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Department of Health and Human Services

Office of Inspector General -- AUDIT

"Audit of California's Section 1115 Medicaid Demonstration Project Extension for Los Angeles County," (A-09-04-00038)

October 24, 2006

PDF File Complete Text of Report is available in PDF format (635 kb). Copies can also be obtained by contacting the Office of Public Affairs at 202-619-1343.


Under section 1115 of the Social Security Act, CMS may waive compliance with certain requirements of Medicaid law to enable States to carry out demonstration projects and receive Federal funds. Our objective was to determine, for State fiscal years 2001 through 2004, whether the State followed the requirements of the project extension agreement when claiming Federal Ambulatory Service Costs (Ambulatory) and Supplemental Project Pool (Supplemental) funds and adequately supported the costs claimed.

The State followed the requirements of the project extension agreement when claiming Federal Ambulatory and Supplemental funds and adequately supported the costs claimed for outpatient clinic services under both components. However, the County could not identify approximately $549.8 million (approximately $285.2 Federal share) in claimed Supplemental expenditures with specific costs incurred.

The project extension agreement did not require that claimed Supplemental expenditures be based on costs incurred by the County or State for specific services, supplies, or equipment. An agreement for a federally funded project should contain an accountability requirement to ensure that Federal funds are spent in accordance with the purposes of the project. Without such a requirement, there was no assurance that the County used the approximately $549.8 million in Supplemental funding for the intended purposes. County documentation indicated that Supplemental disbursements had contributed to a reserve fund of approximately $306.4 million accumulated by the County Department of Health Services.

Given our finding that the County placed a significant portion of Federal funds in a reserve account, we recommended that CMS, in future demonstration project agreements with California and the County, deny or limit such use of Federal funds. We also recommended that if CMS approves future section 1115 agreements, it require documentation by the State and County for claimed expenditures. CMS agreed with our recommendations.