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Section I: Medicaid Program

Overview of the Texas Medicaid Program


The Texas Medicaid program is a joint federal-state entitlement program that pays for defined medical care for the poor. In September 1967, Texas began participating in this program, which was enacted under Title XIX of the federal Social Security Act of 1965.[1] Over the past 33 years, the Texas Medicaid program has expanded both its eligibility criteria and benefits due to federal and state legislation. Texas now ranks third in the nation in overall Medicaid spending.[2]

Since 1993, the Texas Health and Human Services Commission (HHSC) has been designated as the single state agency with oversight responsibility for the Texas Medicaid program. In this role, HHSC is responsible for the Medicaid program policies and operations in Texas. There are six state agencies under the HHSC umbrella that deliver or purchase Medicaid services:

• The Texas Department of Health (TDH);

• The Texas Department of Human Services (TDHS);

• The Texas Department of Mental Health and Mental Retardation (TxMHMR);

• The Department of Protective and Regulatory Services (DPRS);

• The Texas Commission for the Blind (TCB); and

• The Interagency Council on Early Childhood Intervention (ICECI).[3]

(See Appendix E for the Medicaid Organization in Texas.)

TDH has the primary responsibility for delivering acute medical care fee-for-services to Medicaid clients through its Health Care Financing (HCF) Department. TDH/HCF is responsible for policy and operations of purchased health services, managed care, kidney health care, medical appeals and vendor drugs.[4] (See Appendix R for more information on the Vendor Drug Program.)

Texas Medicaid Administrative Systems (TMAS)

In 1996, TDH/HCF created the Texas Medicaid Administrative Systems (TMAS). TMAS is essentially a formal organizational relationship of contractors that perform support and operational functions for the Medicaid program. TMAS consists of four contractors that provide five general functions for the state:

• Claims administration/Medicaid Management Information System (MMIS) Service: Processes and adjudicates all claims for Medicaid that are outside the scope of capitated arrangements between Health Maintenance Organizations (HMOs) and the state. National Heritage Insurance Company (NHIC) is the current Claims Administrator.

• Encounter Processing Administrator (EPA): Collects encounter data from HMOs to use in evaluating quality and utilization of services. NHIC also serves as the Encounter Processing Administrator.

• Enrollment Broker: Helps educate clients concerning their health plan and primary care provider (PCP) choices and enrolls them into Medicaid managed care. Maximus is the state’s current Enrollment Broker.

• Primary Care Case Management (PCCM) Network Administrator: Develops and manages the state-administered plans—both the PCCM program and the Prepaid Health Plan (PHP) program. Under the PCCM program, primary care providers contract with the network administrator to provide a “medical home” for clients, in exchange for a $3 per member per month fee paid to providers for each PCCM client. Birch and Davis is the state’s current PCCM Network Administrator.

• Quality Monitor: Evaluates program access and quality of care for clients enrolled in Medicaid managed care. This function includes conducting consumer and provider satisfaction surveys, on-site contract compliance reviews, care coordination studies and focused clinical studies. The Texas Health Quality Alliance (THQA) is the current Quality Monitor.[5]

With the exception of the Claims Administrator, most of these contractors support the managed care system of health care delivery.

Financing and Expenditures

The Medicaid program is jointly financed by the states and the federal government through a federal matching assistance percentage (FMAP) based on each states’ average per capita income. This federal contribution ranges from 50 percent to 83 percent of the payments for Medicaid services provided by each state.[6] For fiscal 2000, the Texas Medicaid program received 61.36 percent from the federal government for the cost of care of its Medicaid eligible individuals. The state is responsible for the balance of 38.64 percent.[7]

Since Medicaid is an entitlement program, neither the federal government nor the states can limit either the number of people who enroll or the amount of money available for services.[8] Texas spent $11.1 billion for all Medicaid services in fiscal 1999 and expects to spend $11.3 billion in fiscal 2000.[9] The Texas Medicaid spending is distributed among the four main health care delivery programs: fee-for-service, managed care services, long-term care services and reimbursements to hospitals serving a disproportionate share of low-income persons.

Medicaid Population and Services

Eligible Groups

The federal government requires all states to provide Medicaid coverage to six specific groups of population, mainly with low income.[10]

• AFDC-eligible individuals as of July 16,1996

This date coincides with the passage of the welfare reform law creating the successor to Aid to Families with Dependent Children (AFDC), the Temporary Assistance for Needy Families (TANF) block grant. Congress established this eligibility group to ensure individuals did not lose Medicaid coverage due to TANF requirements. This law was signed on August 22, 1996.

