Annual report (Arizona Health Care Cost Containment System (AHCCCS))

              L\ AHCCCS
Ourfirst care is your health care
ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
The Honorable James Weiers
Arizona House ofRepresentatives
1700 W. Washington
Phoenix, AZ 85007
Dear Speaker Weiers:
RECEI\/ ED
OFFICE OF THE PRESIDENT
Janet Napolitano, Governor
Anthony D. Rodgers, Director
801 East Jefferson, Phoenix AZ 85034
PO Box 25520, Phoenix AZ85002
Phone 602- 417- 4000
www. azahcccs. gov
Enclosed, please fmd the FY 2008 AHCCCS Annual Report, including an annual fmanciaI
examination for HeaIthcare Group as required by Laws 2008, Chapter 288.
I would be happy to answer any questions or provide additional information. Please feel free to
contact me at ( 602) 417- 4111.
cO .
r y ~
Dir tor
c: The Honorable Tim Bee, President, Arizona State Senate
The Honorable Kirk Adams, Arizona House ofRepresentatives
The Honorable Bob Burns, Arizona State Senate
Richard Stavneak, Director, Joint Legislative Budget Committee
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ARIZONA HEALTH CARE
COST CONTAINMENT SYSTEM
FINANCIAL STATEMENTS
AND ADDITIONAL INFORMATION
Year Ended June 30, 2008
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ARIZONA HEALTH CARE
COST CONTAINMENT SYSTEM
FINANCIAL STATEMENTS
AND ADDITIONAL INFORMATION
Year Ended June 30, 2008
CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
INDEPENDENTAUDITORS' REPORT
BASIC FINANCIAL STATEMENTS
Government- Wide Financial Statements
Statement of Net Assets ( Deficit)
Statement of Activities
Fund Financial Statements
Balance Sheet - Governmental FundS
Statement of Revenues, Expenditures and Changes in Fund Balances
- Governmental Funds
Reconciliation of the Statement of Revenues, Expenditures, and
Changes in Fund Balances of Governmental Funds to the
Statement of Activities
BUdgetary Comparison Schedule - General Fund
Statement of Net Assets ( Deficit) - Proprietary Fund
Statement of Revenues, Expenses and Changes in Net Assets ( Deficit) Â Proprietary
Fund
Statement of Cash. Flows - Proprietary Fund
Notes to Financial Statements
ADDITIONAL INFORMATION
Schedule of Expenditures of Federal Awards
Report on Internal Control Over Financial Reporting and on Compliance
and Other Matters Based on an Audit of Financial Statements
Performed in Accordance with Government Auditing Standards
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28- 44
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Fiscal Year Ended June 30, 2008
Management of the Arizona Health Care Cost Containment System (" AHCCCS" or the " Agency")
provides this Management's Discussion and Analysis for the benefit of the readers of the AHCCCS
financial statements. This narrative overview and analysis of the financial activities of AHCCCS is
for the fiscal year ended June 30, 2008. The intent of this discussion and analysis is to look at
AHCCCS' performance as a whole. We encourage readers to consider this information in
conjunction with the basic financial statements and related footnotes that follow this section.
Financial Highlights
Government- WIde
• The liabilities of AHCCCS exceeded its assets ( presented as " net deficit") at fiscal year ended
June 30, 2008 by $ 10.5 million. AHCCCS' net deficit at June 30, 2008 is comprised of an
unrestricted net deficit of $ 12.7 million and the amount invested in capital assets of $ 2.2 million.
• The total AHCCCS net assets deficit decreased by $ 5.5 million during fiscal year 2008. Net
assets of governmental activities decreased by $ 2.4 million, while the net assets deficit of the
business- type activity decreased by $ 7.9 million.
Fund Level
• As of the close of fiscal year 2008, AHCCCS' total governmental funds reported an ending fund
balance of $ 1.8 million, a decrease of $ 3.1 million. Approximately 57.7 percent of the decrease
is attributable to the appropriated program expenses that included the carry forward balance of
the Temporary Medical Coverage ( TMC) program that the legislature temporarily suspended for
fiscal year 2009. The appropriated program expenses for fiscal year 2008 utilized the $ 1.6
million beginning fund balance as a current fiscal year source of funds.
• Business- type activities during fiscal year 2008 resulted in a positive operating gain of $ 217,000
compared to the operating loss of $ 20.7 million in the prior year, which constitutes a major turn around.
Overall operating results, including a General Fund subsidy, decreased the net deficit to
$ 15.8 million as compared to the $ 23.7 million net deficit at June 30,2007. In addition to posting
an operating income, HCG received a $ 7.25 million General Fund subsidy to reduce its
reconciliation liability incurred in fiscal year 2006 and 2007. This allowed HCG to decrease its
net deficit position to $ 15.8 million at June 30, 2008; an improvement of over $ 7.9 million from
the year prior.
More detailed information regarding the government- wide financial statements and fund level
financial statements can be found beginning on page 2.
Overview of the Financial Statements
This discussion and analysis is intended to serve as an introduction to AHCCCS' basic financial
statements, which are comprised of three components: 1) government- wide financial statements, 2)
fund financial statements and 3) notes to the financial statements.
Government- Wide Financial Statements ( Reporting AHCCCS as a Whole)
The Government- Wide Financial Statements are designed to provide readers with a broad overview
of AHCCCS' finances that are comparable to a private- sector business. The Statement of Net
Assets ( Deficit) and the Statement of Activities are two financial statements that report information
about AHCCCS, as a whole, and its activities. The presentation in these statements is intended to
help answer the question: is AHCCCS, as a whole, better off or worse off financially as a result of
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this year's activities? These financial statements are prepared using the flow of economic resources
measurement focus and the full accrual basis of accounting. They take into account all revenues
and expenses connected with the fiscal year even if cash involved has not been received or paid.
The Statement of Net Assets ( Deficit) ( page 19) presents information on all of AHCCCS' assets and
liabilities, with the difference between the two reported as " net assets" or in instances where liabilities
exceed assets " net deficit." Over time, increases or decreases in net assets or net deficits, along
with other financial information, serve as indicators of AHCCCS' financial position and whether it is
improving or deteriorating.
The Statement of Activities ( page 20) presents information showing how AHCCCS' net assets
( deficit) changed during the most recent fiscal year. All changes in net assets are reported as soon
as the underlying events giving rise to the change occur, regardless of the timing of related cash
flows. Therefore, revenues and expenses are reported in this statement for some items that will
result in cash flows in future fiscal periods ( e. g. incurred but not reported fee- for- service and
reinsurance claims, revenue from future Tobacco Master Settlement Agreement payments,
business- type activity managed care health plans' stop loss reconciliations, and earned but unused
vacation leave).
Both statements report two categories:
• Governmental Activities - State appropriations along with federal, county intergovernmental
revenues and member premium collections primarily support the activities in this category.
The governmental activities of AHCCCS consist primarily of programs authorized by the
Social Security Act Titles XIX ( Medicaid) and XXI ( State Children's Health Insurance
Program ( SCHIP » that are concentrated on the health needs of the citizens of Arizona. The
majority of AHCCCS' activities are reported in this category.
• Business- Type Activities - This category is comprised of the Healthcare Group ( HCG)
operations. Members/ customers of HCG are charged a premium that is used to fund the
health care coverage provided and administrative functions.
The government- wide financial statements can be found on pages 19 and 20.
Fund Financial Statements ( Reporting AHCCCS' Major Funds)
A fund is a legislatively authorized fiscal and accounting entity with a self- balancing set of accounts
that AHCCCS uses to keep track of specific sources of funding and spending for specific activities or
objectives. AHCCCS, like other State agencies, uses fund accounting to ensure and demonstrate
compliance with legislative appropriation funding requirements. All of the funds of AHCCCS can be
divided into two categories: governmental funds and the proprietary fund.
Governmental funds - Governmental funds are used to account for essentially the same functions
reported as governmental activities in the government- wide financial statements. However, unlike
the government- wide financial statements, the governmental funds financial statements focus on
near- term inflows and outflows of spendable resources, as well as on balances of spendable
resources available at the end of the fiscal year. Such information may be useful in evaluating a
government's near- term financial position and requirements. This approach is known as using the
flow of current financial resources measurement focus and the modified accrual basis of accounting.
These financial statements provide a short- term view of AHCCCS' finances that assists management
in determining whether there will be adequate financial resources available to meet current needs.
Because the focus of governmental funds is narrower than that of the government- wide financial
statements, it is useful to compare the information presented for governmental funds with similar
information presented for governmental activities in the government- wide financial statements. By
doing so, readers may better understand the long- term impact of the State's near- term financial
decisions. Both the governmental fund balance sheet and the governmental fund statement of
revenues, expenditures and changes in fund balances prOVide a reconciliation to facilitate this
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comparison between governmental funds and governmental activities. The basic governmental
funds financial statements and related reconciliations can be found on pages 21 through 23 of this
report.
AHCCCS reports two fund categories: General Fund and Other Governmental Funds. Information
on these funds is presented separately in the governmental fund balance sheet and in the
governmental fund statement of revenues, expenditures and changes in fund balances.
Annually, the Legislature adopts an appropriated bUdget for AHCCCS for the acute care ( includes
separate line item appropriations for the Acute Care Base, Proposition 204, KidsCare, KidsCare
Parents, Breast & Cervical Cancer, Freedom- to- Work and TMC populations and supplemental
payments to hospitals), Long- term Care and AHCCCS Administration programs. The annual
appropriation is made separately for both the State funds and federal financial participation funds
from the Social Security Act Titles XIX ( Medicaid) and XXI ( State Children's Health Insurance
Program). In addition to the appropriation expenditure authority approved by the Legislature,
AHCCCS also expends funds for other third party liability recovery and cost avoidance program
activities and certain payments to hospitals for unfunded emergency department readiness costs and
level 1 trauma center costs. The expenditures for unfunded emergency department readiness costs
and level 1 trauma center costs are financed by revenues specifically collected for those purposes
and are by statute continuously appropriated. A budgetary comparison statement has been provided
for the General Fund to demonstrate compliance with the budget on page 24.
Proprietary fund - This fund is used to account for activities that charge customers for the services
provided. Proprietary funds are prepared using the flow of economic resources measurement focus
and the full accrual basis of accounting; the same method used by private sector businesses. There
is no reconciliation needed between the government- wide financial statements for business- type
activities and the proprietary fund financial statements.
AHCCCS maintains one proprietary fund that is classified as an enterprise fund. AHCCCS uses this
fund to account for the program that provides health insurance coverage for qualifying business
organizations including some State political subdivisions. The basic proprietary fund financial
statements can be found on pages 25 through 27 of this report.
Notes to the Financial Statements
The notes to the financial statements provide additional information that is essential to a full
understanding of the data provided in the government- wide and fund financial statements. The
notes to the financial statements can be found on pages 28 to 44.
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Government- Wide Financial Analysis
As noted earlier, net assets may serve over time as a useful indicator of a government agency's
financial position.
AHCCCS Net Assets ( Deficit)
( in thousands of dollars)
Governmental Business- Type
Activities Activities Total
2008 2007 2008 2007 2008 2007
Current assets $ 768,280 $ 654,949 $ 14,190 $ 12,568 $ 782,470 $ 667,517
Noncurrent assets 900 900
Capital assets 2.160 2.587 103 129 2,263 2.716
Total assets 771.340 657.536 14,293 12,697 785,633 670.233
Current liabilities 766,013 649,856 15,213 18,383 781,226 668,239
Long- term liabilities 14.877 18.031 14.877 18.031
Total liabilities 766,013 649,856 30.090 36.414 796.103 686,270
Net assets ( deficit):
Invested in capital assets,
net of depreciation 2,160 2,587 103 129 2,263 2,716
Restricted net assets 12 12
Unrestricted ( deficit) 3,167 5,093 ( 15,900) ( 23.858) ( 12,733) ( 18.765)
Total net assets ( deficit) $ 5327 $ 7680 $ ( 15797) $ ( 23717) $ ( 10470) $ ( 16037)
For AHCCCS, liabilities exceeded assets by $ 10.5 million at June 30, 2008 as compared to liabilities
exceeding assets by $ 16.0 million at June 30,2007.
