Arizona Improperly Claimed Federal Reimbursement for Medicaid School-Based Administrative Costs

The Arizona Health Care Cost Containment System Administration (State agency) did not always maintain required documentation to support the random moment timestudy (RMTS) methodology used to allocate school-based administrative costs to the Medicaid program, and the RMTS methodology was not fully consistent with Federal requirements. Of the $30.5 million (Federal share) claimed, we determined that $11.7 million was unallowable, and we set aside the remaining $18.8 million for CMS resolution.

Federal law provides for States to be reimbursed for administrative activities that directly support identifying and enrolling potentially eligible children in Medicaid. The Federal reimbursement is 50 percent of allowable administrative expenses. According to Federal regulations, the RMTS is one acceptable method for allocating employees' salaries and wages to Medicaid.

For 2 of the 19 quarters, the State agency did not maintain required documentation to support (1) the universes of total available moments in time and RMTS participants and/or (2) the sample of random moments for selected participants. For the remaining 17 quarters, the State agency's RMTS methodology was not fully consistent with Federal requirements. The State agency did not have adequate controls to ensure that it maintained all required documentation to support the RMTS methodology and that the RMTS methodology was consistent with Federal requirements. In addition, the 2004 State guide included incorrect guidance that allowed its contractor to discard sample items.

We recommended that the State agency (1) refund to the Federal Government $11.7 million for unallowable school-based administrative costs, (2) work with CMS to determine the allowability of $18.8 million that we set aside and refund to the Federal Government any amount determined to be unallowable, (3) strengthen controls to ensure that all required documentation to support the RMTS methodology is maintained and the RMTS methodology is consistent with Federal requirements, and (4) review periods after our audit period and make appropriate financial adjustments for any unallowable school-based administrative costs claimed. The State agency concurred with our third and fourth recommendations but did not concur with our recommendation to refund $11.7 million. In response to our recommendation regarding a set-aside amount, the State agency commented that it explicitly reserved the right to contest our finding in any action taken by CMS.