QTA – A brief analysis of a critical issue in special education

Tapping Medicaid Funds

August 2001
Eileen M. Ahearn, Ph.D.


In 1993, Project FORUM issued a report (Ahearn, 1993) that provided information on resources available to states and districts in accessing Medicaid reimbursements, a relatively new source of funding at that time. It is now over 10 years since Medicaid funds were approved for use for special education services, and this document summarizes the current conditions and issues concerning the use of these funds.

This document was completed as a task under Project FORUM’s Cooperative Agreement #H159K70002 with the U. S. Department of Education, Office of Special Education Programs (OSEP). After a brief background, data from a recent survey of states by the Center on Special Education Finance are presented, and supplementary information gathered from interviews and email contacts with state department representatives is discussed.


Medicaid is a federal/state cost sharing benefit program for health and medical services for low-income individuals that was established as Title XIX of the Social

Security Act in 1965. Each state submits to the federal government a plan which defines the services it will provide. The state must provide at least ten core medical services including EPSDT (Early and Periodic Screening, Diagnosis, and Treatment) for children. Each state is assigned a reimbursement percentage ranging from 50 percent to 80 percent based on the poverty level of the state. In 1997, the Children’s Health Insurance Program (CHIP), a reduced-cost health insurance program, was added to Medicaid, and close collaboration between schools and the Social Security Administration has been established to foster outreach to eligible families.

The Medicaid Program and Special Education

The Health Care Financing Administration (HCFA) that administers Medicaid initially adopted a policy that Medicaid funds would not be available for health-related services that were part of a child’s individualized education program (IEP) or individualized family service plan (IFSP) since the Individuals with Disabilities Education Act (IDEA) assigned responsibility for those services to the schools. However, advocacy actions and court cases gradually supported a change and, in 1988, the Medicare Catastrophic Coverage Act provided that Medicaid could pay for medical services provided to Medicaid-enrolled children with special health care needs on their IEP or IFSP. Based on the 1997 Amendments to the law [§612(a)(12)(A)(i)], the IDEA regulations provide that the financial responsibility of each non-educational public agency, “including the State Medicaid agency and other public insurers of children with disabilities, must precede the financial responsibility of the LEA (or the state agency responsible for developing the child’s IEP)” [CFR §300.142(a)(1)]. However, parents may not be required to “sign up for or enroll in public insurance programs in order for their child to receive FAPE (free appropriate public education)” [CFR §300.142(e)(2)(i)].

Some states have developed a program for billing Medicaid for services delivered in their LEAs (local education agency or school district), while other states are not directly involved in the reimbursement process. A thorough description of the provisions of the Medicaid program and how it has been implemented in the states is beyond the scope of this document. Detailed information is available from the publications and web sites in the Reference list at the end of this document.

State Medicaid Funding for Special Education

Some studies have been conducted about school district (LEA) experiences in accessing Medicaid resources (e.g., Feldman & Leslie, 2000). However, the only data available concerning state education agency (SEA) reimbursements for Medicaid eligible costs was gathered by the federally funded Center on Special Education Finance (CSEF) for the 1994-95 school year (Parrish, O’Reilly, Dueñas, & Wolman, 1997). The CSEF repeated their study of state finance systems in 1999-2000, and the updated data concerning Medicaid were provided for use in this brief analysis. The full report will be published by CSEF later in 2001.

As the table at the end of this document shows, there was significant growth in state recovery of Medicaid funds over the past five years. In the earlier study, only 11 states were able to provide estimates of their Medicaid revenue for school-based services, but 28 states could supply these data for 1999-2000. In some cases, individual LEAs or consortia of LEAs claim these reimbursements, so the SEA may not be able to provide complete data for the state as a whole.

In the 1999-2000 study, states were asked about the handling of Medicaid billing for special education and the percentage of Medicaid reimbursements returned to LEAs. As shown in Table 2, billing is done by LEAs or other parties (an intermediate unit or a billing agent) in about two-thirds of the states that responded to this item. The portion of reimbursements that states return to the LEA ranges from 15 to 100 percent.