The largest portion of the AHCCCS total net deficit ( 150.9%) is due to a $ 15.8 million net deficit for
HCG, the sole AHCCCS business- type activity. During fiscal year 2008, HCG net deficit decreased
by $ 7.9 million. This decrease in the net deficit is primarily due to a $ 7.25 million General Fund
subsidy to fund prior fiscal years 2006 and 2007 reconciliation liability and operating losses along
with an increase in premium revenue to align member premiums with medical loss experience.
A $ 3.2 million unrestricted net asset balance for governmental operations partially offsets the
business- type activity unrestricted net deficit. The governmental unrestricted balance primarily
consists of funds in the amount of $ 1.7 million limited to future spending for certain information
technology expenses and a $ 900,000 hospital residency program loans receivable due and available
in future periods upon collection of the loans. During the year, governmental unrestricted net assets
decreased by $ 1.9 million. This decrease is related to appropriated expenses utilizing a carry forward
fund balance from the TMC program that the legislature temporarily suspended for fiscal year 2009.
The appropriated program expenses for fiscal year 2008 utilized the $ 1.6 million beginning fund
balance as a current fiscal year source of funds. Additionally, $ 447,000 of qualifying information
technology programming expense was funded from available balances authorized by state statute.
The net deficit in unrestricted net assets is also offset by net assets of $ 2.3 million invested in capital
assets. AHCCCS uses these capital assets to provide services to its members.
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AHCCCS Changes in Net Assets ( Deficit)
( in thousands of dollars)
Governmental Business- Type
Activities Activities Total
2008 2007 2008 2007 2008 2007
Revenues
Program Revenues
Charges for services $ 13,666 $ 12,197 $ 77,042 $ 70,007 $ 90,708 $ 82,204
Other operating grants and
contributions 486,708 420,602 35 486,708 420,637
Federal operating grants 5,209,662 4,727,031 10 171 5,209,672 4,727,202
General revenues
State appropriations 1,946.433 1,761,301 1,946,433 1,761,301
Tobacco tax 168,786 193,421 168,786 193,421
Unrestricted investment
earnings 1,639 2,196 443 446 2.082 2.642
Total revenues 7,826,894 7,116,748 77,495 70,659 7,904,389 7,187,407
Expenses
Health Care 7.788.853 7,065.549 76.825 90.708 7.865.678 7.156.257
Excess ( deficiency) before transfers 38,041 51,199 670 ( 20,049) 38,711 31,150
Transfers, net ( 40.394) ( 49.274) 7.250 ( 33.144) ( 49.274)
Increase ( decrease) In net
assets ( 2,353) 1,925 7,920 ( 20,049) 5,567 ( 18,124)
Net assets ( deficit) - beginning of
year 7.680 5.755 ( 23.717) ( 3,668) ( 16.037) 2.087
Net assets ( deficit) - end of year $ 5327 $ 7680 $ ( 15797) $ ( 23717) $ ( 10470) $ ( 16037)
At June 30, 2008, the governmental activities ended in a positive net asset position. The combined
business- type activity and government- wide activities closed the fiscal year with a deficit net assets
balance. Although the business- type activity reported a $ 7.9 million decrease in net assets deficit,
this is the third consecutive fiscal year that the business- type activity has reported a deficit net asset
balance. The deficit in the business- type activity still contributes to a government- wide net deficit for
the Agency as a whole. Overall, the net assets deficit was decreased by $ 5.6 million, or 34.7
percent from the net assets deficit at June 30, 2007.
Governmental activities decreased AHCCCS' net assets by $ 2.353 million during fiscal year 2008.
This decrease is related to appropriated expenses utilizing a carry forward fund balance from the
TMC program that the legislature temporarily suspended for fiscal year 2009. The appropriated
program expenses for fiscal year 2008 utilized the $ 1.6 million beginning fund balance as a current
fiscal year source of funds. Additionally, $ 447,000 of qualifying information technology programming
expenses were funded from available balances as allowed by state statute. Business- type activities
increased net assets by $ 7.920 million. The increase is primarily attributable to a $ 7.25 million
General Fund subsidy provided in order to fund its reconciliation liability incurred in fiscal years 2006
and 2007 and operating losses. Fiscal year 2008 resulted in an operating gain of $ 217,000
compared to the operating loss of $ 20 million in the prior year. Overall operating results covered
expenses in the fiscal year. Including the General Fund subsidy, HCG decreased its net deficit
position to $ 15.8 million at June 30,2008; an improvement of over $ 7.9 million from the year prior.
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Governmental Activities
Fiscal year 2008 governmental activities decreased net assets by $ 2.353 million. The decrease is
primarily related to appropriated expenses utilizing a carry forward fund balance from the Temporary
Medical Coverage program that the legislature temporarily suspended for fiscal year 2009. The
appropriated program expenses for fiscal year 2008 utilized the $ 1.6 million beginning fund balance
as a current fiscal year source of funds. Additionally, $ 447,000 of qualifying information technology
programming expenses was funded from available balances authorized by state statute.
The overall AHCCCS program continued to see growth in program medical expenditures during
fiscal year 2008. Enrollment has increased in six out of the past seven fiscal years. The single year
of decline was fiscal year 2006. The increase in program expenditures in fiscal year 2008 is
attributable to provider reimbursement inflation and increased enrollment. AHCCCS' overall
governmental activity population was 1,157,800 as of June 1, 2008. Since March 1, 2001, just prior
to the implementation of Proposition 204, the overall AHCCCS population has increased by 571,302
including Healthcare Group, which equates to a 97.4 percent growth rate. Of this amount, 151,300
( 26.5 percent of the total 97.4 percent growth rate) are members who were made eligible by the
Proposition 204 program expansion since the April 1, 2001 effective date.
The following charts depict AHCCCS membership growth and enrollment by program for the
reporting period:
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/ 1,157,800
./ ./ 1,102,070
1,086,440 1,090,500
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982,500 V /' /'
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V y. ~ L-!~+ I),,;)' j " ~ V ':: Ok">
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AHCCCS Membership Growth
AHCCCS Enrollment by Program
June- 2004
ALTCS
45,570
Medicare Cost Sharing
26,200
June- 2005
Total Enrollment as of June 1, 2006
Approximately 1,157,800
Healthcare Group
21,220
June- 2006
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June- 2007
Breast and Cervical Cancer
140
June- 2006
Temporary Medical Coverage
280
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The cost of health care programs, including Title XIX Medicaid and Title XXI SCHIP, totaled $ 7,788.9
million in fiscal year 2008, a $ 723.4 million increase over the $ 7,065.5 million reported in fiscal year
2007. As shown in the statement of activities, the amount of expenditures funded from federal
grants through the Centers for Medicare and Medicaid Services ( CMS) was $ 5,209.7 million ( 66.9
percent) in fiscal 2008 as compared to $ 4,727.2 million ( 66.9 percent) in fiscal 2007. Program
funding in the form of federal financial   participation is primarily determined through the Federal
Medical Assistance Percentages ( FMAP) used to provide the amount of federal matching for State
medical assistance expenditures. The FMAP is based on the relationship between Arizona's per
capita personal income and the national average per capita personal income over three calendar
years. The FMAP is recalculated each year and decreased by 0.27 percent to 66.20 percent from
the prior year's rate of 66.47 percent. This decrease resulted in a cost shift of approximately $ 21
million to State sources for fiscal year 2008. The overall increase in program expenditures can
primarily be attributed to an average 6.0 percent capitation rate inflation growth across all capitated
programs. Yearly capitation rate increases have averaged 7.2 percent over the last 5 years, with the
lowest increase of 4.2 percent in fiscal year 2003 and the highest of 13.9 percent in fiscal year 2004.
Other increases in governmental expenditures include $ 32.4 million for expansion of the Graduate
Medical Education program and $ 12.2 million for expenditures related to Medicare Clawback
payments made to CMS.
State, county and miscellaneous funding sources combined to provide $ 2,617.2 million in State
funding sources and appropriations in fiscal year 2008, a $ 227.5 million increase over the $ 2,389.7
million reported in fiscal year 2007. The following are the components of the State match funding
sources. State General Fund revenues raised primarily in the form of income and sales taxes
directed to AHCCCS amounted to $ 1,316.5 million and an additional $ 629.9 million was passed
through from other State agencies in order to provide the State's share for Title XIX Medicaid and
Title XXI SCHIP eligible medical assistance expenditures. Arizona counties contributed $ 319.3
million as determined by Statutory funding formulas and Session Law. Tax collections on tobacco
products provided $ 168.8 million in State match funding, however, collections significantly decreased
by $ 24.6 million or 12.7 percent. An additional $ 126.6 million in State revenue funding was provided
by the annual payments to AHCCCS as administrator of the Tobacco Litigation Settlement Funds
awarded to Arizona. These revenues are recorded in accordance with the Governmental Accounting
Standards Board ( GASB) Technical Bulletin. No. 2004- 1, Tobacco Settlement Recognition and
Financial Reporting Entity Issues, which clarifies how payments made to AHCCCS pursuant to the
Master Settlement Agreement ( MSA) with major tobacco companies are recorded. Payments are
based on cigarette sales from the preceding year. AHCCCS has accrued $ 57.0 million for the period
from January 1, 2008 through June 30, 2008 based on Arizona's Joint Legislative Budget Committee
2009 estimated payment. In addition to the annual payment described above, AHCCCS received
the first Strategic Contribution Fund ( SCF) payment. Under the MSA, starting on April 15, 2008 and
on April 15 of each year through 2017, the tobacco companies that joined the MSA are required to
make a " strategic contribution payment" to the States in addition to the MSA Annual Payment. The
amount of the payment is dependent upon several adjustments, the magnitude of which will not be
fully known until an Independent Auditor provides its calculations in February or March of each year.
Other factors could also affect the SCF Payment amount that AHCCCS ultimately receives, including
default or bankruptcy by one or more tobacco companies and unforeseen withholding of SCF
Payment amounts. Tribal gaming receipts distributed to AHCCCS as determined by statutory
formula and other sources provided an additional $ 56.1 million. Payments of $ 23.4 million were
made to hospital emergency departments and level 1 trauma facilities from tribal gaming receipts.
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AHCCCS Expenses by Fund Type CProprietaryFund
CGovernmental Funds
The following charts depict revenues by source of the governmental activities for the fiscal year and
expenses for the reporting period:
Revenues by Source - Governmental Activities
2005
Federal Grants
66.6%
2006
Tobacco Tax
2.2010
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Fiscal Year
2007
Arizona Tobacco
Litigation
Settlement
County 1.6%
Contnbutions
4.1%
$ 8,000,000
$ 7,500,000
S $ 7,000,000
0 e.
. rJ $ 6,500,000
cI
$ 6,000,000 . c
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l!! $ 5,500,000
.!!
' 0
0 $ 5,000,000
$ 4,500,000
$ 4,000,000
2008
General Fund
Appropriations
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Business- Type Activities
The sole proprietary fund business- type activity for AHCCCS is the Healthcare Group ( HCG). HCG
was established in 1988 by the State to administer health care services primarily to small, uninsured
businesses with 1 to 25 employees and employees of political subdivisions. That range was later
increased to 1 to 50 employees. HCG contracts with three health. plans from the existing network of
AHCCCS health plans, Health Maintenance Organizations ( HMOs), to provide managed care
medical services. In fiscal year 2006, HCG started offering a Preferred Provider Organization ( PPO)
option through a third party administrator in order to provide health care coverage statewide. In
fiscal year 2009 this geographical coverage will exclude   Maricopa and Pima Counties. HCG's
administrative responsibilities include enrollment/ renewal,. fulfillment; premium billing, customer
service, collections, fund disbursement. and data analysis. Also, HCG is responsible for providing
reinsurance for certain HMO losses and regulatory oversight of the HMO's and the third party
administrator.
