(Attached below is a copy of the letter sent June 12 to all 50 state governors.)

June 12, 2003 

Financing Mechanisms

A number of reports over the past several years have documented persistent state schemes designed to generate excessive Federal matching payments under the Medicaid program.[3]  For example, a January 2003 GAO report stated:

For more than a decade, states have used various financing schemes to inappropriately generate excessive federal Medicaid matching funds while their own share of expenditures has remained unchanged or decreased.  Using statutory and regulatory loopholes over the last decade, some states have created the illusion that they have made large Medicaid payments to certain providers, such as county health facilities, in order to generate excessive federal matching payments.  In reality, generally through electronic funds transfers, the states have only momentarily made payments to these providers, as states have required the payments to be returned.  In some cases, states have used these Federal payments for purposes other than Medicaid. . . .  Although the Congress and [the Centers for Medicare and Medicaid Services (CMS)] have repeatedly acted to curtail abusive financing schemes when they have come to light, states have consistently developed new variations to this basic approach.[4]

GAO has identified several types of these schemes:[5] 

Payments to State Health Facilities

States made excessive Medicaid payments to state-owned health facilities, which subsequently returned these funds to the state treasury.  The payments were then reported for the purposes of obtaining Federal matching Medicaid dollars.

Provider Taxes and Donations

Revenues from special taxes on hospitals and other providers were collected by the State and then subsequently returned to the providers in order to create an illusion of payments for Medicaid services, allowing the State to receive a Federal match on the returned amount.

Disproportionate Share Hospital (DSH) Payments

DSH payments compensate hospitals that care for a disproportionate number of low-income patients.  "[U]nusually large" DSH payments were made to certain hospitals, which then returned the bulk of the state and Federal payments to the State.

Payments to Local Government Health Facilities

In an effort to ensure that Medicaid payments are reasonable, Federal law and regulations prohibit Medicaid from paying a certain amount more than what Medicare would pay for comparable services.  This upper payment limit applies to total payments and not to individual services.  As a result of the aggregate upper limit, States were able to make large supplemental payments to a few local public health facilities, such as hospitals and nursing homes.  The local government health facilities then returned the bulk of the state and Federal payments to the State.

The Federal government, in cooperation with the States, has taken significant steps to identify and reform such practices as they have arisen, but such schemes continue to emerge and demand vigilant oversight.  The Committee now is reviewing whether these past reform efforts have been successful and whether additional action is required. 

Section 1115 Demonstration Projects

Under Sec. 1115 of the Social Security Act, the Secretary of Health and Human Services can waive certain Medicaid rules to allow States to use Medicaid funds for experimental, pilot or demonstration projects.  The innovation encouraged by these waivers is vital to the long-term viability of Medicaid and strongly supported by this Committee.  Nevertheless, this important feature of Medicaid, which in 2001 accounted for as much as 20% of the program's total expenditures, must be closely monitored.[6] 

An important financial check on the waiver application process is the demonstration of the project's budget neutrality.  This step, which ensures the proposed project will, in effect, save as much money as it will cost, does not appear to be applied with fiscal rigor.  GAO suggests that some current waivers may lead to significant additional Federal payments over the course of the programs.[7]  The Committee now is examining the use of such waivers and how strictly the requirements of budget neutrality are observed.

Medicaid Waste Fraud and Abuse Enforcement

The day-to-day surveillance and enforcement of Medicaid waste, fraud and abuse is carried out by a host of actors in the Federal-State partnership administering and overseeing this vast program.  An initial look at this complex system suggests two problem areas: (1) organization and coordination; and (2) funding.  According to one Medicaid Fraud Control Unit ("MFCU") official interviewed by the Committee, CMS is equipped to offer little direction of fraud control efforts across the program as a whole.  With respect to funding, although the Federal government subsidizes a substantial percentage of any State's efforts to control Medicaid fraud through MFCUs, GAO reports that no State utilizes its full available anti-fraud funding[8] and, in the case of three States, there are no MFCUs at all.  This less than full commitment from both sides of the Federal-State Medicaid partnership exists despite proven returns on anti-fraud dollars in terms of recoveries, fines and deterrence.[9]
 

Finally, we are investigating state efforts to address one specific area of waste in Medicaid: ensuring that the full amount of available manufacturer rebates for drugs dispensed under the program is collected.  In accordance with the Medicaid Rebate Agreement between the Department of Health and Human Services (HHS) and manufacturers, drug makers are required to give States rebates based upon the average manufacturer price (AMP) and "best price" figures.  However, the process through which providers seek reimbursements for dispensing drugs in most States utilizes "J-Codes," which in some instances do not give States the specific manufacturer information necessary to enable them to seek rebates.  In a March 14, 2003 letter to state Medicaid directors, CMS encouraged States to reform this system to capture these "millions of dollars in uncollected rebates."  The Committee will examine state efforts to ensure that Medicaid programs collect the full amount of manufacturer rebates available.

