State Governments May Unduly Benefit Financially From Publicly Owned but Privately Operated Entities

During our audit of the Alabama Medicaid Agency's (State agency) hospital certified public expenditures (CPEs) program for fiscal year (FY) 2010, we noticed that the State agency had claimed, for FYs 2010 and 2011, more than $5 million in Federal funds related to CPEs for three hospitals that appeared to be private hospitals. The three hospitals were owned but not operated by State or local governments.

The State's definition of a public hospital indicates that a facility only has to be owned by a public entity, regardless of whether the facility is operated by a public entity or whether State or local government funds are used in its operation. As a result, the State agency received more than $5 million in Federal funding by claiming CPEs from the three hospitals, even though no State or local government funding was used to operate the hospitals.

We are concerned that (1) the Federal Government is matching funds from private entities with no true State or local government funds involved and (2) State Governments can benefit financially from publicly owned but privately operated entities because the Federal Government has not provided a clear definition of "public funds" or "contributing public agency."

We suggest that CMS consider requiring that, to certify public expenditures as the State's share of Medicaid expenditures, an entity be operated by a unit of government.