The business- type activities generated a net gain of $ 7.9 million based on operating income of
$ 217,000 following a $ 23.7 million loss in the year prior. Significant factors contributing to this
turnaround are discussed below.
Changes in Fiscal Year 2008
Premium Rate and Benefit Changes: While historically, rate increases have been implemented to
cover projected medical and administrative costs, the increase during fiscal year 2006 and fiscal year
2007 were insufficient to meet the pace of rising cost of medical care and high utilization of the HCG
membership, which resulted in net losses in both fiscal year 2006 and fiscal year 2007. Effective
September 2007, HCG increased premiums by approximately 18% overall in an effort to bring
premiums into balance with its medical utilization. HCG adjusted its premium rates, as depicted in
the following table for September 2007, to fund the projected medical and administrative costs
associated with operations. The table below shows the weighted average premium increase in
September 2007 for the different group sizes.
HMO - September 2007
Groups of 1 Groups of1 Groups of 2- 50 Groups of 2- 50
. New Renew New Renew
12.9% 31.7% 8.4% 16.9%
PPOS - September 2007
Groups of1 Groups of1 Groups of 2- 50 Groups of 2- 50
New Renew New Renew
24.0% 24.6% 24.0% 22.7%
To establish efficiency through consistency, HCG implemented the annual premium increase to all
employer groups on the same date. The September 2007 premium increase that became effective
for all employer groups varied based on group size, health plan, and community location ( rural vs.
urban). HCG also maintains its ability to adjust rates mid year if need, with a 60- day notice to
employer groups.
Eliminated . Zero Deductible Plans: The zero dollar deductible plans were eliminated and
approximately 4,490 members either self- terminated their coverage or were transitioned into a
minimum $ 500 deductible plan as of January 1, 2007, thereby requiring a higher cost sharing.
Focus on Wellness Care: To ensure HCG members continued to stay healthy and receive quality,
wellness- focused care, HCG implemented changes to the benefit plans eliminating the requirement
to meet their deductible for wellness care. Members pay only a co- payment for preventive! wellness
visits, primary care physician visits, urgent care, and basic lab and x- ray services.
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Groups of ' One' Guaranteed Issue: HCG has been the only healthcare coverage option in the state
of Arizona that is guaranteed issue for groups of one, resulting in a higher medical risk profile
compared to other small business health care coverage available within the State. At June 30, 2008,
groups of one totaled 5,596 groups. To address their increased cost of care, employer groups with
only ' one' employee were further community rated as a separate group - adjusting their premiums to
cover a higher cost of care.
Higher Medical Costs: Hospital participation in the HCG program is not mandatory. Although HCG
does not provide routine coverage at out- of- network facilities, costs for services at non- participating
hospitals rose faster than projected mostly related to care received as a result of an emergency room
visit at a non- contracted facility. The coinsurance applied to out- of- network facilities was increased
by 20.0 percent to cover this added cost. The PPO product was also transitioned to a Preferred
Point of Service. ( PPOS) tiered network, with the higher cost hospitals placed at a separate tier
associated with a higher coinsurance..
Hospital Default Rate: Effective September 19, 2007, Laws 2007, Chapter 263 ( HB 2789) placed a
default rate for payment of one hundred fourteen percent ( 114%) of the AHCCCS reimbursement
rate if a contract does not exist between a Healthcare Group contractor and a hospital provider. The
impact of this was a cost savings of approximately $ 3.2 million in calendar year 2006 and an
estimated cost savings of $ 2.5 to $ 3.0 million in calendar years 2007 and 2008.
Higher Utilization of Services: " Bare Period" requirements result in higher medical utilization for new
members who have been without continuous coverage; and in tum utilize services upon enrollment
at a higher rate than members who had continuous coverage. Although a twelve- month pre- existing
policy remains in effect, a benefit dollar maximum of $ 100,000 was placed on members during their
first 12- months of enrollment.
Administrative Costs: In fiscal year 2008 HCG reduced its administrative expense by nearly 36%
compared to the year prior, from $ 8.1 million to $ 5.2 million, respectively. This was accomplished
largely by moving more communications to an electronic format, utilizing a fulfillment vendor for
mailings, and eliminating administrative functions being performed at HCG, in duplicate, within the
HMO's operations. Also, significant reductions in the usage of consultants and contracted/ temporary
labor, and elimination of some FTE positions helped reduce personnel costs by over 50%. Health
plan contracts wer~ also amended to decrease the relative amount of their administrative payments,
thus reducing reconciliation costs.
Change in fiscal year 2009- PPOS availability: Effective October 2008, Laws 2008, Chapter 288 ( HB
2275) restricts the PPOS program to counties with a population of less than 500,000; thus
eliminating the PPOS option in Maricopa and Pima Counties. Data has demonstrated that activity in
these two counties accounted for substantially higher medical costs on average per person than that
of other counties. To the extent that the PPOS costs were more than premiums collected, funds had
to be reallocated in order to pay these medical claims. It is projected in fiscal year 20' 09 the PPOS
program in the remaining rural counties will operate on a break even basis with medical costs
equaling the medical premiums received, resulting in a medical loss ratio reduction of approximately
35.0 percent in fiscal year 2009 compared to fiscal year 2008.
Enrollment
In fiscal year 2008 HCG was required to adhere to a temporary enrollment freeze. Chapter 263
placed a temporary enrollment limit and an enrollment freeze on HCG effective September 19,2007,
not allowing the enrollment of any additional employer groups. The freeze ended on July 31, 2008,
allowing HCG to resume enrollment of new groups as of August 1, 2008. Although   the freeze was
lifted July 31, 2008, Chapter 288 placed additional limitations on enrollment by prohibiting enrollment
of any new business groups with only ' one' employee.
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The group enrollment table below demonstrates the decrease in enrollment experienced in fiscal
year 2008.
Healthcare Group Reconciliation Liability as of June 30, 2008
Fiscal Year 2008 Activity
( in thousands of dollars)
The reconciliation liability will be paid by allocating 2% of medical premium revenues for a
reconciliation reserve, from residual earnings, and from future State subsidies. Reconciliation
payment terms differ by each plan, such as, accruing 1% per month or repayment within 60 days of
final reconciliation.
Reconciliation Period
FY06 FY07 FY08 Total
$ 5,051 $ 17,458 $ $ 22,509
( 5,156) ( 2,354) ( 7,510)
105 ( 227) 4,324 4,202
$ $ 14877 $ 4324 $ 19.201
Group Pet of
Percent
% of
Size as of 2007 Â  2008 Total Change
Change
Total
June ( 2008) Change
1 6,888 5,596 72% - 1,292 - 19% 79%
2 1,327 1,207 15% - 120 - 9% 7%
3- 10 1,130 921 12% - 209 - 18% 13%
11+ 69 47 1% - 22 - 32% 1%
Total 9,414 7,771 100% - 1,643 - 17% 100%
In conclusion, in fiscal year 2008 HCG experienced a significant financial and operational turnaround
compared with the prior two fiscal years results. HCG has been successful in managing both
program and administrative costs through a series of cuts, changes and realignments, and ultimately
has more effectively matched revenues with expenses via premium adjustments. For fiscal year
2009 management believes that HCG will continue to operate without incurring additional losses.
Further, it is projected that HCG will not incur any additional reconciliation liability in fiscal year 2009.
Even though deficit reduction measures resulted in a net gain for fiscal year 2008, a fiscal year 2008
General Fund subsidy of $ 7.25 million was required to pay down a portion of the prior fiscal years
reconciliation liabilities. Additionally, a $ 5.0 million General Fund subsidy was approved by the
Legislature for fiscal year 2009. However, there can be no assurance that future subsidies will be
provided to continue to fund prior year losses.
Balance June 30, 2007
Payments made
Accruals and adjustments
Balance June 30, 2008
HCG reconciles the medical costs experienced by the Plans above a contractual target medical loss
ratio ( stop loss target) that is based on the capitation paid annually to each plan. This stop loss
payment is made for the difference in medical losses above the target medical loss ratio. If medical
costs exceed capitation, HCG pays the plans from the reconciliation reserves available. At June 30,
2008 the reconciliation liability is $ 19.2 million. The following table summarizes reconciliation liability
activity for fiscal year 2008:
By the end of fiscal year 2008 HCG's group enrollment declined approximately 17% from the year
prior, yet due to the rate increase in September 2007, premium revenues declined by only 13.6%.
Average total revenue per member per month in August 2007 was $ 244, while the same amount in
September 2007 was $ 273. This per member per month revenue increase was essential to keep
HCG from experiencing a net loss for the year. In fiscal year 2009 average per member per month
revenue is projected to be over $ 310.
HCG SUbsidy and Reconciliation Liability
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Going Concern Matters
As previously discussed, through a series of deficit reduction actions HCG was able to generate a
net gain in fiscal year 2008 and reduce its net deficit position by $ 7.9 million from the year prior.
Even though HCG's performance in fiscal year 2008 was positive compared with the previous two
years and management currently projects that the positive trend will continue, $ 15.8 million remained
as a net deficit at year end due to the outstanding reconciliation liability owed to the HMO's for the
previous two fiscal years. It is not anticipated in the foreseeable future that operations will generate
sufficient cash flow to significantly pay down the remaining prior deficit.
If a General Fund subsidy is not provided in fiscal year 2010 or if the fiscal year 2009 General Fund
subsidy is reduced due to the state's General Fund deficit or the current favorable medical loss trend
does not continue, each health plan contractor will have to make its own decision as to whether their
organization is willing to carry the medical loss liability from the HCG line of business until or if
premiums are adequate to recover their prior year losses. Should the health plans elect to call the
prior year reconciliation liabilities before HCG has sufficient funds to provide such payments and new
terms are not negotiated, or the Legislature does not provide HCG with additional subsidies, it raises
substantial doubt about HCG's ability to remain as a going concern. However, until the
aforementioned events present themselves, HCG plans to continue operations. Accordingly, the
accompanying financial statements have been prepared assuming that HCG will continue as a going
concern.
Financial Analysis of AHCCCS' Governmental Funds
Governmental Funds
At the end of fiscal year 2008, AHCCCS' governmental funds reported combined ending fund
balances totaling $ 1.840 million, a decrease of $ 3.083 million from the prior year balance.
The General Fund is the chief operating fund of the AHCCCS Acute Care, KidsCare, KidsCare
Parents, Breast & Cervical Cancer, Freedom- to- Work, TMC and Long- Term Care programs. These
programs primarily utilize a State general fund appropriation and revenue sources from the annual
tobacco litigation settlement proceeds, taxes on tobacco products, contributions from Arizona
counties and certified public expenditure methodologies to provide the required state matching funds
for federal Title XIX and Title XXI revenue.
The Other Governmental Funds consist of eight individual funds that have a combined total fund
balance of $ 1.840 million available to meet future year obligations. The Other Governmental Fund's
fiscal year 2008 fund balance, 100 percent of the governmental fund's unrestricted fund balance, is
primarily comprised of the balance in the Hawaii Arizona PMMIS Alliance Fund. Monies in this fund
are only available for certain expenditures. A total of $ 1.7 million is available for administrative
expenditures for information technology activities. Revenue from taxes on cigarettes and other
related tobacco products declined 13 percent over fiscal year 2007 and generated $ 118 million for
the current year compared to $ 135 million in fiscal year 2007. Total tobacco tax collections account
for 73.1 percent of the total Other Governmental Funds revenues compared to 77.1 percent of the
total Other Governmental Funds revenues in fiscal year 2007.
