Audit of California's Medicaid Selective Provider Contracting Program, July 1, 1998 Through June 30, 2002

EXECUTIVE SUMMARY:

In California, a portion of the Medicaid program was operated under a Federal waiver known as the Selective Provider Contracting Program (program).  The program allowed  the State to contract with selected hospitals to provide inpatient services to Medicaid patients at negotiated rates of reimbursement.  The negotiated rates were typically less than hospitals would have received under traditional Medicaid rules.  The State used these lower rates to project savings under the waiver.  Based on the savings projected, the State made supplemental payments to hospitals requesting additional funding.  For our audit period, July 1, 1998 through June 30, 2002, the State projected program savings of $7 billion (direct savings of $4.8 billion and indirect savings of $2.2 billion) and made supplemental payments of $6.2 billion.

Our audit objectives were to evaluate the reasonableness of the methodologies the State used to project program savings and the adequacy of the State's support documentation for its savings projections.  We found that the State's projection methodologies contained errors.  As a result, the State's direct and indirect savings were overstated.  In addition, the State did not maintain adequate documentation to support its savings projections.  Because the savings projections were inaccurate and inadequately documented, the State could not demonstrate the program's cost-effectiveness as required by the waiver.  We recommended that the State:  (1) develop appropriate projection methodologies to address the concerns raised in this report; (2) recalculate projected program savings for the 4-year period ended June 30, 2002; (3) determine whether supplemental payments exceeded recalculated savings and refund the appropriate Federal share; and (4) ensure that adequate documentation is maintained to support savings projections for the 4-year period ended June 30, 2002 and all subsequent period of the waiver.