• Poverty-related groups: states must cover all pregnant women and children below age 6 with incomes up to 133 percent of the federal poverty level (FPL)

• All children born after September 30, 1983, with incomes up to 100 percent of the FPL (under age 19 by the year 2003)

• Current and some former recipients of Supplemental Security Income

• Foster care and adoption assistance

• Certain Medicare beneficiaries with low incomes

The Federal Poverty Level (FPL) refers to the poverty guidelines issued by the U.S. Department of Health and Human Services (HHS) each year in the Federal Register. These guidelines are used for determining financial eligibility for government assistance programs, including the Medicaid program. The published poverty guideline for a family of three was $13,880 in 1999, and $14,150 in 2000.[11]

Texas Eligible Groups

Texas has 64 various Medicaid programs to provide medical services for residents who qualify. Potential clients must meet both federal and state eligibility requirements to receive those services. Some examples of these programs are the Temporary Assistance for Needy Families; State Paid Foster Care; Aged, Blind and Disabled; and Single Pregnant Women. A complete list of the Texas Medicaid eligible groups is in Appendix G.

During the late 1980s and early 1990s, Congress expanded Medicaid eligibility to include a greater number of elderly, people with disabilities, children and pregnant women. As a result of these changes, the Texas Medicaid population tripled in just a decade, adding more than 1 million people between 1990 and 1995.

Texas Medicaid enrollment peaked in January 1996 with 2.1 million enrollees. Since then, the State’s Medicaid enrollment declined to less than 1.8 million in fiscal 2000. [12] Programs with the largest numbers of beneficiaries are the Vendor Drug Program, Medical Transportation, and Texas Health Steps-Comprehensive Care Program (THSteps - CCP).[13] THSteps was formerly known as the Early and Periodic, Screening, Diagnosis and Treatment (EPSDT) program, which is designed to care for Medicaid children.

Covered Services

The federal government requires all states to provide “mandatory services” (for example, inpatient hospital and physician services). There are an additional 33 optional services that states may choose to include in their Medicaid programs.[14] Texas Medicaid provides a majority of the optional services, such as optometry services, chiropractic services, physical therapy, occupational therapy and eyeglasses. More-over, Texas Medicaid covers birthing centers, genetics, renal dialysis, and school health related services.[15] (See Appendix H for a complete list of the general medical services, excluding long term care services, provided by Texas Medicaid.)

The Medicaid program also provides long-term care services to eligible low-income populations in nursing facilities and through community-based care. Two long-term care programs—Nursing Facilities and Community-Based Alternative Services—provided care to approximately 68,000 and 23,000 clients, respectively, in fiscal 1999. [16]


Enrollment and Reimbursement

Health care providers choose to be enrolled in the Medicaid program through an application process with the Claims Administrator, NHIC. This process includes completing some required legally binding forms and meeting eligibility requirements specific to the health care services the individual or entity will provide. For example, one of the requirements for a genetics provider is: “The provider must use a team of professionals to provide genetic evaluative, diagnostic, and counseling services.”[17] In general, all licensed professionals, such as physicians and nurse practitioners, are required to be authorized by their professional licensing authority and with a few exceptions, such as pediatricians, to be concurrently enrolled in Medicare.[18]

Texas Medicaid uses a variety of methods to reimburse enrolled providers. Most providers are paid on a fee-for-service basis or a fee schedule listed in the provider’s specific service section of the Texas Medicaid Provider’s Procedure Manual. All hospitals—except in-state children’s hospitals and specified psychiatric facilities—are reimbursed using the Texas Medicaid Diagnosis Related Grouping (DRG) method.[19] DRGs consist of a given set of diseases, like diabetes and disorders, such as a bone fracture, compiled into clinically related groups that use similar hospital resources and length-of-stay patterns. The DRG payment system is essentially based on averages for length of stays and the number and intensity of services provided.[20]

Medicaid Managed Care Reimbursement

In 1993, the implementation of the State of Texas Access Reform (STAR) Medicaid managed care program brought additional reimbursement methodologies to the Texas Medicaid program. These methodologies are applied to three different models of Medicaid managed care that have evolved over the past seven years and are summarized below:[21] In the Texas Medicaid program, these models are referred to as Managed Care Organizations (MCO).

