Order Code RS22397
Updated May 28, 2008
Medicaid and Schools
Elicia J. Herz
Specialist in Social Legislation
Domestic Social Policy Division
Summary
As a condition of accepting funds under the Individuals with Disabilities Education
Act (IDEA), public schools must provide special education and related services
necessary for children with disabilities to benefit from a public education. Generally,
states can finance only a portion of these costs with federal IDEA funds. Medicaid, the
federal-state program that finances medical and health services for the poor, can cover
IDEA required health-related services for enrolled children as well as related
administrative activities (e.g., outreach for Medicaid enrollment purposes, medical care
coordination). Despite written federal guidance, schools have difficulty meeting the
complex reimbursement rules under Medicaid. According to federal investigations and
congressional hearings, Medicaid payments to schools have sometimes been improper.
P.L. 110-173 included a moratorium on any administrative action restricting Medicaid
coverage or payments for school-based administration and transportation services until
June 30, 2008. Other legislation would extend this moratorium.
Under IDEA, public schools are required to provide children with disabilities with
a free appropriate public education (FAPE), including special education and related
services according to each child’s individualized education plan (IEP) or individualized
family service plan (IFSP). States receive some federal aid under IDEA, but are otherwise
responsible for the expense of special education and related services. One approach
Congress has taken to ease the burden on states and school districts of fulfilling these
IDEA requirements is to allow Medicaid to finance covered health services (e.g., physical,
occupational and speech therapy, and diagnostic, preventive and rehabilitation services)
delivered to low-income, Medicaid-eligible special education students.
Recent History
Prior to 1988, Medicaid did not pay for coverable services that were listed in a
child’s IEP/IFSP since special education funds were available to pay for these services,
and because generally (with a few explicit exceptions), Medicaid is always the payer of
last resort. Congress changed the financing relationship between IDEA and Medicaid in
the Medicare Catastrophic Coverage Act of 1988 (P.L. 100-360). However, there is some
controversy about the exact nature of this legislative change. IDEA requires states to
establish interagency agreements to ensure that IDEA-eligible students receive the

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services to which they are entitled. These agreements must include an identification of
the financial responsibility of all relevant agencies. IDEA regulations further stipulate
that the financial responsibility of Medicaid and other public insurers must precede the
financial responsibility of the local education agency (LEA) or the state agency
responsible for developing the child’s IEP. In other words, Medicaid is deemed to be the
first payer. In contrast, according to officials with the Centers for Medicare and Medicaid
Services (CMS) — the federal agency that administers the Medicaid program — the 1988
law allows, but does not require, state Medicaid agencies to pay for services included in
an IEP/IFSP.1 Thus, given CMS’ interpretation of this law, the IDEA requirement that
Medicaid be the first payer applies only to those states that have elected to pay for
services listed in IEPs/IFSPs. According to CMS, most states do pay for these services.
Since 1988, other complicated issues surrounding the relationship between IDEA,
schools and Medicaid have arisen. While Congress made it clear that Medicaid funds can
be used to pay for reimbursable school-based services rendered to IDEA children enrolled
in Medicaid, at various points in time some Members have expressed concern that some
of these Medicaid payments may be made improperly. In 1999 and 2000, the Senate
Finance Committee asked the U.S. General Accounting Office (GAO; later renamed the
Government Accountability Office) to examine Medicaid school-based services and held
two hearings on this subject.2 Three main concerns were identified in the GAO studies
and accompanying testimony:
! Billing practices for school-based administrative services, coupled with
uneven oversight of these practices by the Health Care Financing
Administration (HCFA; now CMS), resulted in at least 2 of 17 states
receiving improper payments.
! “Bundled” billing methods for school-based services used by seven states
failed to account for variations in service needs among children and often
lacked adequate documentation demonstrating that the benefits paid for
were actually delivered in every case.3 However, both GAO and HCFA
believed that bundled rates, if proper assurances can be built into the
approach, are the preferred method for LEAs to bill Medicaid.
! In some states, school districts received little of the reimbursements
claimed for school-based services because state agencies and private
contractors, hired by schools to assist in billing Medicaid, retained
significant portions of federal payments. For example, seven states
retained from 50% to 85% of total federal reimbursements for both health
services and administrative activities. Some school districts paid private
1 Personal communication with CMS officials, November 14, 2002.
2 See Medicaid Questionable Practices Boost Federal Payments for School-Based Services.
Testimony by William J. Scanlon before the Senate Finance Committee on June 17, 1999
(GAO/T-HEHS-99-148), and Medicaid in Schools: Poor Oversight and Improper Payments
Compromise Potential Benefit. Testimony by Kathryn Allen before the Senate Finance
Committee on April 5, 2000 (GAO/T-HEHS/OSI-00-87).
