Reform Update: Medicaid pilot projects cost $32 billion more than expected, GAO says

HHS has allowed states to spend billions more on Medicaid pilot projects in recent years than the agency's own rules allow, and the problem may grow in the future, according to a new federal audit.

States regularly apply for approval of so-called demonstration projects that provide Medicaid coverage or services to populations beyond those required by federal rules. A key factor determining whether the demonstrations are approved is whether they are budget-neutral—in other words they will not cost more than the program would have spent without the pilot.

But those HHS budget-neutrality calculations are so inaccurate that the department has allowed four states in recent years to spend $32 billion more on demonstrations than their Medicaid programs would have spent otherwise, according to a recent report from the nonpartisan Government Accountability Office (PDF).

On so-called budget-neutrality, “neither the policy, nor HHS' implementation of it, ensures the prudent stewardship of federal Medicaid spending,” the report concluded.

HHS disagreed with the auditors' assessment, insisting that its own projections of state spending were accurate.

This seemingly arcane accounting question could carry huge additional costs for the federal government, as states continue to have waivers approved for projects affecting massive numbers of people—all premised on their ability to stay within their existing spending arc. The federal government matches state spending in the $437 billion program at an average rate of 57%.

"The GAO report makes clear that the Obama administration has a great deal of authority under current law to engage in all manner of creative financing that is not budget-neutral,” said Ben Domenech, a research fellow at the conservative Heartland Institute. “This creates a huge loophole that can be used by CMS to unilaterally increase entitlement spending in Medicaid, and state politicians are happy to take advantage of it.”

The federal government continued to approve major waivers after the time frame studied by the GAO report, including a large Florida waiver in June to place 2.9 million beneficiaries in managed care.

The waiver problem goes beyond HHS projections, said Devon Herrick, a senior fellow at the conservative National Center for Policy Analysis. Spending in states that have gotten Medicaid waivers will generally outstrip estimates because states don't have to cover any cost overruns.

“There needs to be a consequence for the states or they're not going to make the hard decisions to control costs, such as cutting politically powerful providers,” Herrick said.

The demonstration projects are expected to accelerate in 2017, when the Patient Protection and Affordable Care Act authorizes expanded federal matching funds when such waivers are used to restructure states' Medicaid programs.

But the challenge of accurately determining budget-neutrality for future waivers is expected to grow more complicated, according to Joy Johnson Wilson, director of health policy for the National Conference of State Legislatures. Designing a budget-neutral program requires a spending baseline, which the range of federal Medicaid changes in recent years—including a historic 2014 eligibility expansion in about half of the states—have clouded.

“Going forward, it's a lot more complicated to determine budget-neutrality,” Wilson said.

Illinois on Monday became one of the last Democratic-led states to enact legislation authorizing a Medicaid expansion, according to the Associated Press.

Democratic Gov. Pat Quinn signed the state legislation into law, which will allow an estimated 342,000 Illinois residents to enroll by 2017.

The expansion is expected to reduce use of emergency rooms as a primary source of care and improve efforts to prevent illnesses, according to proponents such as the state's hospitals.

Many Republicans opposed it over worries about future funding and long-term sustainability.

Illinois has lagged slightly behind other Democratic-led states in carrying out Obama's cornerstone domestic achievement. After a highly contentious session that failed to produce action on a number of major issues, lawmakers in the Democratic-controlled Legislature adjourned earlier this summer without approving a bill to establish a state-run health insurance exchange—another central pillar of the 2010 healthcare overhaul. At this point Illinois will operate part of its exchange in partnership with the federal government.

Idaho Medicaid officials have begun quietly collecting information from insurers in case the Republican-controlled Legislature changes its mind and approves an expansion in that state as allowed under the federal healthcare reform law, according to the Associated Press.

The Idaho Department of Health and Welfare's effort to prepare for a possible change of heart by legislators and Republican Gov. Butch Otter on expanding Medicaid eligibility to about 104,000 Idahoans has led it to ask private insurers for details on how they would provide that coverage.

Otter balked at any expansion before the program is revamped to ensure any new recipients take more financial responsibility and make good healthcare choices.

Among details the Department of Health and Welfare aims to collect from insurers is the feasibility of letting beneficiaries in an expanded program buy private coverage on the state's new, federally operated health insurance exchange. Such an approach has been proposed in other Republican-controlled states to mollify conservative opposition to any expansion of the government-run Medicaid program.

Follow Rich Daly on Twitter: @MHrdaly