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General Fund Budgetary Highlights
Capital Asset Administration
AHCCCS Capital Assets
( net of depreciation, in thousands of dollars)
2007
$ 976
1,740
$ 2716
Total
Governmental Business- Type
Activities Activities
2008 2007 2008 2007 2008
Vehicles $ 725 $ 945 $ 23 $ 31 $ 748
Furniture and equipment 1.435 1,642 80 98 1,515
Total net assets $ 2.160 $ 2.587 $ 103 $ 129 $ 2263
Additional information on AHCCCS' capital assets can be found in Note 2 to the accompanying
financial statements on page 34.
Differences totaling $ 56.6 million occurred between the original and the final amended administrative
and programmatic expenditure budgets. A net $ 56.6 million supplemental appropriation was
provided for the AHCCCS program in fiscal year 2008 that included a $ 7.2 million reduction to
administrative line items. All other differences relate to special line item adjustments that utilized
surpluses from a line item to offset shortfalls in another line item. These appropriation transfers are
approved by the Governor's Office of Strategic Planning and Budgeting and are in accordance with
legislative authority. The major special line item revisions and supplemental increases can be briefly
summarized as follows:
AHCCCS' investment in capital assets for its governmental and business- type activities as of June
30, 2008 amount to $ 2.263 million, net of accumulated depreciation. This investment in capital
assets includes furniture, vehicles and equipment. Land, buildings and improvements are under the
management of the State and are accounted for on the State's comprehensive annual financial
report. Purchases include the normal planned retirement and replacement of automated systems
equipment. The total decrease in AHCCCS' investment in capital assets for the current fiscal year
was 16.7 percent or $ 453,000 and is primarily attributable a reduction of the motor pool fleet from
112 to 67 vehicles along with normal depreciation and retirement of information technology
equipment.
At June 30, 2008, actual cash basis appropriated expenditures were $ 177.1 million less than
budgetary estimates, thus providing carry- forward balances that are available to be used for
administrative adjustments as authorized by State statute.
• $ 29.5 million increase to Acute Base Special Line Items
• $ 55.0 million increase to Acute Proposition 204 Special Line Items
• $ 7.3 million decrease to Acute Hospital and other Special Line Items
• $ 16.5 million decrease to SCHIP and SCHIP Parents services
• $ 4.2 million decrease to Administration
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Long- Term Contingent Liability
In January 2001, AHCCCS obtained a Section 1115 Waiver (" Waiver") from CMS to receive federal
funding for certain non- categorically linked popUlations including those made eligible by the
November 2000 passage of Proposition 204. The original Waiver period ( April 1, 2001 through
September 30, 2006) has been extended to September 30, 2011 and requires that the population
covered by the Waiver be budget neutral for CMS over the term of the agreement. BUdget neutral
means that CMS will not pay more for medical services with the Waiver than it would without the
Waiver. The Waiver Special Terms and Conditions ( STC) include a monitoring arrangement that
requires AHCCCS to report the demonstration year's financial results on a quarterly basis. It also
established a diminishing annual threshold of the amount that AHCCCS is able to exceed the
calculated cumulative Budget Neutrality limit on an interim basis before being required to submit a
corrective action plan. The STC reporting limit thresholds are monitored on a Federal Fiscal Year
basis. The STC limit threshold for the first seven limit periods ( April 1, 2001 through September 30,
2008) is .75 percent. The threshold declines by 0.25 percent for limit periods eight and nine and is
zero percent for the limit period ended September 30, 2011. As of June 30, 2008, reported date of
service expenditures associated with the six periods ended September 30, 2007 are below the limit
by $ 164.5 million, or 0.94 percent. Through June 30,2008, AHCCCS remains under the cumulative
reporting limit threshold. The budget neutrality calculation is dependent on a number of variables
including the number of members, the eligibility category of members and the general economy and
its impact on unemployment, medical inflation and policy decisions made by the Legislature that may
impact program costs. Given the uncertainty surrounding these factors, AHCCCS is not presently
able to determine if the budget neutrality limit will be exceeded or if it is exceeded that CMS will
require repayment of the excess. Management believes that as of June 30, 2008, AHCCCS does
not have any liability to CMS related to the budget neutrality agreement. Accordingly, the
accompanying basic financial statements have not been adjusted for the impact of any liability
AHCCCS may have related to the Waiver budget neutrality agreement.
Economic Factors and Next Year's Budgets and Rates
The AHCCCS program experienced considerable enrollment growth in fiscal year 2008 following a
period of modest growth in the prior fiscal year. Fiscal year 2006 remains as the only year of
declining enrollment out of the previous six fiscal years. Enrollment for all government- wide
programs grew at a rate of 5.1 percent during fiscal year 2008. The overall change was primarily
due to growth in the Title XIX Waiver Group ( TWG) childless adults ( 17 percent), Title XIX families
and children ( 9 percent) and long term care ( 5 percent) program populations. That growth was
partially offset by a 28 percent decrease In the Title XXI KidsCare Parent population. AHCCCS
expects enrollment to grow in all of the major populations through fiscal year 2009 except fqr the
childless adults group due to a legislative change in the frequency of eligibility re- determinations from
a 12 month to a 6 month period. Arizona continues to experience a statewide economic downturn
that began in the previous fiscal year reSUlting in higher unemployment primarily in the construction
industry due to the housing market decline. Forecasters with the W. P. Carey School of Business at
Arizona State University believe that it is unlikely that Arizona's economy will improve much for at
least another year. The growth rates built into the population forecasts reflect this assumption that
populations will continue to be impacted by the slowdown in the economy, with some reduction in
growth occurring as the economy begins to recover in 2010.
AHCCCS awarded new managed care contr!' icts to provide Medicaid services across the state for
the acute care program for contract year ending September 2009. The awards were made on a
competitive bid basis and a total of 58 bids from 12 health plans were received and reviewed. A total
of 20 awards were made across 7 geographic service areas. Long- Term Care contracts were
renewed as awards are on a separate cycle and were made in a prior fiscal year. AHCCCS sets
capitation rates Within actuarially sound risk bands as required by the Federal Balanced Budget Act
of 1997. The contract year 2009 resulted in an Acute Care weighted average rate increase of 8.7
percent and a Long- Term Care weighted average increase of 2.5 percent, resulting in an overall
weighted average rate increase of 7.3 percent. The contract year 2009 overall weighted average
increase compares unfavorably to the contract year 2008 6.7 percent ( 6.9 percent for Acute Care,
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3.7 percent for Long- Term Care) capitation rate increase. The fiscal year 2010 budget includes
estimated increases in contract year 2010 for Acute Care of 6.0% ( 7.0% for TWG) and Long- Term
Care of 6.0%.
AHCCCS' budget request for fiscal year 2010 submitted to the Governor in September 2008 includes
a rebase of the fiscal year 2009 budget. The revised projection indicates a potential fiscal year 2009
Acute Care shortfall of $ 183.3 million. This shortfall can be partially mitigated by applying $ 44.9
million of unused fiscal year 2008 appropriation authority to claims paid in fiscal year 2009 with dates
of service prior to July 1, 2008. Other factors that may influence the need for or amount of a
supplemental appropriation include enrollment trends greater than projected and tobacco revenue
collections lower than projected. Management is closely monitoring these trends and the adequacy
of fiscal year appropriations.
Request for Information
This financial report is designed to provide a general overView of AHCCCS' finances for the State's
citizens and taxpayers, and AHCCCS' members, providers and creditors. Questions concerning any
of the information provided in this report or requests for additional financial information should be
addressed to the Arizona Health Care Cost Containment System, Division of Business and Finance,
Attention: Finance Administrator MD 5400, 701 East Jefferson, Phoenix, Arizona 85034.
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INDEPENDENT AUDITORS' REPORT
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Mayer Hoffman McCann P. C.
An Independent CPA Firm
3101 North Central Avenue, Suite 300
Phoenix, Arizona 85012
602- 264- 6835 ph
602- 265- 7631 fx
www. mhm- pc. com
INDEPENDENT AUDITORS' REPORT
To the Director of the
ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
( AHCCCS, an agency of the state of Arizona)
We have audited the accompanying financial statements of the governmental activities, the
business- type activities and the aggregate remaining fund information of AHCCCS at and for the
year ended June 30, 2008, as shown on pages 19 through 27. These financial statements are the
responsibility of AHCCCS' management. Our responsibility is to express opinions on these financial
statements based on our audit.
We conducted our audit in accordance with U. S. generally accepted auditing standards and the
standards applicable to financial audits contained in Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinions.
As discussed in Note 1, the financial statements of AHCCCS are intended to present the financial
position, the changes in financial position and cash flows, where applicable, of only that portion of
the governmental activities, the business- type activities and the aggregate remaining fund
information of the state of Arizona that are attributable to the transactions of AHCCCS. They do not
purport to, and do not, present fairly the financial position of the state of Arizona at June 30, 2008,
and the changes in its financial position and its cash flows, where applicable, for the year then ended
in conformity with U. S. generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
respective financial position of the governmental activities, the business- type activities and the
aggregate remaining fund information of AHCCCS at June 30, 2008, and the respective changes in
financial position and cash flows, where applicable, thereof and the respective budgetary comparison
for the general fund for the year then ended in conformity with U. S. generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that Healthcare Group,
AHCCCS' business- type activity will continue as a going concern. As discussed in Note 6 to the
financial statements, Healthcare Group's significant operating losses in the past years and significant
net deficit raise substantial doubt about its ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might result should Healthcare
Group be unable to continue as a going concern.
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In accordance with Government Auditing Standards, we have also issued our report dated
December 8, 2008 on our consideration of AHCCCS' intemal control over financial reporting and on
our tests of its compliance with certain provision of laws, regulations, contracts, and grant
agreements and other matters. The purpose of that report is to describe the scope of our testing of
internal control over financial reporting and compliance and the results of that testing, and not to
provide an opinion on the internal control over financial reporting or on compliance. That report is an
integral part of an audit performed in accordance with Government Auditing Standards and should
be considered in assessing the results of our audit.
The accompanying management's discussion and analysis on pages 1 through 16 Â  and the
budgetary comparison information on page 24 ' are not a required part of the basic financial
statements but are supplementary information required by U. S. generally accepted auditing
standards and the Governmental Accounting Standards Board ( GASB). We have applied certain
limited procedures, which consisted principally of inquiries of management regarding the methods of
measurement and presentation of the required supplementary information. However, we did not
audit the information and express no opinion on it.
Our audit was conducted for the purpose of forming an opinion on the financial statements that
collectively comprise AHCCCS' basic financial statements. The accompanying Schedule of
Expenditures of Federal Awards is presented for purposes of additional analysis as required by the
U. S. Office of Management and Budget Circular A- 133, Audits of States, Local Governments, and
Non- Profit Organizations, and is not a required part of the basic financial statements. This schedule
has been sUbjected to the auditing procedures applied in the audit of the basic financial statements
and. in our opinion, is fairly stated in all material respects in relation to the basic financial statements
taken as a whole.
This report is intended solely for the information and use of AHCCCS and the state of Arizona
Auditor General and is not intended to be and should not be used by anyone other than these
specified parties.
