate provisional eligibility for most populations, and cover former foster care youth, was determined to be incomplete (that is, not in compliance with the transparency requirements), partially due to the state not submitting a revised evaluation design plan. In contrast, CMS determined that Arkansas’s application, which did not include a revised evaluation design plan, was complete. Arkansas noted in its application that the state planned to revise its evaluation to test two additional hypotheses. However, the added hypotheses did not address, for example, the waiver for retroactive eligibility proposed in the application. Among the 18 other demonstration amendment applications CMS approved during our review period, there was variation in the information the states included about the changes to the demonstration’s evaluation hypotheses or design. For example: Iowa submitted an amendment application, which CMS determined to be in compliance with transparency requirements, to waive retroactive eligibility for all beneficiaries, and said that it was not changing the evaluation design based on the amendment provisions. In at least two other states’ amendments—Florida and Utah—the applications, which CMS determined to be in compliance with transparency requirements, did not include any information on the changes to the evaluation due to the amendment or indicated that the state would be making changes at a later date. The potential effects of policy changes states make through amendments can be comparable to effects of new demonstrations and extensions. CMS has considered taking further steps to ensure transparency for amendments, but has not done so. Specifically, in both its response to comments in the 2012 final rule and a subsequent letter to state Medicaid directors in 2012, CMS indicated that the agency intended to evaluate the types of amendments submitted by states and issue further guidance on how the notice and comment provisions would be applied to amendments that have a significant impact. However, CMS did not issue such guidance and officials told us that they had no plans to do so. CMS officials told us that including standard requirements in demonstration STCs for submitting amendment applications helps improve the transparency of amendments. However, the standard requirements that CMS has included do not ensure that states provide information to the public or CMS on the effect of an amendment on enrollment and costs, key pieces of information for amendments that have and may continue to have a significant impact. According to federal standards for internal controls related to risk assessment, federal agencies should identify and manage risks related to achieving agency objectives. Without a policy with robust transparency requirements for amendment applications with significant impacts, there is the potential that states and CMS will fail to receive meaningful public input on the amendment and thereby lack complete understanding of the impact. As a result, CMS may not be positioned to mitigate any potential risks in the demonstrations being amended or when other states request to test similar policies in the future. CMS Has Used Public Input in Making Demonstration Approval Decisions, but the Extent to Which Input Influenced Monitoring and Evaluations Was Not Always Clear CMS Reviewed Comments Received through the State and Federal Public Input Process for its Approval Decisions, and in Some Cases Approved Changes Consistent with the Comments CMS reviewed state descriptions of issues raised during the state public input process and the state’s response as part of its application review. Applications for six of the seven approvals for which we conducted in- depth reviews summarized themes from the comments that were received and included the states’ responses to these comments. State responses included laying out changes the state made to the proposal in response to the comments, clarifying certain aspects of the proposed demonstration, or providing justification for not making a change. However, the level of detail in state summaries of their responses to these comments varied considerably. For example: Washington application for new demonstration. Washington provided an extensive summary of the comments received, categorized by themes, along with the state’s responses to each of them. One commenter suggested a 1-year implementation period to ensure that sufficient planning and preparations were undertaken before the new demonstration officially went into effect. The state agreed that this was “essential to assure operational readiness and critical success of this demonstration,” and revised its proposal to include a 9-month implementation period. Florida application to extend demonstration. In contrast to Washington, Florida’s application to extend its managed care program provided a long list of state comments and nearly all were addressed with a standard response from the state that the comments were taken into consideration, but no changes to the existing STCs were being requested. These included concerns about access and choice under current pharmacy networks, and other access issues such as difficulties in obtaining referrals to specialists. Florida officials told us that they addressed stakeholder concerns through the state public comment process, which includes public forums, and that they are not necessarily required to provide any additional explanation in the state’s application to CMS. Florida officials also stated that some demonstration elements stem from state legislation, which limits their ability to make changes in response to comments. According to CMS officials, historically, the agency has not requested the full set of comments that are submitted to the states. None of the states that we reviewed attached the actual comments