Pursuant to Title XIX of the Social Security Act (the Act), the Medicaid program provides medical assistance to low-income individuals and individuals with disabilities. The Federal and State Governments jointly fund and administer the Medicaid program. At the Federal level, the Centers for Medicare & Medicaid Services (CMS) administers the program. Each State administers its Medicaid program in accordance with a CMS-approved State plan. Although the State has considerable flexibility in designing and operating its Medicaid program, it must comply with applicable Federal requirements. In Pennsylvania, the Department of Public Welfare (State agency) administers the Medicaid program. Section 1903(a) of the Act permits States to claim Federal reimbursement for Medicaid administrative costs. These costs must be for the proper and efficient administration of the State plan. In a December 1994 letter to State Medicaid directors, CMS (formerly the Health Care Financing Administration) clarified its position on State claims for administrative costs, stating that allowable claims must be directly related to the administration of the Medicaid program. CMS's letter included a listing of allowable administrative activities. The list was not all inclusive, but stated that claims for administrative costs cannot reflect the cost of providing a direct medical or remedial service, such as immunizations or psychological counseling and may not include the overhead costs of operating a provider facility, such as the supervision and training of providers. In State fiscal year (FY) 2010-2011, the State agency claimed $924 million in Medicaid administrative costs, of which $654 million was claimed as Other Financial Participation. We are conducting a series of audits that address unidentified Medicaid administrative costs claimed as Other Financial Participation.
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