Phoenix, Arizona
December 8, 2008
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BASIC FINANCIAL STATEMENTS
•• ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
• STATEMENT OF NET ASSETS ( DEFICIT)
• June 30, 2008
( amounts expressed in thousands) ••
ASSETS Governmental Business- type
Activities Activities Total • CURRENT ASSETS
Cash $ 83,752 $ 14,169 $ 97,921 • Restricted cash 13,124 13,124
Due from state and county governments 120,824 120,824 • Due from the federal government 493,417 493,417
Tobacco settlement receivable 57,002 57,002 • Receivables and other 161 21 182
TOTAL CURRENT ASSETS 768,280 14,190 782,470 • NONCURRENT ASSETS • Hospital residency program loans 900 900 • Furniture, vehicles and equipment, net
of accumulated depreciation 2,160 103 2,263 • TOTAL NONCURRENT ASSETS 3,060 103 3,163 • TOTAL ASSETS 771,340 14,293 785,633 • LIABILITIES • CURRENT LIABILITIES • Accounts payable 3,488 329 3,817
Other accrued liabilities 3,866 113 3,979 • Bank overdraft 655 655
Deferred revenue 22,686 8,047 30,733 • Due to federal, state and county governments 37,713 37,713
Accrued programmatic costs 693,985 6,594 700,579 • Compensated absences 3,620 130 3,750
TOTAL CURRENT LIABILITIES 766,013 15,213 781,226 • ACCRUED PROGRAMMATIC COSTS, less current portion 14,877 14,877 • TOTAL LIABILITIES 766,013 30,090 796,103
• COMMITMENTS AND CONTINGENCIES
• NET ASS E T S ( 0 EF I C I Tl • INVESTED IN CAPITAL ASSETS 2,160 103 2,263
• UNR. ETSOTTRAICLTNEEDT( ADSESFEICTIST)( DEFICIT) $ 35,, 312677 $ (( 1155,, 970907)) $ (( 1120,, 743730)) ••
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
STATEMENT OF ACTIVITIES
Year Ended June 30,2008
( amounts expressed in thousands)
Program Revenues
Net ( Expense) Revenue and
Changes in Net Assets
NET ASSETS ( DEFICIT), END OF YEAR
CHANGE IN NET ASSETS ( DEFICIT)
NET ASSETS, BEGINNING OF YEAR
Transfers:
Transfers in
Transfers out
Total general revenues and transfers
General revenues:
State appropriations
Tobacco tax
Unrestricted investment earnings
Total
$ ( 2,078,817)
227 227
227 ( 2,078,590)
1,946,433
168,786
443 2,082
443 2,117,301
7,250 7,250
- ( 40,394)
7,693 2,084,157
7,920 5,567
( 23,717) ( 16,037)
( 15,797) $ ( 10,470)
Business- type
Activities
( 2,078,817) $
Governmental
Activities
( 2,078,817)
1,946,433
168,786
1,639
2,116,858
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( 40,394)
2,076,464
( 2,353)
7,680
$ 5,327 $
486,708 $
10
5,209,672 $ . 486,708
5,209,662 $
Federal Other Operating
Operating Grants and
Grants Contributions
90.708 $
77,042
13,666 $
Charges for
Services
Program
Expenses
PROGRAMS
Government activities:
Health care programs $ 7,788,853 $
Business- type activities:
Healthcare Group 76,825 -
TOTAL PROGRAMS $ 7,865,678 $
See Notes to Financial Statements
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BALANCESHEET- GOVERNMENTALFUNDS
June 30, 2008
( amounts expressed in thousands)
Other Total
Governmental Governmental
General Fund Funds Funds
ASSETS
Cash $ 72,083 $ 11,669 $ 83,752
Restricted cash 11,936 1,188 13,124
Due from state and county governments 76,897 13,565 90,462
Due from the federal government 248,880 248,880
Due from other funds 10,409 10,409
Receivables and other 142 19 161
TOTAL ASSETS $ 420,347 $ 26,441 $ 446,788
LIABILITIES
Accounts payable $ 3,425 $ 63 $ 3,488
Other accrued liabilities 3,688 178 3,866
Bank overdraft 655 655
Deferred revenue 21,877 809 22,686
Due to federal, state and county governments 37,398 315 37,713
Due to other funds 10,409 10,409
Accrued programmatic costs 353,304 12,827 366,131
TOTAL LIABILITIES 420,347 24,601 444,948
COMMITMENTS AND CONTINGENCIES
FUND BALANCES
Unreserved 1,840 1,840
TOTAL FUND BALANCES 1,840 1,840
TOTAL LIABILITIES AND FUND BALANCES $ 420,347 $ 26,441
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
Amounts reported for governmental activities in the statement of net assets are different because:
Capital assets used in governmental activities are not financial resources and, therefore, are not reported in the
funds.
Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of these
assets is allocated over their estimated useful lives and reported as depreciation expense. This is the amount by which
depreciation $ 1,526 exceeded capital outlays ($ 1,099) in the current fiscal year.
Long- term receivable for the hospital residency loan program is not due and receivable in the current fiscal year and,
therefore is not reported in the funds
Long- term liabilities for accrued paid time off are not due and payable in the current fiscal year and, therefore, are not
reported in the funds.
Long- term receivables, offsetting the above accrued paid time off liability, which are not receivable in the current
fiscal year and, therefore, are not reported in the funds.
Long- term accrued liabilities for programmatic costs are not due and payable from current financial resources and,
therefore are not reported in the funds.
Long- term receivables, offsetting the above accrued programmatic liability, which is not due and receivable in the
current fiscal year and, therefore, are not reported in the funds.
NET ASSETS OF GOVERNMENTAL ACTIVITIES
See Notes to Financial Statements
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2,160
427
900
( 3,620)
3,620
( 327,854)
327,854
$ 5,327
•• ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
• STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES-GOVERNMENTAL
FUNDS • Year Ended June 30, 2008
( amounts expressed in thousands) • other Total
Governmental Governmental • REVENUES General Fund Funds Funds
State government: • Appropriations $ 1,327,063 $ $ 1,327,063
Pess through funds 629,894 629,894
Federal government: • Acute care 3,219,908 10,200 3,230,108
Long- term care 744,219 744,219
PallS through funds 1,237,733 122 1,237,855 • County government:
Acute care 59,879 59,879
Long- term care 255,826 255,826 • Pass through funds 3,610 3,610
Tobacco litigation settlement revenue 115,587 115,587
Tobacco tax revenue 51,174 117,612 168,786 • Gaming revenue 23,434 23,434
Intergovernmental agreement revenue 8,564 8,564
Premium revenue 13,666 13,666 • Other 9,421 1,027 10,448
TOTAL REVENUES 7,667,980 160,959 7,828,939 • PROGRAMMATIC EXPENDITURES
Capitation: • Acute care 3,219,428 79,269 3,298,697
Long- term care 1,752,644 1,752,644
Children's rehabilitative services 74,292 74,292 • Mental health services 941,923 941,923
Fee- for- service:
Acute care 718,905 718,905 • Long- term care 108,425 108,425
Trauma center services 23,573 23,573
Disproportionate share 102,540 102,540 • Graduate medical education 66,644 66,644
Reinsurance 262,234 262,234
Medicare: • Acute care premiums 111,334 9,626 120,960
Long- term care premiums 31,660 31,660 • Part D clawback payments 57,942 57,942
Part D drug co- pay 3,733 3,733
Payments to counties 4,826 4,826 • TOTAL PROGRAMMATIC EXPENDITURES 7,456,730 112,468 7,569,198
ADMINISTRATIVE EXPENDITURES 196,035 20,297 216,332 • ADMINISTRATIVE EXPENDITURES PASSED THROUGH 5,076 122 5,198
TOTAL EXPENDITURES 7,657,841 132,887 7,790,728 • EXCESS OF REVENUES OVER EXPENDITURES 10,139 28,072 38,211 • OTHER FINANCING SOURCES ( USES)
Transfers out:
To State General Fund ( 1,566) ( 1,566) • To AHCCCS General Fund ( 100) ( 100)
To Healthcare Group ( 7,250) ( 7,250) • To Arizona Government Information Technology Agency ( 312) ( 312)
To Arizona Department of Emergency and Military Affairs ( 56) ( 56)
To Arizona Department of Economic Security ( 2,683) ( 2,683) • To Arizona Department of Health Services ( 28,443) ( 28,443)
To Arizona Department of Health Services Health Crisis Fund ( 84) ( 84) • Transfers in:
From AHCCCS Other Funds 100 100 • Hospital residency loan program ( 900) ( 900)
TOTAL OTHER FINANCING SOURCES ( USES) ( 11,767) ( 29,527) ( 41,294) • NET CHANGE IN FUND BALANCES ( 1,628) ( 1,455) ( 3,083) • FUND BALANCES, BEGINNING OF YEAR 1,628 3,295 4,923 • FUND BALANCES, END OF YEAR $ $ 1,840 $ 1,840
• See Notes to Financial Statements
- 22-
RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND
BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES
Amounts reported ' for governmental activities in the statement of activities ( page 20) are different because:
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
Year Ended June 30, 2008
( amounts expressed in thousands)
Net change in fund balance - total governmental funds ( page 22)
The Hospital Residency Loan Program receivable consumes current financial
resources of governmental funds while the repayment of the loan provides
current financial resources of governmental funds This amount is the use of
current financial resources in the current year.
Governmental funds report capital outlays as expenditures. However, in the
statement of activities the cost of those assets is allocated over their estimated
useful lives and reported as depreciation expense. Due to its pass through
nature, AHCCCS accrues revenue sufficient to eliminate its deficit fund balance
and, therefore, this is the amount by which depreciation exceeded capital
outlays in the prior period.