that were received to the application—only summaries—though some posted them on their website or had them available upon request, according to state officials. CMS officials told us the agency has not consistently requested that states provide the actual comments received; however, in the last year and a half the agency has been making more of an effort to request the full set of comments instead of solely relying on the summaries provided in the applications. Officials said they anticipate that this will be the agency’s standard practice going forward. In making demonstration decisions, CMS reviews and summarizes all input received during the federal comment period. CMS created a summary of comments received for all seven of the demonstrations we reviewed. Officials said that these summaries are used to brief CMS leadership as part of the decision-making process. We found that the level of detail in the summaries we reviewed varied, ranging from bulleted lists identifying and detailing common themes in support, opposition, or both, to a few brief sentences covering all comments. This variation often reflected the differences in the number of comments received and the significance of the concerns raised. For example: CMS received about 100 comments on Washington’s application during the federal comment period that were predominantly supportive of the new demonstration, and CMS’s summary was a brief overview. In contrast, CMS received thousands of comments on Kentucky’s application for each of the three federal comment periods held for that new demonstration, with many opposed to or concerned with certain aspects of the application. CMS’s summaries of comments received on the Kentucky application provided an overview of the issues raised, along with counts of how many fell within different themes and how many were in support, opposition, or unrelated to what was being proposed. CMS officials explained that there are unique circumstances surrounding each demonstration—a comment period with many concerns raised or conflicting viewpoints will necessitate a longer and more detailed summary than one that has broad support and few, if any, areas of disagreement. We found instances where CMS approved changes to certain aspects of the demonstrations that were in line with concerns raised by the comments. Among the seven demonstrations we reviewed in-depth, CMS received comments for four demonstrations that included concerns about the state’s proposal: Arkansas, Indiana, Kentucky, and Massachusetts. For Arkansas and Kentucky, CMS either approved more limited changes than what the state initially proposed or required that certain beneficiary protections be in place. Arkansas: In its amendment application, Arkansas requested a waiver of the requirement to provide retroactive eligibility, among other things. Commenters were concerned that the state’s proposal to eliminate retroactive eligibility would result in gaps in coverage, adverse health outcomes, and medical debt for members. In CMS’s approval, the agency acknowledged these concerns and allowed the state to reduce the period for retroactive eligibility from 90 days to 30 days but not eliminate it completely. (See fig. 6.) Kentucky: In Kentucky, some commenters were concerned about the state’s proposal to implement a work and community engagement requirement as a condition of Medicaid eligibility, noting that individuals need to be healthy to work or look for a job. CMS said in its January 2018 approval that Kentucky was exempting medically frail individuals from this requirement, but CMS would also be requiring that the state add certain protections for vulnerable individuals, including maintaining a system that identifies, validates, and provides reasonable accommodations. We also found there were instances where CMS approved certain aspects of the demonstrations despite concerns raised by the comments. CMS’s rationale for those decisions varied across demonstrations. For example, CMS noted in one instance that sufficient controls were planned to address the concerns raised, and in another instance noted that the potential benefits of the demonstrations outweighed the risks. The following are examples of when CMS approved aspects of states’ demonstrations without changes. Arkansas: In Arkansas, some commenters were opposed to the enforcement mechanism for the state’s proposal to institute a work and community engagement requirement as a condition of maintaining eligibility. The state proposed to disenroll beneficiaries who fail to fulfill these requirements for any 3 months during a calendar year and lock them out from coverage until the start of the next calendar year. CMS approved this proposal and provided an explanation of the circumstances under which it would happen, underscoring that individuals have three opportunities (each of the months they fail to fulfill the requirements) to rectify the situation or seek an exemption before they would ultimately lose coverage. CMS indicated in the approval letter to Arkansas that it believed the health benefits of community engagement outweigh the health risks with respect to those who fail to respond. Indiana: In Indiana, some commenters were opposed to the state’s proposal to institute a work and community engagement requirement as a condition of maintaining eligibility. They argued, in part, that beneficiaries who are able to work are already doing so and the requirement is unnecessarily burdensome. CMS responded that employment is positively correlated with health outcomes and imposing these requirements serves the purposes of the Medicaid statute. (See fig. 7.) In an effort to improve transparency around its approvals, CMS began providing a high-level summary and response to public comments in the demonstration approval letters beginning in January 2018. Agency