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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Review of Medicaid Enhanced Payments to Local Public Providers and the Use of Intergovernmental Transfers," (A-03-00-00216)

September 11, 2001

Complete Text of Report is available in PDF format (1.1 MB). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


This final summary report points out practices by States that, if not brought under control, threaten the financial stability of the Medicaid program. For Fiscal Year 2000, 28 States made or had planned to make at least $10.3 billion in Medicaid enhanced payments which included $5.8 billion in Federal matching funds. Our audits in six States showed enhanced payments to local government providers were not based on the actual cost of providing services. Also, many of the enhanced payments were not retained by the facilities to provide services to Medicaid beneficiaries. Instead, some or most of the funds were transferred back to the States for other uses. In effect, the States had designed financing mechanisms to maximize Federal/Medicaid reimbursements by partly circumventing the requirement that expenditures be a shared Federal/State responsibility. The States were the clear winners because they were able to reduce their share of Medicaid costs and cause the Federal Government to pay significantly more than it should for the same volume and level of Medicaid services. The Centers for Medicare and Medicaid Services (CMS), based on our recommendations, has taken action to revise Medicaid regulations to mitigate this problem (savings will total about $55 billion over 10 years). However, additional actions, partly agreed to by CMS, are needed to further alleviate the adverse effects of the States’ financial manipulation of the Medicaid program. In this final report our recommendations specify, and call for such actions.