Record and Information Requests

In order for the Committee to review effectively the issues described above, we are requesting that, pursuant to Rules X and XI of the U.S. House of Representatives, you provide the Committee with the following records and information by July 7, 2003.  Please note that Requests Nos. 1, 2, 4, 6, 7, 8, 10, 11, 13, 15, 17, 19, 20, and 21 ask for narrative responses or a statement of specific data.  The breadth and timeliness of this investigation require each State to prepare and submit complete written responses, as appropriate.  To avoid any doubt, answers by way of simple reference to produced documents will be considered insufficient and incomplete for the purposes of this investigation.  Finally, the Committee directs each Request below to each and every State department, agency or entity, where relevant and responsive information or records may be found including, but not limited to, any departments or agencies of health and human services, public health, Medicaid or budget.

1. Has your State, at any time since the beginning of 1995, considered or engaged in any plan, program, policy or practice similar to the financing mechanisms described above or any other similar plan, program, policy or practice the intended effect or result of which was to generate additional Federal Medicaid matching funds while your own State's expenditures on related services, or share of such expenditures, remained unchanged or decreased?

2. If your response to Request No. 1 above is anything but an unqualified "no," please describe any such plan, program, policy or practice.

3. If your response to Request No. 1 above is anything but an unqualified "no," please provide all records relating to any such plan, program, policy, or practice.

4. Has your State ever hired any outside consultant or expert for the purpose of assisting in the design or development of any plan, program, policy or practice as described and referenced in Request No. 1 above?  If so, please identify the consultant or expert and their project, and state the total dollar amount paid to the consultant or expert by your State.

5. Please provide all records relating to the relationship, advice or work of any consultant or expert identified in Request No. 4 above.

6. Please describe how your State accounts for and tracks Medicaid funds, including Federal Medicaid matching funds, to ensure such funds are used only to pay for legitimate Medicaid services.    

7. Has your State, at any time since the beginning of 1995, considered or engaged in any plan, program, policy or practice (including, but not limited to, the use of  inter-governmental transfers) the intended effect or result of which was to increase Federal matching payments in order to fund, in whole or in part, non-Medicaid services?

8. If your response to Request No. 7 above is anything but an unqualified "no," please describe any such plan, program, policy or practice. 

9. If your response to Request No. 7 above is anything but an unqualified "no," please provide all records relating to any such plan, program, policy or practice. 

10. For each year from 1995 to the present, please provide a list of your State's ten largest public medical providers, in terms of total Medicaid funds received, and for each such provider and year, state the following:

a.      net patient revenue;

b.      gross Medicaid revenue;

c.      net Medicaid revenue;

d.      total costs for Medicaid services;

e.      total Medicaid funds received; and

f.        total Medicaid funds advanced, remitted or repaid by the provider to any payor, including the State, by any means including, but not limited to, intergovernmental transfers.

For the purpose of responding to this request, "Medicaid funds received" includes any and all Medicaid funds sent, directed, reported or attributed to each provider for whatever purpose or duration, including payments for Medicaid services, DSH funds and any other supplemental payment under Medicaid.  With respect to Request Nos. 10(a) - 10(d), please use these terms as understood for the purposes of Medicare cost reporting.

11. Since the beginning of 1995, has your State applied for a waiver under Social Security Act Sec. 1115 for any experimental, pilot or demonstration project?  If so, please provide a brief narrative synopsis of the waiver project and its present status.  Please include in your narrative a statement explaining the budget neutrality of the project.  If the project is currently ongoing, please describe how projections of budget neutrality in the application process are meeting the actual performance of the project.

12. For each project identified in your response to Request No. 11 above, please provide all records relating specifically to the evaluation or review of the budget neutrality of the waiver project.  With respect to this request, please do not produce the complete application and supporting documentation for the Section 1115 project, but only those documents that specifically relate to whether the waiver project is or will be budget neutral. 