3 Bundled payments typically means a fixed rate is paid for a package of specific services made
available to children with a specific condition during a set period of time (e.g., a month). In a
May 21, 1999 memorandum to state Medicaid directors, HCFA prohibited additional states from
applying to use the bundled rate methodology.

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contractors contingency fees as high as 25% of federal payments for
school-based administrative activities. In the worse case reported,
schools received as little as $7.50 for every $100 claimed for services and
activities performed in support of Medicaid-eligible children.
In order for LEAs providing IDEA-related services to qualify for reimbursement
under Medicaid, four conditions must be met: (1) the child receiving the service must be
enrolled in Medicaid, (2) the service must be covered in the state Medicaid plan or
authorized in federal Medicaid statute, (3) the service must be listed in the child’s IEP,
and (4) the LEA (or school district) must be authorized by the state as a qualified
Medicaid provider. To help schools obtain Medicaid reimbursement for health care
services, and also related administrative activities, HCFA and later CMS issued two
manuals, Medicaid and School Health: A Technical Assistance Guide (August 1997) and
Medicaid School-Based Administrative Claiming Guide (May 2003). Prior to the release
of the 2003 guide, on two occasions, Congress urged the Administration to revise early
drafts.4 The 2003 guide represents a consolidation of existing requirements for
administrative claiming, and drew on the input from education community on the two
earlier draft versions released in 2000 and 2002. Some in the education field have
questioned the usefulness of these guides.5
Current Issues
Nationwide, estimated Medicaid expenditures for school-based services were $2.7
billion in FY2006 (see Table 1). Roughly $1.9 billion or 69% of total expenditures was
for Medicaid benefits provided in schools and about $849 million or 31% was for school-
based administration/training activities. There was wide variation in spending patterns
across states with respect to the proportion of expenditures for benefits versus
administration and training. Among the 45 states reporting any school-based spending,
14 had expenditures for benefits only. At the other extreme, six states reported school-
based spending for administration and training only.
In the President’s FY2008 budget proposal, the Bush Administration noted that
Medicaid claims for services provided in school settings have been prone to abuse and
overpayments, especially with respect to transportation and administrative activities. As
of November 2007, the HHS Office of Inspector General (OIG) has published reviews of
school-based claims in 22 states. Based on this and other research, both the HHS OIG
and GAO have reached similar conclusions.6
4 See Sec. 321, H.Rept. 106-577 for the Concurrent Resolution on the Budget for Fiscal Year
2001, and page 153 of H.Rept. 106-1033 for the Omnibus Consolidated and Emergency
Supplemental Appropriations for Fiscal Year 2001.
5 See, for example, Travis Hicks: “Special Ed advocates oppose new Medicaid guidance. (Cuts
in Medicaid funding for health services professional for special education students).” Education
Daily, February 6, 2003.
6 See, for example, HHS OIG, Review of Medicaid Transportation Claims Made by the New York
City Department of Education, A-02-03-01023, September 2005; HHS OIG, Audit of LaPorte
Consortium’s Administrative Costs Claimed for Medicaid School-Based Services, A-06-02-
00051, January 2006; GAO, Medicaid in Schools: Improper Payments Demand Improvements
(continued...)

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For transportation services, examples of inappropriate Medicaid billing include (1)
no verification that transportation was in fact provided, (2) a Medicaid-covered school
health service other than transportation was not provided on the day that transportation
was billed, and (3) child/family plans did not include a recommendation for transportation
services, or there was no IEP or IFSP.
School districts may perform administrative functions for Medicaid purposes, such
as outreach, eligibility intake, information and referrals, health service monitoring, and
interagency coordination. Examples of inappropriate Medicaid billing include (1)
payments based on inaccurate time studies used to allocate the cost of these administrative
activities across funding sources including Medicaid; (2) expenditures for school
employees who do not perform Medicaid administrative activities; (3) expenditures for
operating costs such as nursing supplies, non-Medicaid outreach supplies, and education-
related expenditures; (4) expenditures for personnel funded by other federal programs;
and (5) payments for personnel who render only direct medical services.
