Medicaid Rates for Residential Habilitation Services Provided at New York State-Operated Residences Are Excessive

Payment rates for residential habilitation services provided at State-operated residences did not meet the Federal requirement that payment for services be consistent with efficiency and economy. Specifically, for State fiscal year 2010, Federal Medicaid payments exceeded actual costs for providing these services by approximately $320 million (57 percent more than actual costs). Further, the payment rate for supervised residential habilitation services at State-operated residences was more than double the average rate for privately operated residences that offered the same services.

We also determined that if New York had used the prior year's actual costs in calculating payment rates for residential habilitation services, its State fiscal year 2011 total reimbursement would have been approximately $692 million ($346 million Federal share) less than what it claimed.

Payment rates for residential habilitation services were significantly higher because CMS did not adequately consider the appropriateness of Office for People With Developmental Disabilities (OPWDD's) rate-setting methodology when it approved New York's waiver agreement. Specifically, CMS approved the Department of Health (DOH's) application for its waiver even though the application did not describe in detail the methodology that DOH used to calculate the payment rates for State-operated residences. According to New York officials, that methodology used the prior year's adjusted payment rates, which were calculated using reimbursable costs rather than actual costs, to determine payment rates for the current year.

We recommended that CMS work with New York to ensure that the methodology used to set payment rates for State-operated residences meets the Federal requirement that payment for services be consistent with efficiency and economy. Use of payment rates based on actual costs would have saved the Federal Medicaid program approximately $346 million in State fiscal year 2011 and may result in similar savings annually. DOH stated that it, along with OPWDD, has taken aggressive actions to address the issues we raised. CMS concurred with our recommendation.