Interviews with State Representatives

Six states were selected to obtain further details on their experiences in accessing Medicaid reimbursements. The states were chosen to reflect variation in three factors on the CSEF table: amount of reimbursement reported, percentage returned to the LEA, and the handling of billing in the state. The following is a summary of the information provided by these states.

Arizona: Although Arizona is listed as receiving no revenue from Medicaid, a new state-level agreement has been adopted to be implemented in April 2001 that will bring Medicaid reimbursements to the schools. All LEAs will be able to submit bills through a third party billing agent, contracted by the state Medicaid office, who will prepare the bill for the Medicaid office. All reimbursements, minus a fee for the agent, will be returned to the LEA. A request has been made by the state to HCFA for permission to bill retroactively for past services, but no decision has yet been made. The state Medicaid agency and the billing agent are providing training for LEA personnel on forms and procedures. There is strong interest in returning as much of the funding as possible to the schools.

Connecticut: The state bills Medicaid for services delivered to students, but not for administrative costs. LEAs send bills to the state Medicaid agency and 60 percent of the reimbursements received are returned to the LEA. In 1999, only seven of the state’s 180 LEAs were participating, but the number is growing steadily. As of July 2000, 25 LEAs were billing and an additional 35 were signed up to begin in the current school year. Connecticut uses a “bundled rate” in which a flat amount is billed for a student based on the prescribed services eligible for reimbursement rather than billing for each separate service delivered to that student. However, complete documentation of service delivery is maintained at the school level. The state’s Department of Health and Human Services provides training for school personnel and does reviews to ensure appropriate record keeping and prepare the LEAs for formal audits.

Delaware: Reimbursements for Medicaid eligible services have been collected by Delaware for seven years. The state allows Medicaid reimbursements to be used by each district to hire billing specialists. The state returns 30 percent of the amounts received to the LEAs that generated the billing. There is one restriction in the way the LEAs can use reimbursement returns: any amount generated through a program for a special population, such as a class for students with autism, must be returned to that program.

Illinois: LEAs prepare claims for Medicaid reimbursement and submit them to the Illinois Department of Public Aid, the state Medicaid agency. Each fiscal year the state returns 100 percent of the federal reimbursements to the LEA up to a total of $1 million, after which the state retains 10 percent of any additional amount generated by that LEA up to $10 million in reimbursements, after which the state retains one percent. The LEA is required to use all reimbursements for special education services and new special education programs and cannot use the funds to supplant existing programs already funded through other sources.

Pennsylvania: A single independent contractor has been hired by the state to do Medicaid billing. Each LEA or intermediate district that wants to participate submits its bills to the state through that contractor. The state has placed a control on the allocation and use of the reimbursements: the reimbursements are deposited into a restricted receipt account for each LEA, and the LEA must submit a budget and a plan for use of the funds in order to draw down on their reimbursements for use in special education. The state program now covers only physical health services, but they are pursuing coverage for mental health services.

Washington: The state of Washington has adopted a very aggressive program to ensure Medicaid reimbursement for services delivered in schools. It is mandatory for LEAs to bill Medicaid for eligible services delivered in schools. This requirement is high stakes for LEAs because their state funding is reduced if they do not bill Medicaid for all eligible services. LEAs are required to use the state-appointed billing agent, and regional service districts in the state assist LEAs in the billing process. The state is also required by law to clearly designate the retained share of the Medicaid reimbursement for future special education expenditures.

Additional Information

It was beyond the scope of this Project FORUM task to contact every state to discuss Medicaid reimbursements. However, an email message was sent requesting verification from the State Director of Special Education in the states where data was listed as not available (“NA”) in the CSEF table for the 1998-99 school year. The following summary of responses received confirms the tremendous variation and the rate of change over time in state procedures for Medicaid reimbursements.