Health Maintenance Organizations (HMOs) - These organizations usually receive a monthly “capitation” payment for each person enrolled based on a projection of what medically necessary care for the typical patient will cost.

Primary Care Case Management (PCCM) - Primary Care Providers (PCP) enrolled in the state-administered plan, Texas Health Network, receive a $3 monthly case management fee per assigned clients in addition to their fee-for-service or scheduled service fee.

Prepaid Health Plan (PHP) - These are entities that either contract on a prepaid, capitated risk basis to provide a non-comprehensive selection of services, or contract on a non-risk basis. Services that are not capitated are paid on a fee-for-service basis. In Texas, PHPs are capitated for physician, lab and x-ray services.

This study’s sample consisted of professional claims paid by the traditional fee-for-service reimbursement method, including claims submitted for clients in the PCCM managed care program paid in the fee-for-service system. The Medicaid Managed Care in Section IV of this report discusses related issues with the state’s managed care program.

Medicaid Fraud and Abuse Detection Activities


Fraud and abuse in the Medicaid programs across the nation was a suspected problem soon after it was implemented. As the program expanded in scope over its first 10 years, estimates showed losses of at least $653 million a year. In 1977, the U.S. Congress enacted the federal Medicare/Medicaid Anti-Fraud and Abuse Act, which provided federal funding to states that established Medicaid fraud and abuse control units.[22] Most states, including Texas, developed Surveillance and Utilization Review Systems (SURS) to address the problem. SURS staff compare specific providers’ claims data with the normal procedure coding patterns for that type of provider to identify errors and evidence of possible abuse.

In 1997, Texas’ ability to combat Medicaid fraud improved when the Texas Legislature enacted Senate Bill 30, which provided for implementing fraud detection technology, additional monitoring of service providers along with administrative penalties, civil remedies, and criminal sanctions for fraudulent and abusive actions.

HHSC Office of Investigations and Enforcement (OIE)

Senate Bill 30 also created the Office of Investigations and Enforcement (OIE), under the direction of the Texas Health and Human Services Commission, to oversee fraud control for the Medicaid program, including the managed care portion. HHSC’s OIE annually reports the results of the various areas they investigate. Table 1 summarizes the main areas of OIE’s fraud and abuse activities per dollars paid for the past three fiscal years.

Table 1: Fraud and Abuse Activities for HHSC/OIE(Excluding Medicaid Fraud and Abuse Detection System)

Areas of Investigation
FY98Dollars Recovered
FY99Dollars Recovered
FY00Dollars Recovered
Medicaid Program Integrity
$ 5,722,536
$ 8,719,952
Civil Monetary Penalties
Included in above total
Included in above total
$ 324,470
Utilization Review (Hospitals paid by Diagnosis Related Grouping)
Utilization Review (Case Mix-Nursing Homes)
$ 7,544,699
$ 7,090,259
Tax Equity Fiscal Responsibility Act (TEFRA) Claims
$ 45,025
$ 362,341
Surveillance and Utilization Review Subsystems (SURS)
$ 2,184,623
$ 1,426,859
Compliance Monitoring and Referral

Source: Texas Health and Human Services Commission Office of Investigations and Enforcement, January 2001.

The HHSC’s OIE works closely with the Office of Attorney General’s (OAG) Medicaid Fraud Control Unit. Through successful investigations and prosecution, OAG has increased fines and restitutions (ordered) from $32,000 in 1997 to $5.7 million in 1999. In one recent case, a Houston pediatrician was ordered to pay $1.49 million in restitution, damages, and penalties [23]

HHSC Medicaid Fraud and Abuse Detection System (MFADS)

With improved technology, more powerful and comprehensive fraud and abuse detection systems are available to detect illegal or unethical activities in the health care industry. In December 1997, HHSC contracted with Electronic Data Systems (EDS) to develop and provide operational support for the Medicaid Fraud and Abuse Detection System (MFADS). [24] This system is administered by the OIE. MFADS uses learning or neural network technology to identify fraud and abuse.

MFADS has data elements that support functions such as compliance monitoring, provider referrals, and utilization review. MFADS supports the following OIE tasks: research; receive and access licensing board data; target queries (look for known abusive or fraudulent practices), and track the progress of individual cases, including case hours, investigative cost, and travel expenses related to the Medicaid program.

