State governments may be profiting off Medicaid funds meant for hospitals that are publicly-owned but managed privately, according to a report from HHS’s Office of Inspector General (OIG).

The OIG identified the issue during an audit of Alabama’s Medicaid agency. It found the state received $5 million in fiscal years 2010 and 2011 for three hospitals that are state-owned but operated by Infirmary Health. According to the agency’s memorandum, none of the $5 million was distributed to the hospitals.

The issue could be a potential loophole created by relying on state law rather than a federal statute.

“The federal and state governments jointly administer the Medicaid program, and the Federal Government pays a share of each State’s actual Medicaid expenditures. States may fund the State share of Medicaid through public funds that are certified by the contributing public agency (e.g., a public hospital) as eligible Medicaid expenditures,” OIG said. “However, ‘public funds’ and ‘contributing public agency’ are not defined in Federal statute or regulations. Thus, CMS relies on the State’s definition or requirement of what constitutes an appropriate entity that may certify public expenditures.”

Under Alabama law, the state ownership defines facilities as public hospitals  when they’re “owned or operated by the state”, therefore making them eligible for the certified public expenditures program under CMS, though the hospitals receive no state or local funding for operations.

The OIG audit said Georgia, Kentucky and Virginia all had the same “owned or operated” language in their laws, making it possible those states could be “utilizing funds from private entities that operate a facility that is owned by” state or local government.

The concern the agency raised is not only could states be benefitting financially from these arrangements, but that the federal governments could be matching funds which state and local governments haven’t actually spent.

To combat those kinds of arrangements, OIG recommended CMS require hospitals be operated, not just owned, by a unit of government in order to certify public expenditures.