Review of Medicaid Enhanced Payments to Hospitals and the Use of Intergovernmental Transfers in North Carolina

EXECUTIVE SUMMARY:

This final report points out that North Carolina used the enhanced payment provisions of the Medicaid program to develop a mechanism to receive additional Federal Medicaid funds by using disproportionate share hospital payments (which are Federal funds paid hospitals that serve a disproportionate number of low income patients) as the source of the State match for the enhanced payments, thus effectively reducing the State's matching share. In other words, the State's practice had the effect of using Federal funds to generate more Federal funds, thereby increasing the Federal share and decreasing the State share of hospital medical expenditures. For fiscal years 1996 through 1999 North Carolina made enhanced payments to hospitals totaling about $647 million, generating about $412 million in Federal funds. The hospitals retained the supplemental payments and used the funds to pay facility expenses. As in other States, we are recommending actions the Centers for Medicare and Medicaid Services need to take to place controls on the overall financing mechanisms States are using to circumvent the Medicaid program requirement that expenditures be a shared Federal/State responsibility.