On December 28, 2007, the Bush Administration published a final rule7 regarding
Medicaid payments for school-based administration and transportation. First, the rule
would restrict federal payments for school-based administrative activities (e.g., outreach,
service coordination, referrals) that may be conducted on behalf of children dually eligible
for Medicaid and IDEA, as well as those eligible for Medicaid only. Second, the rule
would restrict federal payments for certain transportation services provided to children
dually eligible for Medicaid and IDEA. This rule supercedes prior guidance from CMS
on these issues, and is estimated to reduce federal Medicaid outlays by $635 million in
FY2009 and by $3.6 billion over the period FY2009-FY2013. The Congressional Budget
Office (CBO) estimates that this final rule will reduce federal Medicaid outlays by $4.2
billion over 5 years and by $10.2 billion over 10 years.8 A recent congressional report
indicates that this rule would result in the loss of roughly $3.2 billion over the next five
years in 34 states affected by the rule that could provide such estimates.9 CMS indicated
that school budgets for the 2007-2008 school year will not be affected by the rule.
According to CMS, federal Medicaid reimbursement would no longer be available
for (1) administrative activities performed by school employees or contractors, or anyone
under the control of a public or private educational institution, because of inconsistent
application of Medicaid requirements by schools, or (2) transportation from home to
6 (...continued)
in HCFA Oversight, GAO/HES/OSI-00-69, April 2000, and Medicaid: States’ Efforts to
Maximize Federal Reimbursements Highlight Need for Improved Federal Oversight. Testimony
by Kathryn Allen before the Senate Finance Committee, June 28, 2005 (GAO-05-836T).
7 “Medicaid Program; Elimination of Reimbursement under Medicaid for School Administration
Expenditures and Costs Related to Transportation of School-Age Children Between Home and
School,” 72 Federal Register 73635, December 28, 2007. This rule is identical to a proposed
rule issued on September 7, 2007 (72 Federal Register 51397).
8 See Congressional Budget Office, Medicare, Medicaid and SCHIP Administrative Actions
Reflected in CBO’s Baseline, February 29, 2008.
9 See The Administration’s Medicaid Regulations: State-by-State Impacts, prepared for Chairman
Henry Waxman by the Majority Staff, U.S. House of Representatives, Committee on Oversight
and Government Reform, March 2008.

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school and back for school-aged children with an IEP or IFSP, because such
transportation does not meet the definition of an optional medical transportation service,
nor is it necessary for the proper and efficient administration of the Medicaid state plan.
Many in the education and state Medicaid communities are opposed to these cuts.10
Opponents argue that the rule (1) will reduce the availability of, and access to, needed
health care for children; (2) is inconsistent with decades of approved state plan
amendments allowing federal funding of these administrative and transportation services;
and (3) falsely assumes that health care administrative activities performed by school
personnel are inconsistent with the proper and efficient administration of the state
Medicaid plan because such activities improve children’s health, reduce inappropriate
medical care utilization, and thus ultimately save money. Moreover, additional federal
funding for existing programs like IDEA or other new appropriations to offset these
Medicaid cuts are unlikely to be on the horizon.
While the final rule eliminates federal matching funds for certain school-based
spending under Medicaid, other types of school-based expenditures remain reimbursable.
States may still claim federal matching dollars when school-based administrative
activities are conducted by employees of the state or local Medicaid agency for which
proper oversight and allocation of costs to Medicaid is more reliable according to CMS.
In addition, federal funding would still be available for administrative overhead costs
(e.g., patient follow-up, assessment, counseling, education, parent consultations, and
billing activities) that are integral to, or an extension of, a specified direct medical service
to the extent that those costs are represented in the rate paid for such services and
reimbursed at the applicable federal matching rate. Medicaid outreach and eligibility
intake, conducted by local or state Medicaid employees, would also remain reimbursable.
CMS would continue to reimburse states for the costs of school-based direct medical
services under IDEA that are covered in approved state Medicaid plans, and for
transportation of school-age children from school or home to a non-school-based direct
medical service provider that participates in Medicaid, or from the non-school-based
provider to school or home. CMS would also continue to reimburse states for
transportation of children who are not yet school age from home to another setting
(including school) and back to receive a direct medical service, as long as the visit does
not include an educational component or activity unrelated to the direct medical service.
P.L. 110-173 prohibits the Secretary of HHS from taking any actions that would
restrict coverage or payments for school-based administration and transportation under
Medicaid, relative to policies in place on July 1, 2007. This moratorium is effective until
June 30, 2008. H.R. 5613, as passed by the House, and H.R. 2642 as subsequently passed
by the Senate, would extend this moratorium to April 1, 2009. (See CRS Report
RS22849, Medicaid Financing, by April Grady, for more information on these bills).
