By Rebecca Mayo, J.D.
Administrative costs for implementing Medicaid work requirement programs in five states varied from under $10 million to over $250 million and these costs were not considered in the approval process.
The Government Accountability Office (GAO) reviewed the costs associated with implementing Medicaid work requirements in the first five states with approved demonstrations and discovered substantial and widely varying costs across the states. It also found weaknesses within CMS’s oversight of the administrative costs, such as no consideration of administrative costs during the approval process and that current procedures may be insufficient to ensure that costs are allowable and matched at the correct rate (GAO Report, GAO-20-149, October 1, 2019).
Work requirement demonstrations. In January 2018, CMS announced a new policy to support states interested in using demonstrations to make participation in work or community engagement a requirement to maintain Medicaid eligibility or coverage. Since then, about one-third of states have either received CMS approval or submitted applications to CMS to test work requirements in their demonstrations. The GAO found that states took different approaches in designing their work requirements. As of May 2019, the nine states with approved work requirements all varied in the age and eligibility groups subject to work requirements, as well as the number of hours required and frequency of required reporting.
Administrative cost funding. Implementing work requirements can involve an array of administrative activities by states, which can increase costs of the programs. In general CMS provides federal funds for 50 percent of state Medicaid administrative costs. States may also receive federal funds for administrative activities through the Federal Medical Assistance Percentage (FMAP), which typically ranges from 50 percent to 76 percent with some exceptions. States that chose to expand Medicaid under the Patient Protection and Affordable Care Act receive a higher FMAP for newly eligible adults. Additionally, CMS has administrative costs associated with overseeing these demonstrations. The GAO was tasked with reviewing the administrative costs of demonstrations with work requirements.
Cost estimates. The estimated costs to implement the work requirements varied considerably among the five selected states with estimates ranging from under $10 million to over $250 million. These estimates were compiled by the states and may vary due to several factors, including planned IT system changes and the number of Medicaid beneficiaries subject to the work requirements. These estimates did not include all expected costs such as the costs associated with having managed care organizations or other health plans to help administer work requirements. They also did not include all ongoing costs that they expected to incur after the up-front costs and initial expenditures related to implementing the programs. Additionally, there were costs to states that were not covered by Medicaid, such as increasing and training the workforce, or providing beneficiaries with job skills training, job search assistance, and other services. Though the states did expect to receive federal funds for the majority of their estimated costs and expenditures for implementing these programs.
CMS oversight. The GAO found that CMS’s demonstration approval process does not take into account the extent to which demonstrations will increase a state’s administrative costs. States are not required to provide projections of administrative costs in their application or include them in their cost projections, which are used by CMS to assess budget neutrality. Failing to take these costs in to consideration counter two key objectives of the demonstration approval process, which are transparency and budget neutrality. Although the administrative costs can be significant, CMS officials indicated that there was no plan to revise its formal process to require these estimated costs to be provided or account for the costs when CMS is assessing whether the demonstration is budget neutral.
The GAO found that three of the five states requested or received funding approval for planned IT costs to implement their demonstrations that did not appear to be allowable or at a higher matching rate than appropriate under CMS guidance. It also found that one state requested or planned to seek federal funds for beneficiary support costs that are not allowable until the GAO discovered the issue and notified CMS. The GAO also found that the three states who planned to require MCOs to perform a number of activities to implement work requirements planned to increase their capitalization payments, which receive at least a 90 percent federal matching rate. The GAO was unsure if this was allowable under current CMS regulations and guidance.
Recommendations. The GAO recommended that CMS require states to submit and make public projections of administrative costs when seeking approval of demonstrations. CMS should also account for the administrative costs of demonstrations when assessing whether demonstrations are budget neutral. Finally, CMS should assess the risks of providing federal funds for costs to administer work requirements that are not allowable and should respond to risks by improving oversight procedures.
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