According to the GAO, 505 hospitals received Medicaid payment surpluses (payments that exceeded the costs of providing services) totaling about $2.7 billion in 2012, resulting in part from lump-sum supplemental payments hospitals above regular payments for individual services. The GAO has conducted a review of states’ basis for distributing these payments and how hospitals use such revenues.

The report, Medicaid: Federal Guidance Needed to Address Concerns About Distribution of Supplemental Payments, notes that CMS has not provided written guidance to articulate or broadly communicate requirements for supplemental payments to all states, although CMS wrote to one state that (1) payments should be distributed based on Medicaid or demonstration purposes, and (2) payments should not be made based on the availability of local financing. Nevertheless, three out of four states reviewed by GAO distributed Medicaid supplemental payments largely based on the availability of local government funds to finance the nonfederal share of the payments, rather than on the services the hospitals provided. Hospitals that otherwise were eligible for payments but whose local government could not finance them did not receive them.

Based on information from 12 hospitals receiving large payments, the GAO determined that such revenues were used for a broad range of purposes, including covering the costs of uninsured patients and funding general hospital operations and capital purchases. Some but not all states reviewed required hospitals receiving supplemental payments under Medicaid demonstrations to track that payment revenues were used for approved demonstration purposes.

GAO recommends that CMS issue written guidance clarifying its policies that (1) supplemental payments should be linked to the provision of Medicaid services and (2) payments should not be contingent on the availability of local financing.