Change in net assets of governmental activities ( page 20)
See Notes to Financial Statements
- 23-
$
$
( 3,083)
900
( 170)
( 2,353)
•• ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
• BUDGETARY COMPARISON SCHEDULE - GENERAL FUND
Year Ended June 30, 2008 • ( Unaudited)
( amounts expressed in thousands) • Original Final Variance
Appropriation Appropriation with Final • @ udget) ( Budget) Actual Budget
REVENUES • State appropriations $ $ $ 1,296,570 $
State pass- through funds 689,142 • Federal government 3,867,745
Federal pass- through funds 1,214,404
County government 324,038 • County pass- through funds 3,581
Tobacco tax revenue 50,783 • Tobacco litigation settlement 115,587
Other 14,055 • Total revenues 7,575,905
OTHER FINANCING SOURCES • Operating transfers in 8,384
TOTAL REVENUES AND OTHER • FINANCING SOURCES 7,584,289
PROGRAMMATIC EXPENDITURES • Acute capitation 1,830,964 1,921.543 1,915,353 6,190
Reinsurance 108,133 109,550 95,962 13,588
Acute fee- for- servlce 497,367 434,866 432,294 2,572 • Proposition 204 capitation 968,755 1,098,248 1,087,291 10,957
Proposition 204 reinsurance 109,441 42,441 38,454 3,987 • Proposition 204 fee- for- service 175,537 168,067 163,980 4,087
Proposition 204 Medicare premiums 18,907 19,377 19,277 100
Medicare premiums 91,929 91,978 91,754 224 • SOBRA Pregnant Woman 5,337
Graduate medical education 44.157 42,657 42,657 • Disproportionate share 30,350 30,350 4,202 26,148
Hospital loan residency program 1,000
Rural hospital reimbursement 12,158 12,158 12,158 • Breast and cervical cancer 2,131 1,051 984 67
Critical access hospitals 1,700 1,700 1,699 1 • Freedom to work 8,044 6,174 6,155 19
Part D copay subsidy 1,030 2,640 2,602 38
Part D clawback payments 27,022 26,735 26,735 • SSDI temporary medical coverage 10,326 11,552 9,922 1,630
County hold harmless 4,826 4,826 4,826 • Long- term care 1,099,330 1,099,330 1,041,976 57,354
ALTCS clawback 20,429 20,429 19,225 1,204
LTC Part D capay SUbsidy 470 949 870 79 • LTC board of nursing 210 210 210
CHIP - Services 125,685 119: 112 119,074 38 • CHIP - Parents 50,296 40,401 39,069 1,332
TOTAL PROGRAMMATIC EXPENDITURES 5,245,534 5,306,344 . 5,129,246 177,098 • ADMINISTRATIVE EXPENDITURES 201,564 198,119 187,733 10,386
OPERATING TRANSFERS OUT 8,000 7,250 7,250 • TOTAL APPROPRIATED EXPENDITURES 5,455,098 5,511,713 5,324,229 187,484 • PRIOR YEAR APPROPRIATED EXPENDITURES 230,662 • NON- APPROPRIATED EXPENDITURES 2,006,336
REVENUES AND OTHER FINANCiNG • SOURCES OVER ( UNDER) EXPENDITURES 23,062 • FUND BALANCES, BEGINNING OF YEAR 57,311
FUND BALANCES, END OF YEAR $ $ $ 80,373 $ • See Notes to Financial Statements • - 24-
COMMITMENTS AND CONTINGENCIES
ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
STATEMENT OF NET ASSETS ( DEFICIT) - PROPRIETARY FUND
329
113
8,047
6,594
130
103
14,169
21
14,190
15,213
See Notes to Financial Statements
- 25-
ACCRUED PROGRAMMATIC COST, less current portion above 14,877
TOTAL LIABILITIES ~$~--.; 3;.;; 0;. l.;, O;.;; 9.;;. 0
TOTAL ASSETS $.......~""""==~=-
TOTAL CURRENT LIABILITIES
June 30, 2008
( amounts expressed in thousands)
ASSETS
CURRENT ASSETS
Cash .$
Receivables and other
TOTAL CURRENT ASSETS
CAPITAL ASSETS
Furniture, vehicles and equipment, net of accumulated depreciation
NET ASS E T S ( D E F I C I n
INVESTED IN CAPITAL ASSETS $ 103
UNRESTRICTED ( DEFICIT) ( 15,900)
TOTAL NET ASSETS ( DEFICIT) ~$_"';( ll,,;,, 15;;;, l,, 7;.;;; 9'.;../ 7)
LIABILITIES
CURRENT LIABILITIES
Accounts payable $
Other accrued liabilities
Deferred revenue - premiums
Accrued programmatic costs
Compensated absences due within one year
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STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS ( DEFICIT) Â PROPRIETARY
FUND
$ 77,042
55,468
5,138
11,033
2,908
1,258
953
67
76,825
217
443
10
453
670
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
Year Ended June 30, 2008
( amounts expressed in thousands)
OPERATING REVENUES
Premium revenue
OPERATING EXPENSES
Premiums paid to health plans
Reinsurance
Other programmatic
Salaries and employee benefits
Professional and outside services
Other
Depreciation
TOTAL OPERATING EXPENSES
OPERATING INCOME
NONOPERATING REVENUE
Investment income
Grant revenue
TOTAL NONOPERATING REVENUE
INCOME BEFORE TRANSFERS
TRANSFERS IN
From General Fund
CHANGE IN NET ASSETS
NEr ASSETS ( DEFICIT), BEGINNING OF YEAR
NET ASSETS ( DEFICIT), END OF YEAR
See Notes to Financial Statements
- 26-
$
7,250
7,920
( 23,717)
( 15,797)
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
STATEMENT OF CASH FLOWS - PROPRIETARY FUND
Year Ended June 30, 2008
( amounts expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers $ 75,034
Payments to health plans ( 64,067)
Payments to providers ( 11,357)
Payments to employees ( 2,888)
Payments to suppliers ( 2,759)
Net cash used in operating activities ( 6,037)
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES
Operating subsidies from other funds 7,250
Grant revenue 10
Net cash provided by non- capital financing activities 7,260
CASH FLOWS FROM INVESTING ACTIVITIES
Payments to purchase property and equipment ( 41)
Investment income 444
Net cash provided by investing activities 403
NET CHANGE IN CASH 1,626
CASH, BEGINNING OF YEAR 12,543
CASH, END OF YEAR $ 14,169
RECONCILIATION OF OPERATING INCOME TO NET CASH
USED IN OPERATING ACTIVITIES
Operating income. $ 217
Adjustment to reconcile operating income to net cash
provided by operating activities:
Depreciation 67
Changes in operating net assets and liabilities:
Decrease in prepaid rent 3
Decrease in accounts payable and other accrued liabilities ( 554)
Decrease in deferred revenue - premiums ( 2,006)
Decrease in accrued programmatic costs ( 3,785)
Increase in accrued compensated absences 21
NET CASH USED IN OPERATING ACTIVITIES $ ( 6,037)
See Notes to Financials Statements
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
( 1) Description of reporting entity and summary of significant accounting policies
A. Reporting entity
The accounting policies of the Arizona Health Care Cost Containment System (" AHCCCS" or the
" Agency") conform to the U. S. generally accepted accounting principles applicable to governmental units.
The financial statements of AHCCCS, as a department of the State of Arizona (" State") are not intended to
represent the related financial statement information of the primary government.
The Arizona Legislature (" Legislature") established AHCCCS in November 1981 to administer health care
for the State's indigent population. AHCCCS is a State agency managed by an independent cabinet level
administration created by the Legislature and is funded by a combination of federal, State and county funds.
The federal portion is funded through the Centers for Medicare and Medicaid Services (" CMS") of the U. S.
Department of Health and Human Services under a Section 1115 Waiver (" Waiver") approved by CMS,
which exempts the AHCCCS program from certain requirements of conventional Medicaid programs.
Approval of the Waiver, by CMS, extends through September 30, 2011. AHCCCS receives quarterly
federal grants from CMS ( as matching funds) to cover a portion of the health care costs of the residents of
the State eligible for the State's Title XIX Medicaid program and Title XXI State Children's Health Insurance
Program (" SCHIP"). State appropriations and county funding levels are based on annual budgets as
dictated by the Legislature and specified by Arizona Statutory funding formula and Session Law.
AHCCCS prOVides acute and long- term health care coverage to eligible residents of Arizona. Eligible
residents include those who qualify under Section 1931( b) of the Social Security Act, individuals who are
aged, blind or disabled, children who meet certain age requirements from families receiving food stamps,
children and pregnant women whose household income meets eligibility requirements, certain single adults,
childless couples, parents of SCHIP and Medicaid children under the Health Insurance Flexibility and
Accountability Demonstration initiative, uninsured women needing active treatment for breast and/ or
cervical cancer, individuals with disabilities who want to work and who meet certain SSI eligibility criteria
and disabled individuals who receive Social Security Disability Income (" SSDI") payments, are not eligible
for Medicare, and are no longer eligible for other AHCCCS programs.
Under AHCCCS, health care coverage is provided SUbstantially through a competitive bidding process with
private and county- sponsored health plans bidding for the enrollment of AHCCCS eligibles by geographical
service area. In addition, AHCCCS purchases health care services directly from providers.
AHCCCS also has the Healthcare Group line of business, which provides medical coverage primarily to
small businesses. The activities of Healthcare Group are included. in the proprietary fund. See Notes 5 and
6 for information on the Healthcare Group.
B. Basis of presentation
The basic financial statements include both government- wide and fund financial statements. The
government- wide financial statements report information on the entire. Agency while the fund financial
statements focus on major funds. Each presentation provides valuable information that can be analyzed
and compared between years to enhance the usefulness of the information.
The government- wide financial statements ( Le., the statement of net assets ( deficit) and the statement of
activities) report information on the entire Agency. The effect of all significant interfund activity has been
removed from these financial statements.
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
( 1) Summary of significant accounting policies ( continued)
The statement of activities demonstrates the degree to which the governmental and business- type activities
direct expenses are offset by program revenues. Direct expenses are those that are clearly identifiable with
a specific function. Program revenues include appropriations, contributions and grants that are restricted
for the operational or capital requirements of a partic. ular function or segment.
Fund financial statements provide information about the Agency's funds. Separate financial statements are
provided for the governmental and proprietary funds. The General Fund is the Agency's primary operating
fund, and it accounts for all financial resources except those required to be accounted for in another fund.
AHCCCS has one business- type activity, Healthcare Group. In fiscal year 2008, AHCCCS did not have any
major funds; accordingly, all governmental funds other than the General Fund are aggregated and reported
as other governmental funds.
C. Measurement focus, basis of accounting and financial statement presentation
The government- wide financial statements are reported using the economic resources measurement focus
and the accrual basis of accounting, as are the proprietary fund financial statements. Revenues are
recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of
the related cash flows.
Proprietary funds distinguish between operating revenues and expenses from non- operating items.
Operating revenues and expenses generally result from providing services and producing and delivering
goods in connection with a proprietary fl, md's principal ongoing operations. The principal operating
revenues of the Healthcare Group are premiums charged to small, uninsured businesses with 1 to 50
employees and employees of political subdivisions for medical coverage. Operating expenses for the
Healthcare Group include the costs of medical services, administrative expenses, and depreciation on
capital assets. All revenues and expenses not meeting this definition are reported as non- operating
revenues and expenses.
Proprietary fund revenues are recognized when they are earned, and expenses are recognized when they
are incurred. Member premiums are due by the first day of the month preceding the month of coverage. At
June 30, 2008, the proprietary fund deferred revenue of $ 8,047 consists of premium payments received for
fiscal year 2009 as required by contract.
The governmental fund financial statements are reported using the current financial resources
measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as
they. are both measurable and available. Revenues are considered to be available when they are
collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this
purpose, AHCCCS considers revenue to be available if they are collected within 31 days of the end of the
current fiscal year. The governmental funds deferred revenue consists of revenue received in advance for
services not yet provided. Expenditures generally are recorded when a liability is incurred, as under accrual
accounting. Accrued programmatic costs include estimates for incurred but not reported ( IBNR) claims for
a 31- day period following the end of the fiscal year. Actual results for accrued programmatic costs may
differ from such estimates. These differences are recorded in the period in which they are identified.
However, expenditures related to compensated absences and claims and judgments are recorded only
when payment is due.
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
( 1) Summary of significant accounting policies ( continued)
In fiscal year 2008, AHCCCS reports the following significant funds:
a. The general fund is the primary operating fund for the Title XIX Medicaid program and the Title XXI
State Children's Health Insurance Program.
b. Special revenue funds, reported as other governmental funds, account for various health and
administrative programs.
c. The Healthcare Group fund, reported as a business- type activity, accounts for the activities of a
medical coverage program primarily for small, uninsured businesses with 1 to 50 employees and
employees of political subdivisions.
Private- sector standards of accounting and financial reporting issued prior to December 1, 1989, generally
are followed in both the government- wide and proprietary fund financial statements to the extent that those
standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board
( GASB). Governments also have the option of following subsequent private- sector guidance for their
business- type activities and enterprise funds, sUbject to this same limitation. AHCCCS has elected to
follow subsequent private- sector guidance.
D. Cash and investments
Substantially all of. the cash and investments maintained by AHCCCS are held by the State of Arizona
Office of the Treasurer (" Treasurer") with other State monies. Investment income is allocated to AHCCCS
on a pro rata basis. Amounts held by the Treasurer are recorded at fair value and totaled $ 111,045 at June
30,2008, including restricted funds of $ 13,124.
The State is statutorily limited ( by ARS   35- 312 and   35- 313) to certain investment types. Additionally,
State statutes require investments made to be in accordance with the " Prudent Person" rule. This rule
imposes the responsibility of making investments with the judgment and care that persons of ordinary
prudence would exercise in the management of their own affairs when   considering both the probable safety
of their capital and the probable income from that capital. The Treasurer issues a separately pUblished
Annual Financial Report that provides additional information relative to the Treasurer's total investment
activities.
Cash in the General Fund has been internally restricted by AHCCCS in the amount of $ 11,936 for the Inter Agency
Service Agreement ( ISA) Fund. The ISA Fund is used to properly account for, control, and report
receipts and disbursements associated with ( SAs, which are not required to be reported in other funds.