13. Please briefly describe the organization, structure, and duties of your State's MFCU, or similar type agency. 

14. For the period beginning January 1, 1999, please provide all records relating to any complaints or criticisms relating to the coordination, structure, organization or effectiveness of your State's Medicaid anti-fraud efforts. 

15. For the period beginning January 1, 1999, please describe any proposed, considered or implemented changes to the overall authority or powers of your MFCU, or similar type agency, as well as the status of such proposed, considered or implemented changes. 

16. For the period beginning January 1, 1999, please provide all records relating to any proposed, considered or implemented changes to the overall authority or powers of your MFCU, or similar type agency. 

17. For the period beginning January 1, 1999, please describe any proposals or plans to increase or decrease the funding for your State's Medicaid anti-fraud efforts as well as the status of such proposals or plans. 

18. For the period beginning January 1, 1999, please provide all records relating to any such proposals or plans to increase or decrease the funding for your State's Medicaid anti-fraud efforts. 

19. Please provide a brief narrative synopsis of the process by which your State obtains manufacturer rebate amounts for drugs submitted for reimbursement using J-Codes rather than unique NDC numbers.  Please also describe any obstacles your State faces in determining the rebate amounts for these types of drugs. 

20. For each quarter from 1999 to the present, please provide the following information for your State's Medicaid program:

a.      The number of single source J-Codes utilized by providers seeking reimbursement;

b.      The number of multiple source J-Codes utilized by providers seeking reimbursement;

c.      The volume of drugs, in both quantity and dollar amount, reimbursed by single source J-Codes;

d.      The volume of drugs, in both quantity and dollar amount, reimbursed by multiple source J-Codes;

e.      The total manufacturer rebates in dollars received for single source J-Coded drugs;

f.        The total manufacturer rebates in dollars received for multiple source J-Coded drugs;

g.      The total volume of single source J-Coded drugs, in number of codes, quantity of drugs reimbursed under such codes, and reimbursement dollar amount, for which your State does not seek any manufacturer rebates; and

h.      The total volume of multiple source J-Coded drugs, in number of codes, quantity of drugs reimbursed under such codes, and reimbursement dollar, for which your State does not seek any manufacturer rebates.

21. Please describe and provide all records relating to any plans or efforts to reform your Medicaid system to capture any rebates on J-Coded drugs before and after the March 14, 2003 letter to state Medicaid directors mentioned above, including, but not limited to, any calculations of rebates which your State has failed to capture for Medicaid reimbursed drugs. 

Please note that, for the purpose of responding to these requests, the terms "records" and "relating" should be interpreted in accordance with the attachment to this letter.  If you have any questions, please contact Mr. Mark Paoletta, Chief Counsel for Oversight and Investigations, at (202) 225-2927.

Sincerely,

W.J. "Billy" Tauzin

Chairman

Michael Bilirakis                                                                       

Chairman, Subcommittee on Health

James C. Greenwood

Chairman, Subcommittee on Oversight and Investigations

cc:        The Honorable John D. Dingell, Ranking Member

            The Honorable Peter Deutsch, Ranking Member, Subcommittee on Oversight and Investigations

Attachment

1.         The term "records" is to be construed in the broadest sense and shall mean any written or graphic material, however produced or reproduced, of any kind or description, consisting of the original and any non-identical copy (whether different from the original because of notes made on or attached to such copy or otherwise) and drafts and both sides thereof, whether printed or recorded electronically or magnetically or stored in any type of data bank, including, but not limited to, the following: correspondence, memoranda, records, summaries of personal conversations or interviews, minutes or records of meetings or conferences, opinions or reports of consultants, projections, statistical statements, drafts, contracts, agreements, purchase orders, invoices, confirmations, telegraphs, telexes, agendas, books, notes, pamphlets, periodicals, reports, studies, evaluations, opinions, logs, diaries, desk calendars, appointment books, tape recordings, video recordings, e-mails, voice mails, computer tapes, or other computer stored matter, magnetic tapes, microfilm, microfiche, punch cards, all other records kept by electronic, photographic, or mechanical means, charts, photographs, notebooks, drawings, plans, inter-office communications, intra-office and intra-departmental communications, transcripts, checks and canceled checks, bank statements, ledgers, books, records or statements of accounts, and papers and things similar to any of the foregoing, however denominated.

2.         The terms "relating," "relate," or "regarding" as to any given subject means anything that constitutes, contains, embodies, identifies, deals with, or is in any manner whatsoever pertinent to that subject, including but not limited to records concerning the preparation of other records.