officials said this will be their standard practice going forward. Our review of the approval letters sent between January 1, 2018, and July 31, 2018, confirmed that CMS included a discussion of some of the issues that were raised in 10 of 11 letters. For example, the approval letters explained the decision to reduce the period of retroactive eligibility in Arkansas instead of eliminating it completely, as well as the decision to approve Indiana’s proposal to implement work and community engagement requirements. However, the approval letters do not respond to every concern raised. For example, a number of commenters were concerned with a request in Arkansas’s amendment application to no longer offer presumptive eligibility, but CMS did not respond to these concerns in the approval letter. CMS officials told us that the agency is striking a balance between transparency and processing applications in a timely manner. The Extent to Which CMS Used Public Comments to Inform Monitoring and Evaluation Decisions Was Not Always Clear Among the four demonstration approvals for which we conducted in-depth reviews and where public comments raised concerns—approvals for Arkansas, Indiana, Kentucky, and Massachusetts—we observed instances where CMS added specific monitoring requirements to the STCs that aligned with these concerns and other cases where the agency did not. For example: The STCs required Arkansas to submit a monitoring plan for its work and community engagement requirement in order to monitor eligibility operations and the impact on beneficiaries reapplying for coverage after being disenrolled for noncompliance. In contrast, CMS did not require a monitoring plan for the Indiana and Kentucky demonstrations, which also included work and community engagement requirements where the public raised concerns about the effects on beneficiaries. This remains the case for Indiana; however, CMS’s new approval of Kentucky’s demonstration in November 2018 included additional monitoring requirements. Specifically, the November 2018 STCs required Kentucky to submit a monitoring protocol that includes measures for monitoring enrollment, disenrollment, and eligibility suspension, among other things. In other cases where public comments raised concerns about the impact of demonstrations on beneficiaries, including changes in eligibility requirements (e.g., retroactive eligibility), we did not observe specific monitoring requirements included in the STCs. Though CMS did not provide any specific examples, officials told us that they consider public input when making decisions about monitoring requirements. Officials also said they were developing monitoring metrics and tools that they plan to use consistently going forward for states implementing work and community engagement requirements. As of January 2019, officials said these materials were in draft form and under review. Regarding evaluations, the extent to which CMS considered concerns raised through public comments for the four demonstration approvals was also not always clear, including how input informed the evaluation requirements in the STCs. For example, commenters on the applications submitted by Indiana and Kentucky raised concerns about aspects of the work and community engagement requirements proposed by each state, such as the requirements for reporting work or other activities and the circumstances under which beneficiaries would lose coverage. In the STCs for Indiana, CMS did not include specific hypotheses that the state would be required to test related to its work and community engagement policies. Instead, CMS noted that the state’s goals should inform the evaluation, subject to CMS approval. For example, Indiana’s goals included determining whether implementing work and community engagement requirements will lead to sustainable employment and improved health outcomes among beneficiaries. In the STCs for Kentucky’s initial approval in January 2018, CMS included the same language as in Indiana—that the goals should inform the state’s evaluation. However, in the STCs approved for Kentucky in November 2018, CMS added some broad guidance for Kentucky’s draft evaluation design. Specifically, CMS included a variety of hypotheses that the state must evaluate, such as the effect of work requirements on enrollment and the impact of the demonstration on uncompensated care costs. When approving evaluation designs, the extent to which CMS considers areas of risk identified through public input is also unclear at this time. As of January 2019, evaluation designs for the Arkansas and Indiana demonstrations were under review at CMS and Kentucky had not yet submitted one. Regarding Arkansas’s evaluation design, CMS sent a letter to the state providing comments and feedback that seem to align with some of the concerns raised about the demonstration through public input. Specifically, the November 2018 letter from CMS raised concerns with the state’s “broadly defined” expected outcomes of the demonstration, which included culture of work and personal life stability. CMS recommended that the state revise the design to include a list of quantifiable outcomes and measures that capture the important features, such as increased employment (e.g., hours worked, wages) and improved health (e.g., health care utilization). For Massachusetts, the one demonstration with an approved evaluation design, the extent to which CMS considered public input during approval was unclear. For example, with regard to Massachusetts’s proposal to discontinue provisional eligibility for most adults, commenters raised concerns about the potential effects on beneficiaries’ timely access to coverage and care; however, the evaluation design did not include plans to examine the effects of the policy on beneficiaries. Though CMS did not provide