Review of Medicaid Enhanced Payments to Public Hospital Providers and the Use of Intergovernmental Transfers by the Alabama State Medicaid Agency

EXECUTIVE SUMMARY:

This final report points out a method used by Alabama to obtain additional Federal funds by circumventing the requirement that Medicaid expenditures be a shared Federal/State responsibility. From October 1996 through July 2000, Alabama made enhanced payments to State-owned and locally-owned inpatient hospitals totaling about $432 million (Federal share $302 million). Of the Federal share, the hospitals retained about $216 million and returned about $86 million (28.5 percent) to the State agency. Contrary to the spirit of Medicaid's State/Federal matching requirements, the State, in effect, developed a mechanism to receive additional Federal funds without committing its share of required matching funds. Because 28.5 percent of the Federal funds were returned to the State, it did not appear that the State actually incurred an expense related to the enhanced payments. This condition raises the question of whether the amounts paid back to the State agency by the hospitals constituted a refund required to be reported as a collection and offset against expenditures reported to the Health Care Financing Administration (HCFA). Among other things, we recommended that HCFA take action to limit the present manipulation of the upper payment limits requirement and corresponding abuses of the Medicaid enhanced payments provisions. The HCFA concurred and to address the problem has issued revised regulations. We estimate the Federal Government will save about $18.8 million in Alabama through October 1, 2005 due to the revised regulations.