10 See, for example, Joint Association Letter to Secretary Michael O. Levitt, from a consortia of
school organizations, August 23, 2007; Testimony by David Parrella, Director of Medical Care
Administration, Connecticut Department of Social Services, and Denise Herrmann, National
Association of School Nurses at a hearing held by the House Committee on Oversight and
Government Reform entitled The Administration’s Regulatory Actions on Medicaid: The Effects
on Patients, Doctors, Hospitals and States, November 1, 2007.

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Table 1. Medicaid School-Based Expenditures by States for FY2006
(in thousands of dollars)
Benefits
Admin/Training
State
Total
Dollars
% of Total
Dollars
% of Total
Alabama
5,974
0
0.0
5,974
100.0
Alaska
15,235
38
0.2
15,197
99.8
Arizona
91,126
75,550
82.9
15,576
17.1
Arkansas
4,081
3,136
76.8
945
23.2
California
309,932
130,407
42.1
179,525
57.9
Colorado
27,883
27,883
100.0
0
0.0
Connecticut
44,157
33,585
76.1
10,572
23.9
Delaware
24,950
24,950
100.0
0
0.0
District of Columbia
26,414
26,414
100.0
0
0.0
Florida
110,797
16,091
14.5
94,706
85.5
Georgia
41,760
10,131
24.3
31,629
75.7
Hawaii
0
0
—
0
—
Idaho
15,468
15,468
100.0
0
0.0
Illinois
245,346
82,572
33.7
162,774
66.3
Indiana
2,695
2,695
100.0
0
0.0
Iowa
25,190
24,883
98.8
307
1.2
Kansas
65,855
61,402
93.2
4,453
6.8
Kentucky
7,514
850
11.3
6,664
88.7
Louisiana
0
0
—
0
—
Maine
15,794
15,794
100.0
0
0.0
Maryland
180,328
180,328
100.0
0
0.0
Massachusetts
117,034
113,535
97.0
3,499
3.0
Michigan
0
0
—
0
—
Minnesota
54,906
42,702
77.8
12,204
22.2
Mississippi
3,408
0
0.0
3,408
100.0
Missouri
76,934
68
0.1
76,866
99.9
Montana
17,036
14,966
87.8
2,070
12.2
Nebraska
67,995
6,626
9.7
61,369
90.3
Nevada
1,387
1,387
100.0
0
0.0
New Hampshire
35,759
35,759
100.0
0
0.0
New Jersey
0
0
—
0
—
New Mexico
16,921
13,002
76.8
3,919
23.2
New York
469,653
469,653
100.0
0
0.0
North Carolina
37,313
15,403
41.3
21,910
58.7
North Dakota
1,547
1,547
100.0
0
0.0
Ohio
11,532
11,532
100.0
0
0.0
Oklahoma
5,780
5,780
100.0
0
0.0
Oregon
23,938
6,190
25.9
17,748
74.1
Pennsylvania
240,328
193,378
80.5
46,950
19.5
Rhode Island
5,526
0
0.0
5,526
100.0
South Carolina
56,193
45,258
80.5
10,935
19.5
South Dakota
5,543
0
0.0
5,543
100.0
Tennessee (see note)
504
(216)
-42.9
720
142.9
Texas
301
0
0.0
301
100.0
Utah
16,429
15,060
91.7
1,369
8.3
Vermont
0
0
—
0
—
Virginia
36,178
3,900
10.8
32,278
89.2
Washington
34,364
23,632
68.8
10,732
31.2
West Virginia
52,400
52,400
100.0
0
0.0
Wisconsin
72,697
69,480
95.6
3,217
4.4
Wyoming
0
0
—
0
—
National
2,722,105
1,873,219
68.8
848,886
31.2
Note: In FY2006, Tennessee had a negative adjustment made to its spending on benefits, thus, all net school-based
spending was for administration and training.
Source: CMS, Form-64 Information Forms. As submitted quarterly by states on a voluntary basis. States may forego
completing Information Forms if it delays reporting of overall Medicaid expenditures. Data may be incomplete for
some quarters and may contain amounts for prior periods. Unadjusted by CMS or CRS. Some services can be claimed
as either administrative expenses or as a benefit (e.g., case management, transportation).

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