Fund receipts consist of monies received from other entities and are utilized to match federal funding under
the Medicaid and SCHIP programs under the terms stated in the ISAs. Cash in the Other Governmental
Funds is legally restricted in the amount of $ 1,188 for the Hawaii Arizona PMMIS Alliance ( HAPA) Fund, as
described in Note 4 and is offset by an equal amount of accrued expenditures and deferred revenue at
June 30, 2008.
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
( 1) Summary of significant accounting policies ( continued)
In accordance.. with the Federal Cash Management Improvement Act guidelines, AHCCCS may only
request federal funds under specified funding techniques. These techniques require that AHCCCS draw
down or request funds for any check   issued in accordance with its historical average check clearance
pattern. The timing difference that occurs, due to drawing down funds after the issuance of checks, may
result in bank overdrafts to AHCCCS at various times during the year. At June 30, 2008, a bank overdraft
of $ 655 existed which represented the excess of checks issued over federal funds deposited.
E. Capitation payments
Contracted health plans receive fixed capitation payments, generally in advance, based on actuarially
determined rates for each AHCCCS member enrolled with the plan. The plans are required to provide all
covered health care services to their members, regardless of the cost of care. If there are funds remaining,
the plan retains the funds as profit; if the costs are higher than the amount of capitation payments from
AHCCCS, the plan absorbs the loss, except for those cases eligible for reinsurance payments or risk
sharing reconciliations.
Capitation is paid prospectively as well as for prior period coverage ( PPC). The PPC period generally is
from the first day of the month of application to the time of enrollment with a contracted health plan. The
risk under PPC is shared by both the contracted health plans and AHCCCS for the contract year. AHCCCS
reconciles the actual PPC medical costs to the PPC capitation paid during the contract year. The
reconciliation limits the contractor's profits and losses to 2%. Accrued programmatic costs include
approximately $ 91,710 at June 30,2008 that represents estimated settlement payments due to contracted
health plans for the PPC reconciliation. Actual results may differ from this estimate, and such differences
will be recorded in the period in which they are identified.
Similar risk sharing is in place for medical costs incurred by contracted health plans for the Title XIX Waiver
Group ( TWG) members. AHCCCS reconcill; ls the contractor's medical costs to the total capitation
payments, hospitalized supplemental payments, delivery supplemental payments and HIV/ AIDS
supplemental payments paid for the contract year. The reconciliation limits the contractor's profits or losses
to 2%. Accrued programmatic costs include approximately $ 26,436 at June 30, 2008 that represents
estimated settlement payments due to contracted health plans for the TWG reconciliation. Actual results
may differ from this estimate, and such differences will be recorded in the period in which they are
identified.
F. Reinsurance payment$
AHCCCS provides a stop- loss reinsurance program for its contracted health plans for partial
reimbursement, after a deductible is met, of reinsurable covered medical services incurred for members
with an acute medical condition. The program includes a deductible, which varies based on the health
plan's enrollment and the eligibility category of the members. AHCCCS will adjust the deductible levels
based upon enrollment levels and, in some cases; the contracted health plan with a higher deductible level
may elect a lower deductible level. AHCCCS reimburses the health plans based on a coinsurance amount
for reinsurable covered services incurred above the deductible. This reinsurance provides partial
reimbursement of reinsurance eligible covered services and will reimburse 75% of eligible costs above the
deductible level up to $ 650 of covered expenses and 100% thereafter.
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
( 1) Summary of significant accounting policies ( continued)
The reinsurance program also provides reimbursement for covered organ transplantation and catastrophic
disorders such as certain high cost behavioral health and blood related disorders. For transplants, payment
is limited to 85% of the AHCCCS contract amount for the transplant services rendered or 85% of the health
plans' paid amount, Â  whichever is lower. There is no deductible for catastrophic reinsurance cases, and
AHCCCS reimburses the health plans at a percentage of the health plans' paid amount, less the
coinsurance amount, unless the costs are paid under a subcapitated arrangement. AHCCCS pays 85% of
the health plans' paid amount for catastrophic reinsurance for certain blood related disorders up to $ 650 of
covered expenses and 100% thereafter. AHCCCS pays 75% of the health plans' paid amount for
catastrophic reinsurance for certain high cost behavioral health up to $ 650 of covered expenses and 100%
thereafter.
G. Fee- for- service payments
The AHCCCS program is responsible for the cost of providing medical services on a fee- for- service basis to
three populations: persons enrolled in the Emergency Services Program ( ESP), persons enrolled in a
health plan for less than 30 days, and Native American members enrolled with Indian Health Services
( IHS).
The ESP provides for emergency medical care to persons who are not eligible for full AHCCCS coverage
due to their lack of United States citizenship or lawful alien status. Outpatient medical services for the ESP
and for members enrolled in a health plan for less than 30 days are reimbursed using the AHCCCS
Outpatient Hospital Fee Schedule. Inpatient medical services for these populations are reimbursed based
on the category of service provided and an inpatient per- diem reimbursement rate system.
Medical services provided at an IHS facility or by a tribal- owned facility licensed by IHS are reimbursed at
rates determined by the Department of Health and Human Services, Indian Health Services. Off reservation
services are reimbursed based on the AHCCCS fee- for- service rates and the AHCCCS
Outpatient Hospital Fee Schedule.
H. Incurred but not reported programmatic expenditures
In the accompanying financial statements, the fee- for- service, reinsurance and capitation expenditures
include claims paid, claims in process and pending, and the estimate made by management for incurred but
not reported ( IBNR) programmatic claims. These IBNR programmatic claims include charges by
physicians, hospitals and other health care providers for services rendered to eligible members during the
period for which claims have not yet been submitted as well as prior period capitation payments for
members enrolled retrospectively.
The estimates fo~ IBNR programmatic claims are developed using actuarial methods based upon historical
data for payment patterns and other relevant factors. Such liabilities are necessarily based on assumptions
and estimates, and while management believes the amount is adequate, the ultimate liability may be in
excess of or less than the amount provided. The methods for making such estimates and for establishing
the resulting liability are continually reviewed, and adjustments are reflected in the period determined.
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year' Ended June 30, 2008
( dollar amounts expressed in thousands)
( 1) Summary of significant accounting policies ( continued)
I. Disproportionate share hospital payments
CMS and the Legislature authorized AHCCCS to make disproportionate share payments to Arizona
hospitals that provided care to a disproportionate share ( as defined) of the State's indigent population.
Expenditures for disproportionate share totaled $ 102,540 for the year ended June 30, 2008. See Note 13.
J. Taxes
AHCCCS is an agency of the State of Arizona and is not subject to income taxes.
K. Management's use of estimates
The preparation of financial statements in conformity with U. S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and
expenditures at June 30, 2008. Actual results may differ from these estimates.
L. 100% federal poverty level expansion and CMS Waiver
On November 7, 2000, the Arizona voters approved ballot Proposition 204. One of its primary components
directed AHCCCS to increase the minimum qualifying income eligibility level up to 100% of the Federal
Poverty Level. Proposition 204 also designC3ted AHCCCS as the administrator of the tobacco litigation
settlement funds awarded to the State for compensation of costs incurred in providing its citizens with
health care and other services necessitated by the use of tobacco products.
In January 2001, AHCCCS obtained a Waiver from CMS to receive federal funding for certain non categorically
linked populations including those made eligible by the passage of Proposition 204. The
Waiver. requires that over the term of the agreement the populations covered by the Waiver be budget
neutral for CMS. The Waiver period for budget neutrality began April 1, 2001 and extends through federal
fiscal year 2011, at which time any federal funds received by the State that exceed the negotiated bUdget
neutrality limit must be returned to CMS. Management believes that as of June 30, 2008, AHCCCS does
not have any liability to CMS related to the budget neutrality agreement and, accordingly, no liability is
recorded in the accompanying financial statements. See Note 9.
AHCCCS has classified the Arizona Tobacco Litigation Settlement Fund, created by ballot Proposition 204,
as part of its General Fund. These funds are restricted for use as specified in the litigation settlement
and/ or legislation. Annual settlement payments, based on . cigarette sales from the preceding calendar year
are made in April. In addition, supplemental payments may be received as tobacco companies enter into
the tobacco master settlement agreement. AHCCCS received an annual payment of $ 91,343 and a
strategic contribution fund payment of $ 24,244 in April 2008 for the period from January 1, 2007 to
December 31, 2007. Revenue and a related receivable of $ 57,002 was accrued for the period of January
1, 2008 through June 30, 2008 and is included in Tobacco Settlement Receivable and Other Operating
Grants and Contributions in the acqompanying Statement of Net Assets and Statement of Activities.
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NOTES TO FINANCIAL STATEMENTS
Year Ended June 30,2008
( dollar amounts expressed in thousands)
Compensated absences
2.263
2,716
1,140
( 20)
( 1.573)
3750
3,502
6,103
( 5.855)
$
$
$
$
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Balance, June 30, 2007
Additions
Reductions
Balance, June 30, 2008
It is the State's policy to permit employees to accumulate earned but unused vacation, compensatory and
sick pay benefits. Employees may accumulate up to 240 or 320 hours of vacation depending upon their
position classification. Vacation hours in excess of the maximum amount that are unused at the calendar
year end are forfeited. There is no liability recorded on AHCCCS' financial statements for sick leave as any
amounts eligible for payment when employees separate from State service are the responsibility of the
Arizona Department of Administration. The amount recorded in the government- wide financial statements
consists of employees' vested accrued vacation and accrued compensatory time benefits. All compensated
absences are due within one year. Balances and current fiscal year activity are as follows:
Capital assets, which consist of furniture, vehicles and equipment, are reported in the governmental and
business- type activity columns in the government- wide statement of net assets. Capital assets are defined
as assets with an initial, individual cost of more than $ 5 and an estimated useful life in excess of one year.
Such assets are recorded at historical cost and are depreciated over their estimated useful lives ranging
from three to five years. The costs of normal maintenance and repairs that do not add to the value of the
asset or materially extend assets lives are not capitalized. Net asset balances and current fiscal year
activity are as follows:
Capital assets
ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
Balance, June 30, 2007
Additions
Retirements
Depreciation
Balance, June 30, 2008
AHCCCS accounts for capital assets in accordance with the provisions of GASB Statement No. 42,
Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. GASB
Statement No. 42 requires that capital assets be reviewed for impairment whenever events or changes in
circumstances indicate a significant, unexpected decline in the service utility of a capital asset. If such
assets are considered to be impaired and are still in use, the impairment can be recognized using the
following methods: restoration cost approach, service unit approach, and a deflated depreciated
replacement cost approach. If such assets are considered to be impaired and are no longer used, the
impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. At June 30, 2008, management does not believe impairment
indicators are present, and there were no idle capital assets.
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands) .
( 4) Other governmental funds
At June 30, 2008, the other governmental fund balance of $ 2,740 was comprised of the following funds:
• Tobacco Tax and Health Care Fund, Medically Needy Account ( TTHCF- MNA) - The Arizona
Department of Revenue allocates funding to the TTHCF- MNA which provides funding for
services provided through the Title XIX Medicaid and other legislatively authorized health related
services or programs. Revenue sources for the TTHCF- MNA include tobacco tax proceeds and
investment income.
• Tobacco Products Tax Fund, Emergency Health Services Account ( TPTF- EHSA) - The Arizona
Department of Revenue allocates the tobacco tax revenue to the TPTF- EHSA which is used
solely for the reimbursement of uncompensated care, primary care services and trauma centers
readiness costs. Reve'nue sources for the TPTF- EHSA include tobacco tax proceeds and
investment income.
• Third Party Liability Fund - This fund is comprised of monies recovered from first and third party
payers under various AHCCCS recovery programs prior to the disbursement to the appropriate
programs. These programs include casualty, special treatment trusts, estate and health
insurance recoveries.
