Claiming administrative costs to Medicaid waivers has become a targeted area of review by the Office of Inspector General (OIG) and Centers for Medicare and Medicaid Services (CMS). A number of state Medicaid agencies in various regions are facing potential disallowances or deferral of Medicaid administrative claims for failing to properly claim administrative costs to Medicaid waivers on the CMS-64.10 report. In some cases, states have been required to retroactively update their processes.
The reasons cited by CMS for these potential penalties vary. In some states, the cost allocation plan (CAP) methodology did not identify cost allocation down to individual waivers (i.e., costs were identified as Medicaid administration at the appropriate Federal Financial Participation [FFP] rate level only). In others, methodologies outlined in waiver applications were not implemented in the CAP. To date, CMS has not issued formal written guidance on this topic.
Below, we provide some history on CAPs and Medicaid administrative claiming, as well as steps that agencies should consider in updating their CAPs to avoid similar penalties.
The Code of Federal Regulations (CFR) Title 45, Part 95 requires that public assistance agencies, including Medicaid and CHIP, prepare a full public assistance CAP. 45 CFR 95.509 requires that agencies promptly amend the CAP when certain events occur to impact the validity of the approved cost allocation procedures—including changes to agency organizational structure; the addition of a new federal program, function, or activity; or a change in federal law. Medicaid regulations (42 CFR 433.34) also require that the Medicaid agency State Plan provide that the agency will have an approved CAP on file that is in accordance with the requirements contained in Subpart E of Title 45, Part 95.
States may only claim FFP for administrative costs associated with a program in accordance with the approved CAP. If costs are not claimed in accordance with an approved plan, or the state has failed to submit an amended plan as required, costs may be disallowed.
In December 1994, CMS (under its former title, Health Care Financing Authority) issued the State Medicaid Director Letter (SMDL) No. 122094, which clarified the policy for claiming Medicaid administrative costs—stating, “We consistently held that allowable claims under this authority must be directly related to the administration of the Medicaid program.” The SMDL also provides a list of allowable administrative activities, noting that the list is not all-inclusive, and further states that an allowable administrative cost must be directly related to Medicaid State Plan or waiver program services. This SMDL is cited in various OIG reports as one of the key sources of federal regulation requiring states to allocate and report administrative costs to waivers.
The CMS-64 report, used to report Medicaid administrative and service-related expenditures on a quarterly basis, includes section 64.10 for reporting administrative costs. The CMS-64.10 base form is intended to be used for reporting administrative expenditures for Medicaid fee for services (FFS). The CMS-64.10 waiver form is used to report administrative costs related to specific waivers. Typically, each waiver operated by a state has a separate 64.10 waiver form.
Claiming Administrative Costs Associated with Waivers
State Medicaid agencies can seek Medicaid waivers to allow them to experiment with new or existing ways to deliver, and pay for, healthcare and healthcare-related services under Medicaid and the Children’s Health Insurance Program (CHIP). States receive approval from CMS to operate a waiver by submitting a waiver application, which must include a budget outlining all costs associated with the waiver—including Medicaid administrative expenditures necessary to implement and administer the waiver. The application must also include a waiver narrative describing the methodology the state will use to allocate administrative costs to the waiver.
Historically, Medicaid agency CAPs have not allocated costs to individual waivers—and until recently, CMS appeared indifferent as to whether states reported Medicaid administrative costs to waivers in the CMS-64 report, or identified administrative costs applicable to waivers in the CAP. As a result, many states that report administrative costs to waivers have been doing so outside of the CAP. However, CMS is now instructing certain states to update the CAP to identify how costs will be claimed to Medicaid waivers and/or Medicaid eligibility groups to avoid disallowances or deferral of federal Medicaid administrative funding. This may be a challenge for states. Oftentimes, it can be difficult for a state Medicaid agency to tease apart the costs of administering a specific waiver, as certain policies and procedures impact multiple Medicaid programs, waivers, and clients—particularly since clients may be enrolled in multiple waivers.
What Should Agencies Do?
State Medicaid agencies should review waiver agreements to identify waivers that include administrative costs, then determine if these costs are clearly defined in the CAP. If not, the agency should update the CAP with the details on how the waiver’s administrative costs will be identified and allocated in the CAP.
Even if the waivers do not specifically state administrative costs, CMS may still request that the agency allocate down to waiver programs, depending on how the overall state Medicaid program is structured.
The key steps needed to prepare this CAP update are as follows:
- Review waiver budgets to determine the specific administrative costs included in each budget (e.g., contracted administrative functions, administrative functions performed by another state agency, state personnel costs, etc.), organized by category (e.g., program integrity, information technology, quality assurance, etc.).
- Determine where the waiver administrative costs support multiple waivers and/or FFS, CHIP, and other programs—and develop proper allocation methodologies to allocate those costs accordingly.
- Update the CAP narrative to identify all waiver costs and how these costs are allocated to benefitting objectives.
Additional steps may be necessary, especially if CMS compels a particular state to make modifications. These may include, for example:
- Reviewing overhead cost pools in the CAP and determining if the function supports Medicaid FFS or waiver(s) and updating the CAP accordingly.
- While there is still a question regarding whether allocating overhead costs to waivers is necessary and required, and CMS has not been consistent in their guidance on how to treat these costs, it may be best to allocate these costs to the waivers to avoid potential problems down the road.
- Implementing time tracking or other documentation processes in compliance with the Uniform Guidance to support personnel costs associated with waivers (where applicable).
- Ensuring that contracts and inter-agency agreements are updated to include methods for allocating costs to waivers (where applicable).
If the agency CAP has never addressed allocating costs to waivers, the agency should seek guidance before making changes to the cost allocation plan.
Programmatic and contracting staff in charge of implementing and managing waivers should work closely with cost allocation staff to ensure that the agency’s CAP includes up to date waiver information—and that cost allocation, waiver reporting, and CMS-64 reporting processes are in sync. For new waivers, make sure the CAP team is involved in preparing the administrative cost budget to ensure costs are able to be properly identified and allocated in the CAP.
Taking proactive measures to review waiver budgets and update the CAP now to properly report administrative costs in CMS-64.10 waiver forms will avoid potential issues with CMS in the future.
If you have any questions regarding this article, or how PCG can assist you in updating your agency’s CAP (including allocating administrative costs to your Medicaid waivers), please contact Amy Ferraro, Kelly Gallagher, or Ruth Quirion.
 Some states have received a Medicaid Waiver Administrative Claiming Template from CMS outlining how the waiver budget for administrative costs must be prepared in accordance with specific procedures outlined in the CAP.