Alaska: LEAs are not able to bill Medicaid directly for special education or related services, but LEAs do receive a prorated portion of the amount the state receives from Medicaid each year. Changes in this system are currently under study.

Colorado: LEAs bill Medicaid and must report to the SEA how much Medicaid money is used to pay special education expenditures. The SEA is involved in the review of LEA Medicaid Plans, but not in the billing process.

Iowa: The state bills Medicaid for administrative claims and eligible services on students’ IEPs delivered by the Area Education Agencies (intermediate units). As of March 1, 2001, LEAs bill directly for services on the IEP or IFSP and for administrative costs. Data about reimbursements is not compiled by the SEA, but is available from the Iowa Department of Human Services.

Kentucky: LEAs that participate in the “School-Based Health Services Medicaid Program” have access to Medicaid funds. The funds are returned to the LEA directly. The statewide figures for 1998-99 are not yet available.

Minnesota: A law that became effective on 7/1/2000 “permits reimbursements for administrative costs of billing, technical assistance for the billing process, and for services provided to students with disabilities in the district” (MN Statute 125A.21). A new Medicaid billing system was developed by the state, and all districts in the state are now in the process of enrolling as Medicaid providers and setting rates for specific services.

Oklahoma: Medicaid is billed directly by the schools through intergovernmental agreements with the state Medicaid agency, the Oklahoma Health Care Authority (OHCA), and reimbursements are made without involvement of the SEA. School districts adhere to the Oklahoma Cost Accounting System (OCAS) in reporting Medicaid reimbursements, expenditures, and matching funds. The SEA and the OHCA confer in an ongoing manner for coordination of policy decisions and fiscal data relevant to the school based Medicaid/EPSDT program.

South Carolina: LEAs bill Medicaid although the SEA works closely with the Department of Health and Human Services to develop standards. An SEA staff member provides technical assistance to districts to ensure that they maximize their potential for reimbursements.

Utah: About half the LEAs and the State School for the Deaf and Blind bill Medicaid for reimbursements. The SEA is not involved and no statewide data on reimbursements is compiled.

Concluding Remarks

States vary greatly in their approaches to the use of Medicaid reimbursements as a source of revenue. SEA involvement ranges from none to total control of the process. Accessing Medicaid for school-based services is becoming a significant source of funding in some states, but claiming for eligible services is far from complete. Many states reported recent or pending revisions or current consideration of changes in their policies on Medicaid reimbursements. The requirements are complex and many of the procedures for obtaining Medicaid reimbursements are cumbersome. However, since there is no cap on the amount a state may claim for eligible services, it is expected that states will continue to pursue Medicaid to support special education even more vigorously in the foreseeable future.

This report was supported by the U.S. Department of Education (Cooperative Agreement No. H159K70002). However, the opinions expressed herein do not necessarily reflect the position of the U.S. Department of Education, and no official endorsement by the Department should be inferred.

Note: There are no copyright restrictions on this document; however, please credit the source and support of federal funds when copying all or part of this material.