specific examples of how public input had informed evaluation designs, CMS officials said requirements for evaluations have been evolving as they have gained experience in understanding the public’s concerns. Officials also said they were developing robust evaluation guidance that they plan to use consistently going forward for states implementing work and community engagement requirements. As of January 2019, officials said this guidance was in draft form and under review. Conclusions While CMS has long recognized the importance of public input in the demonstration approval process, the agency has developed more robust procedures for ensuring transparency since the beginning of 2012. Despite this progress, CMS’s approach to ensuring transparency when states propose major changes to their demonstrations has significant gaps. The lack of policies for ensuring transparency when states make major changes to pending applications and limited transparency requirements applied for amendments—which are being used by some states to make major changes to their demonstrations—puts CMS’s goal of transparency at risk. These gaps may leave the agency and the public without key information to fully understand the potential impact of the changes being proposed, including on beneficiaries and costs. These risks take on increased importance given that CMS is encouraging states to use the flexibility provided under demonstrations to test changes to their Medicaid programs that could have significant effects for beneficiaries and other stakeholders. Recommendations for Executive Action We are making the following two recommendations to CMS: The Administrator of CMS should develop and communicate a policy that defines when changes to a pending section 1115 demonstration application are considered major and should prompt a new review of the application against the transparency requirements applicable to the pending application. (Recommendation 1) The Administrator of CMS should develop and communicate a policy whereby applications for section 1115 demonstration amendments that may have significant impact are subject to transparency requirements comparable to those for new demonstrations and extensions. (Recommendation 2) Agency Comments and Our Evaluation We provided a draft of this report to HHS for review and comment. HHS concurred with both recommendations. HHS’s comments are reproduced in appendix III. Regarding our first recommendation concerning when states submit major changes to pending demonstration applications, HHS stated that it will develop (1) standards for determining when such changes are so substantial that it would be appropriate for HHS to solicit additional public input, and (2) a process for informing states and the public about the additional comment period. These steps appear to formalize the approach CMS has already been taking as demonstrated by the agency’s response to the changes submitted by Indiana and Kentucky to their applications. Our recommendation, however, requires additional actions. In particular, we recommended that CMS develop and communicate a policy that includes standards for when changes are substantial enough to warrant a new review of the application against the transparency requirements. The transparency requirements, among other things, call for states to provide for public notice and input at the state level before they submit their applications. As such, holding an additional federal comment period would not be sufficient to meet our concerns. Regarding our second recommendation—concerning transparency requirements for amendment applications that may have significant impacts—HHS said that it has implemented enhanced processes to improve transparency and will review its current processes and develop additional policies and processes, as needed, to enhance the transparency of such applications. However, the enhanced processes HHS referred to do not apply to amendments. Thus, HHS’s planned review of its policies alone would not be sufficient to meet our concerns. HHS’s efforts should also result in actions to develop and communicate a policy that ensures amendments with significant impacts meet transparency requirements comparable to those for other applications, namely new demonstrations and extensions. 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 IV. Appendix I: Information about Selected Medicaid Section 1115 Demonstration Approvals, January 2017–May 2018 Florida Massachusetts Washington Appendix II: Federal Spending for Medicaid Section 1115 Demonstrations, by State, Federal Fiscal Year 2016 State Total Medicaid expenditures (dollars in millions) State Total Medicaid expenditures (dollars in millions) Appendix III: Comments from the Department of Health and Human Services Appendix IV: GAO Contact and Staff Acknowledgements Staff Acknowledgements In addition to the contact named above, Susan Barnidge (Assistant Director), Linda McIver (Analyst-in-Charge), Michael Moran, and Jessica L. Preston made key contributions to this report. Also contributing were Drew Long, Vikki Porter, and Emily Wilson.


Background Medicaid Section 1115 Demonstrations 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. Work Requirements 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 Oversight of Administrative Costs 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. Medicaid Services. | GAO-20-149. 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. Conclusions 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. Recommendation for Executive Action 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) Agency Comments and Our Evaluation 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 GAO Contact 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. Related GAO Reports 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.