MFADS is a new system that can detect relationships and trends in databases from different sources. When all planned development is finished, MFADS “will integrate both historical and current data stored in the various (claims) processing systems into a single data repository.”[25]

MFADS and other efforts by Texas are important in developing the programs and systems that discourage and prevent fraud. This study also plays a role in the Texas’ fraud and abuse prevention and detection effort by identifying areas of potential fraud and abuse that may be occurring in the Medicaid program. OIE can then use this information in its investigative efforts. Such efforts, as well as the continued awareness of fraud patterns uncovered by the federal government, is crucial in arming Texas with the necessary knowledge and tools to maintain the integrity of the Medicaid program.

As seen in Table 2, HHSC has improved the identification and recovery of questionable Medicaid payments using the MFADS.

Table 2: Number of Cases and Actual Dollars Recovered by HHSC/OIE using MFADS

Performance Measure
Actual Cases Identified
Total Dollars Identified for Recovery
Actual Dollars Recovered

Source: Texas Health and Human Services Commission’s “MFADS FY2000 Fourth Quarter Performance Report.”

Federal Activities in Medical Fraud and Abuse Detection

U.S. General Accounting Office

During the past few years, the U.S. General Accounting Office (GAO) has published several reports and provided Congressional testimony on the integrity of the payments to providers.

In July 2000, GAO testified before Congress on federal efforts to improve the measurement of improper Medicare payments. This report commented on the strengths and weaknesses of various methodologies in measuring improper payments. [26]

Office of Inspector General of the U.S. Department of Health and Human Services (OIG)

A 1999 report by the Office of Inspector General of the U.S. Department of Health and Human Services (OIG) found that improper payments in the Medicare program totaled $13.5 billion or 7.97 percent of the $169.5 billion spent on Medicare fee-for-service claims in fiscal 1999.

The OIG is planning to conduct several studies in the area of Medicare and Medicaid program payments during federal fiscal 2001, including one of improper Medicare fee-for-service payments and the claims processing edits used by the states in administering the Medicaid program.[27]

Health Care Claims Studies from Other States

To date, only two other states, Illinois and Kansas, have performed state health care studies that used a similar random sampling methodology to estimate payment accuracy.

• In August 1998, the State of Illinois, through the Department of Public Aid, was the first state to publish a report on the payment accuracy of a state Medicaid program. A 95.28 percent accuracy rate, or a 4.72 percent error rate, was calculated as a result of the analysis of the sampled claims. The margin of error was 2.31 percent.

Approximately 600 services were sampled that were paid by the Illinois Medicaid program in January 1998. The services were randomly selected from three categories: physician and pharmacy services, inpatient hospital and hospice services and all other types of services including outpatient, clinic services and medical supplies. The analysis included a client interview, medical record review and a review of other services paid for the client through the electronic payment system. The most common errors were incorrect provider billing, clerical errors and errors committed by the administrating agency, which unintentionally violated its own policies.[28]

• The Kansas Department of Social and Rehabilitative Services published a report on the payment accuracy of the Kansas Medicaid program in April 2000. A 76 percent payment accuracy rate, or 24 percent error rate, was calculated as a result of the analysis of the sampled claims. The margin of error was 9 percent.

Six hundred claims were sampled from a total of 650,000 claims paid by Kansas Medicaid for March 1999. The claims were randomly selected from four strata: pharmacy, inpatient hospital, home and community based services and all other services. The analysis performed included a client interview or questionnaire, a review of the electronic payment system and a medical record review. The most common errors found were incomplete documentation and a lack of medical necessity documentation. Because documentation could be present in a provider’s office but not forwarded as requested for the study, another payment accuracy rate of 91 percent, or error rate of 9 percent, was calculated after excluding errors for incomplete documentation. The margin of error for the revised calculation was 5 percent.[29]


[1] Texas Health and Human Services Commission, “Medicaid History,” Austin, Texas, February 1999 ( (Internet document.)

[2] US Department of Health and Human Services, Health Care Financing Administration, A Profile of Medicaid: Chartbook 2000 (September 2000), pp. 6-10, 48-50 ( (Internet document.)

[3] Texas Legislative Budget Board, Fiscal Size-Up, Texas State Services: 2000-01 Biennium (Austin, Texas, January 2000), pp. 100-101 ( (Internet document.)

