Members of Congress are pushing to extend a moratorium on
several key Medicaid regulations, arguing that they would devastate
state Medicaid programs. However, these regulations would serve to
eliminate any ambiguity in the current law and prevent future fraud
and abuse. Congress should recognize the importance of these
regulations and go even further to promote accountability and
transparency in Medicaid.
For years, the Government Accountability Office (GAO) has called
on the federal government to improve oversight of state efforts to
maximize federal reimbursement under Medicaid. The Centers for
Medicare and Medicaid Services (CMS) has worked with the states to
address many of these inappropriate schemes. The regulations in
question aim to close the loopholes on intergovernmental transfers,
rehabilitation services/targeted case management, school-based
services and administrative costs, and graduate medical
Problems with Medicaid Financing
Medicaid's open-ended financing structure encourages states to
maximize opportunities for federal contributions. States receive a
guaranteed federal matching rate for qualified Medicaid services
that ranges from 50 percent to 83 percent. For every dollar a state
spends, the federal government contributes between one and three
dollars. This generous and unlimited matching structure creates
perverse incentives for states to manipulate the system to their
own advantage while leaving federal taxpayers to foot the
What the Regulations Would Do
The current system has allowed some states to exploit the
Medicaid financing structure inappropriately. The CMS regulations
focus on ending questionable practices in the following key
- Intergovernmental Transfers (IGTs). Under this
scheme, states overpay for Medicaid services provided by certain
government facilities in order to capture more federal funds.
Typically, once these federal contributions have been received, a
portion of the Medicaid payments is returned to the state.
Therefore, states overcharge the federal government and use the
excess funds for other purposes. The CMS regulation would cap the
amount states could pay these providers at actual cost and enable
the federal government to recoup overpayments made under this
- Rehabilitation Services/Targeted Case
Management. Reports show that some states are charging
Medicaid for services that are not medically necessary or are using
federal payments to fund non-Medicaid services. The CMS regulation
would clarify the definition of covered services and would stop
federal payments for non-Medicaid services.
- School-Based Services and Administrative
Costs. States can use Medicaid to fund discrete services
provided in public schools. However, some states are overbilling
Medicaid for administrative costs and for school initiatives
completely unrelated to Medicaid. The CMS regulation would end
federal payments for excessive administrative overhead and for
certain transportation services outside the scope of Medicaid.
- Graduate Medical Education. States receive
federal Medicaid payments to help support graduate medical
education. Since these activities are not a direct Medicaid
service, the CMS regulations would eliminate these payments.
What Congress Should Do
First, Congress should allow regulations to move
forward. Congress should reject any attempt to further delay the
implementation of these regulations. Congress imposed the current
moratorium last year and has yet to propose any substantive
alternative solutions to address the exploitation of the federal
Medicaid matching rate. Under these regulations, the federal
government would continue to fund legitimate Medicaid services, and
states would be held accountable for paying their fair share.
Second, Congress should consider transferring
non-health services out of Medicaid. Congress could eliminate the
ambiguity of qualified Medicaid services by limiting the federal
matching rate to essential medical services. All other non-medical
support services-such as rehabilitation, transportation, and
school-based services-should be considered discretionary spending
and should be subject to debate as to whether the federal
government has responsibility to fund them.
Third, Congress should reform Medicaid and its
financing structure. As noted, the current federal matching rate
system and the open-ended entitlement structure encourage states to
manipulate the system to maximize federal contributions. Medicaid,
along with the other major entitlements, faces long-term fiscal
disaster. If Congress is serious about reforming the nature of
these entitlements, it could start by reforming the way the
Medicaid program is funded.
The result of state gimmicks is an inappropriate shift of costs
to federal taxpayers. Congress should reject any attempt to prevent
the CMS from implementing sound and sensible regulations. These
changes are a first step toward fixing the mismanagement of the
If Congress is serious about entitlement reform, it is time to
draw the line. Congress should go even further than these
regulations to promote accountability and transparency in Medicaid.
Policymakers should protect Medicaid funding for essential medical
services and reconsider the entire federal matching structure under
Owcharenko is Senior Policy Analyst in the Center for Health
Policy Studies at The Heritage Foundation.