Selected Data from CSEF Survey

States Medicaid Revenue 1994-95 Medicaid Revenue 1998-1999 % Returned to LEA How Billing Is Handled (1999-2000)
Alabama NA 134,107 69 Statewide
Alaska NA NA NA Statewide
Arizona NA 0 0 Statewide
California NA NA NA NA
Coloraado NA 234,056 NA LEA/Intermediate Unit
Connecticut 1,456,305 7,200,000 60 Statewide
Delaware NA 2,046,848 30 LEA/Intermediate Unit
Florida NA 21,433,006 100 LEA/Intermediate Unit
Georgia NA NA NA NA
Hawaii NA 0 0 Dep’t. of Health
Idaho NA 652,728 100 LEA/Intermediate Unit
Illinois NA 217,763,055 100 LEA/Intermediate Unit
Iowa NA NA NA LEA/Intermediate Unit
Kansas 966,902 18,000,000 100 LEA/Intermediate Unit
Kentucky NA NA NA LEA/Intermediate Unit
Louisiana 70,000,000 4,306,185 NA LEA/Intermediate Unit
Maine NA NA NA Billing Agency
Maryland NA 49,575,658 99 LEA/Intermediate Unit
Massachusettes NA 70,000,000 50 LEA/Intermediate Unit
Michigan 36,700,000 NA NA LEA/Intermediate Unit
Minnesota NA NA NA Statewide
Mississippi NA 12,425 100 LEA/Intermediate Unit
Missouri NA 5,800,000 100 LEA/Intermediate Unit
Montana 400,000 761,175 100 LEA/Intermediate Unit
Nebraska NA 2,361,948 100 LEA/Intermediate Unit
Nevada NA 0 0 LEA/Intermediate Unit
New Hampshire NA NA NA NA
New Jersey NA 25,898,461 15 Billing Agency
New Mexico NA 7,000,000 95 LEA/Intermediate Unit
New York NA 432,000,000 50 Statewide
North Carolina 100,305 NA NA Statewide
North Dakota 310,000 579,333 100 LEA/Intermediate Unit
Ohio NA NA NA Statewide
Oklahoma NA NA 100 LEA/Intermediate Unit
Oregon NA NA 100 LEA/Intermediate Unit
Pennsylvania NA 28,966,429 100 Statewide
Rhode Island 2,750,340 8,000,000 100 LEA/Intermediate Unit
South Carolina NA NA NA NA
South Dakota 345,080 NA NA NA
Tennessee NA NA NA LEA/Intermediate Unit
Texas NA 73,900,000 100 LEA/Intermediate Unit
Utah NA NA NA LEA/Intermediate Unit
Vermont 900,000 7,593,307 40 Statewide
Virginia 100,000 984,273 100 LEA/Intermediate Unit
Washington NA 9,105,209 5 Statewide
Wisconsin NA 37,960,475 40 LEA/Intermediate Unit
Wyoming NA 0 0 NA

Source: Center for Special Education Finance, AIR, Palo Alto, CA Note: See text for explanations of these data.
Legend: NA = Not Available LEA –
Local Education Agency (school district)


Health Care Financing Administration documents:
Medicaid school-based administrative claiming guide: 2003. Available online: http://www.cms.hhs.gov/MedicaidBudgetExpendSystem/Downloads/Schoolhealthsvcs.pdf

Medicaid and school health: August 1997 technical assistance guide. Available online: http://www.oregon.gov/DHS/healthplan/school-based-hs/scb-guide.pdf

Richardson letter:
5/21/99. Available online: http://www.cms.hhs.gov/smdl/downloads/SMD052199.pdf

Testimony of Tim Westmoreland, Director, HCFA Center for Medicaid and State Operations:
4/5/2000. Available online: http://www.hhs.gov/asl/testify/t000405a.html

Testimony of Sally Richardson, Director, HCFA Center for Medicaid and State Operations:
6/17/99. Available online: http://www.hhs.gov/asl/testify/t990617a.html

General Accounting Office Documents: (Available online at: http://www.gao.gov/archive/1999/he99148t.pdf)
Questionable practices boost federal payments for school-based services: Statement of William J. Scanlon, Director, HCFA,. June 17, 1999. GAO/T-HEHS-99-148.

Medicaid and special education: Coordination of services for children with disabilities is evolving. December 1999. GAO/HEHS-00-20.

Ahearn, E.M. (1993). Medicaid as a resource for students with disabilities. Alexandria, VA: National Association of State Directors of Special Education.

Feldman, B & Leslie, L. (2000). Medicaid cost recovery in the great city schools. Washington, D.C.: Council of the Great City Schools.

Parrish, T. B. , O’Reilly, F., Dueñas, I. E., & Wolman, J. (1997). State special education finance systems 1994-95. Palo Alto, CA: The Center for Special Education Finance.

This document, along with many other FORUM publications, can be downloaded from the Project FORUM at NASDSE web address:


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