[4] Texas Department of Health, Texas Department of Health Fiscal Years 2001-2005 Strategic Plan (Austin, Texas, October 9, 2000), Appendix B, p. 95 ( (Internet document.)

[5] Texas Health and Human Services Commission, Medicaid Managed Care Report (Austin, Texas, November 2000), Chapter 8, p. 7 ( (Internet document.)

[6] US Department of Health and Human Services, Health Care Financing Administration, A Profile of Medicaid: Chartbook 2000 (September 2000), p. 27 ( (Internet document.)

[7] Texas Department of Human Services, “History of Texas Medicaid Percentage as of September 14, 2000,” Austin, Texas.

[8] Texas Health and Human Services Commission, Texas Medicaid in Perspective, Third Edition (Austin, Texas, February 1999), p. 25.

[9] Texas Department of Human Services, “State of Texas Medicaid Expenditure Information,” Austin, Texas, November 15, 2000.

[10] US Department of Health and Human Services, Health Care Financing Administration, A Profile of Medicaid: Chartbook 2000, p. 7.

[11] US Department of Health and Human Services, “The 1999 HHS Poverty Guidelines,” May 25, 2000 (; and “The 2000 HHS Poverty Guidelines,” July 14, 2000 ( (Internet documents.)

[12] Texas Health and Human Services Commission “Insured Medicaid Services – Total,” Austin, Texas ( (Internet document.)

[13] Texas Health and Human Services Commission, “Vendor Drug Program” (; “Medical Transportation” (; and “EPSDT—Comprehensive Care Program (CCP)” ( (Internet documents.)

[14] US Department of Health and Human Services, Health Care Financing Administration, A Profile of Medicaid: Chartbook 2000, p. 8.

[15] Texas Department of Health, National Heritage Insurance Company, 2000 Texas Medicaid Provider Procedures Manual (Austin, Texas), pp. i-ii ( (Internet document.)

[16] Texas Health and Human Services Commission, “Total Nursing Facility Recipients,” Austin, Texas (; and “Community Based Alternative Services,” Austin, Texas ( (Internet documents.)

[17] Texas Department of Health, 2000 Texas Medicaid Provider Procedures Manual, pp. 21-1.

[18] Texas Department of Health, 2000 Texas Medicaid Provider Procedures Manual, p. 33-7.

[19] Texas Department of Health, 2000 Texas Medicaid Provider Procedures Manual, pp. 3-3 to 3-5.

[20] St. Anthony’s Publishing, St. Anthony’s DRG Guidebook (Reston, Virginia: St. Anthony’s Publishing, Inc., 1996), pp. iv-v.

[21] Texas Health and Human Services Commission, Medicaid Managed Care Report, Chapter 3, p. 2.

[22] US Department of Health and Human Services, Office of Inspector General, Annual Report, State Medicaid Fraud Control Units: Fiscal Years 1997, 1998 and 1999 (Washington, DC, June 2000), p. 2 ( (Internet document.)

[23] Texas Office of the Attorney General, “Cornyn and Mosbacker Announce Successful Prosecution of Medicaid Fraud,” Austin, Texas, July 21, 2000 ( (Internet document.)

[24] Texas Health and Human Services Commission, “MFADS FY2000 Third Quarter Performance Report,” Austin, Texas, p. 1.

[25] Texas Health and Human Services Commission, “MFADS FY2000 Third Quarter Performance Report,” Austin, Texas, p. 1.

[26] US General Accounting Office, Medicare Improper Payments: Challenges for Measuring Potential Fraud and Abuse Remain Despite Planned Enhancements (Washington, DC, July 12, 2000), pp.1-4 ( (Internet document.)

[27] US Department of Health and Human Services, Office of Inspector General, Work Plan Fiscal Year 2001 (Washington, DC), pp. 29, 40-41 ( (Internet document.)

[28] Illinois Department of Public Aid, Payment Accuracy Review of the Illinois Medical Assistance Program: A Blueprint for Continued Improvement (Springfield, Illinois, August 1998), pp. ii, 3,5,22-24 ( (Internet document.)

[29] Kansas Social and Rehabilitation Services Medical Policy Department, Payment Accuracy Review of the Kansas Medical Assistance Program: Final Report (Topeka, Kansas, April 2000) ( (Internet document.)