• Trauma and Emergency Services Fund - This fund is comprised of gaming revenues to be used
to reimburse hospitals in Arizona for unrecovered trauma center readiness costs and
unrecovered emergency services costs.
• Miscellaneous Funds - These funds account for various. grants and other money received for
specific purposes including the Hawaii Arizona PMMIS Alliance ( HAPA) and the Hospital Loan
Residency Fund. HAPA represents AHCCCS' project with Hawaii whereby AHCCCS provides
data processing services for Hawaii's Medicaid program. The Hospital Loan Residency Fund is
established consisting of legislative appropriations and loan repayment monies for the
establishment of a hospital loan program to fund start- up and ongoing costs for residency
programs in accredited hospitals. The hospital loans are interest- free and are due and will
become available in future periods when certain criteria are met triggering repayment or
beginning in fiscal year 2013 with five annual installments after the execution date whichever is
earlier.
Other governmental funds earned, expended and transferred during the fiscal year ended June 30, 2008
were as follows:
Trauma and
Third Party Emergency Miscel-
TTHCF- TPTF- Liability Services laneous
MNA EHSA Fund Fund Funds Total
Fund balances, June 30, 2007 $ $ $ $ $ 3,295 $ 3,295
Receipts 93,228 24,384 970 23,434 18,731 160,747
Interest earned 1 8 22 140 41 212
Expenditures ( 64,702) ( 24,392) ( 992) ( 23,574) ( 20,127) ( 133,787)
Transfers in ( out):
AHCCCS General Fund ( 100) ( 100)
Arizona Dept of Health Services ( 28,443) ( 28,443)
ADHS Health Crisis Fund ( 84) ( 84)
Fund balances, June 30, 2008 $ $ $ $ $ 1840 $ 1840
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
( 5) Proprietary fund - operations
Healthcare Group was established in 1988 by the State to administer health care services primarily to
small, uninsured businesses with 1 to 25 employees and employees of political subdivisions. That range
was later increased to 1 to 50 employees. HCG contracted with three health plans from the existing
network of AHCCCS health plans ( HMOs) to provide managed care medical services. In fiscal year 2006,
HCG started offering a PPO option through a third party administrator in order to provide health care
coverage statewide. In fiscal year 2009 this geographical coverage will exclude Maricopa and Pima
Counties. HCG's administrative responsibilities include enrollment/ renewal, fulfillment, premium billing,
collections, fund disbursement and data analysis. Also, HCG is responsible for certain oversight functions
of the HMO's and the third party administrator.
The HMO contracted health plans are prepaid on a " per member, per month" ( PMPM) basis. Capitation
payments are made prospectively. Pursuant to contractual agreement, HCG reconciles the health plans'
actual medical expenses reported to the capitation payments made by HCG during the contract year to
determine if any additional payments are required. Such additional payments are subject to the contracted
health plan's medical loss ratio as well as the availability of funds in I- iCG to fund such payments. Accrued
programmatic costs include approximately $ 19.2 million of estimated settlement payments due to
contracted health plans based on the reconciliations prepared as of June 30, 2008. Due to HCG's financial
condition ( see Note 6) and the inadequacies of reserves, HCG is currently negotiating payment terms with
the 3 contracted health plans to repay the remaining liabilities owed over the next two to three fiscal years.
In fiscal year 2008, there was a $ 7.250 million General Fund appropriation to subsidize HCG's operations.
In fiscal year 2008, HCG raised premium rates and reduced program and administrative costs. The
changes resulted in a net operating increase of $ 217 and a reduction in the net deficit by $ 7.920 million.
Future financial operations of HCG will be dependent on setting actuarially sound premium rates for the
various plan options and stable enrollment. See further discussion in Note 6.
( 6) Proprietary fund - decrease in net deficit and turnaround from prior fiscal year
As of June 30, 2008, HCG had a net deficit of $ 15,797 as a result of significant losses in prior fiscal years.
In fiscal year 2008 HCG revenues were sufficient to cover all expenses incurred in that year. HCG received
a $ 7.25 million General Fund subsidy in order to reduce its liabilities owed to its contracted HMO's for
reconciliations incurred in fiscal year 2006 and fiscal year 2007. HCG decreased its net deficit position to
$ 15.8 million at June 30,2008.
In fiscal year 2007, Management projected a net loss of $ 2 - $ 8 million for fiscal year 2008. This was a
conservative estimate as HCG recognized a net gain of $ 0.7 million before a $ 7.25 million General Fund
subsidy. In fiscal year 2006 and fiscal year 2007 HCG was unable to cover its costs due to the PPOS
operating at net medical losses ( medical costs were more than premiums received). The elimination of the
availability of the PPOS program in Maricopa and Pima Counties in fiscal year 2009 is projected to bring the
remaining PPOS program to a break even point, thus allowing HCG to begin to accumulate reserves for the
purpose of eliminating its reconciliation liabilities.
Many other actions were taken to address HCG's losses in fiscal year 2006 and fiscal year 2007 and to
address the deficit. The significant actions and events are as follows:
• Eliminated Zero Deductible Plans: The zero dollar deductible plans were eliminated and 4,939
members either terminated their coverage or were transitioned into a minimum of $ 500 deductible
plan as of January 1, 2007, thereby requiring a higher cost sharing.
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
( 6) Proprietary fund - decrease in net deficit and turnaround from prior fiscal year ( continued)
• Focus on Wellness Care: To ensure HCG members continued to stay healthy and receive quality,
wellness- focused care, HCG implemented changes to the benefit plans eliminating the requirement
to meet their deductible for wellness care. Members pay only a co- payment for preventive/ wellness
visits, PCP visits, urgent care, and basic lab and x- ray services.
• Groups of ' One' Guaranteed Issue: HCG has been the only healthcare coverage option in the state
of Arizona that is guaranteed issue for groups of one, resulting in a higher medical risk profile
compared to other small business health care coverage available within the State. At June 30,
2008, groups of one totaled 5,596 groups. To address their increased cost of care, employer
groups with only ' one' employee were further community rated as a separate group, adjusting their
premiums to cover a higher cost of care.
• Higher Medical Costs: Hospital participation in the HCG program is not mandatory. Although HCG
does not provide routine coverage at out- of- network facilities, costs for services at non- participating
hospitals rose faster than projected mostly related to care received as a result of an emergency
room visit at a non- contracted facility. The coinsurance applied to out- of- network facilities was
increased by 20 percent to cover this added cost. The PPO product was also transitioned to a
PPOS tiered network, with the higher cost hospitals placed at a separate tier associated with a
higher coinsurance.
• Hospital Default Rate: Effective September 19, 2007, Laws 2007, Chapter 263 ( HB 2789) placed a
default rate for payment of one hundred fourteen ( 114) percent of the AHCCCS reimbursement rate
if a contract does not exist between a Healthcare Group contractor and a hospital provider. The
impact of this was a cost savings of approximately $ 3.2 million in calendar year 2006 and estimated
cost savings of $ 2.5 and $ 3.0 million in calendar years 2007 and 2008.
• Higher Utilization of Services: " Bare Period" requirements result in higher medical utilization for new
members who have been without continuous coverage; and in turn utilize services upon enrollment
at a higher rate than members who had continuous coverage. Although a twelve- month pre existing
conditions policy remains in effect, a benefit dollar maximum of $ 100,000 was placed on
members during their first 12- months of enrollment.
• Administrative Costs: In fiscal year 2008 HCG reduced its administrative expense to $ 5.2 million
from the $ 8.1 million expended in   fiscal year 2007. This was accomplished largely by moving more
communications to an electronic format, utilizing a fulfillment vendor for mailings, and eliminating
administrative functions being performed at HCG that were redundant with the HMO's operations.
Additional reductions occurred in the usage of consultants and contractec; i/ temporary labor and
elimination of some FTE positions helped reduce personnel type costs by over 50 percent. Health
plan contracts were also amended to decrease the relative amount of their administrative
payments, thus reducing reconciliation costs.
• Change in Fiscal Year 2009 - PPOS availability: Effective October 2008, Laws 2008, Chapter 288
( HB 2275) restricts the PPOS program to counties with a population of less than 500,000 thus
eliminating the PPOS option in Maricopa and Pima Counties. To the extent that the PPOS costs
were more than premiums collected, funds had to be reallocated in order to pay these medical
claims. It is projected in fiscal year 2009 that the PPOS program in the remaining rural counties will
operate on a break even basis with medical costs equaling the medical premiums received,
reSUlting in a medical loss ratio reduction of approximately 35 percent in fiscal year 2009 compared
to fiscal year 2008.
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
( 6) Proprietary fund - decrease in net deficit and turnaround from prior fiscal year ( continued)
For fiscal year 2009 management is projecting that HCG will continue to operate without incurring additional
losses. Further, it is projected that HCG will not incur any additional reconciliation liability in fiscal year
2009. The following table summarizes reconciliation liability activity for fiscal year 2008.
Healthcare Group Reconciliation Liability as of June 30, 2008
Fiscal Year 2008 Activity
( in thousands of dollars)
Reconciliation Period
FY06 FY07 FY08 Total
Balance June 30, 2007 $ 5,051. $ 17,458 $ $ 22,509
Payments made 5,156 2,354 7,510
Accruals and adjustments 105 ( 227) . 4,324 4.20~
Balance June 30, 2008 $ $ 14.877 $ 4.324 $ 19.201
The reconciliation liability will be paid by allocating 2% of medical premium revenues for a reconciliation
reserve, from residual earnings, and from any State subsidies provided by the Legislature. Reconciliation
payment terms differ by each plan, such as, accruing 1% per month or repayment within 60 days of final
reconciliation.
Th. ere can be no. assurance that th, ese operating improvements will occur or will provide sufficient cash to
fund operating expenses. Additionally, if there is an adverse change in . enrollment and the premium
increases are not sufficient to fund the reserves for past losses and future medical claims , experience costs,
then HCG will be required to further scale back administrative expenditures to the level supported by actual
enrollment and/ or require a subsidy from the State General Fund to cover these operating costs. There can
be no assurances that the Legislature will approve such a subsidy from the State General Fund.
Even though deficit reduction measures resulted in a net gain for fiscal year 2008, a fiscal year 2008
General Fund subsidy of $ 7.25 million was required to pay down a portion of the prior fisca. l year
reconciliation liabilities and a net deficit of $ 15.8 million still exists as of June 30, 2008. A $ 5.0 million
General Fund subsidy was passed by the Legislature for fiscal year 2009. However, there is no assurance
that future subsidies will be provided to continue to pay down prior year losses. It is not anticipated in the
foreseeable future that operations will generate sufficient cash flow to significantly pay down the remaining
prior deficit. If a General Fund subsidy is not provided in fiscal year 2010 or if the fiscal year 2009 General
Fund subsidy is reduced due to the state's General Fund deficit or the current favorable medical loss trend
does not continue, each health plan contractor will have to make its own decision as to whether their
organization is willing to carry the medical loss liability from the' HCG line of business until or if premiums
are adequate to recover their prior year losses. Should the health plan elect to call' the prior year
reconciliation . liabilities before HCG has sufficient funds to provide such payments and new terms are not
negotiated, or the Legislature does not provide HCG with additional subsidies, it raises substantial doubt in
HCG'~ ability to continue as a going concern.
Accordingly, the accompanying financial statements have been prepared assuming that HCG will continue
as a going concern. The matters discussed above raise substantial doubt about HCG's ability to
continue as a going concern. The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and classification of liabilities that
might result should'HCG be unable to continue as a going concern. .
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
( 7) Retirem, ent plan
AHCCCS employees are covered by a defined benefit retirement plan administered by the Arizona State
Retirement System Board. Benefits are established by State statute and provide retirement and long- term
disability benefits to AHCCCS employees. The retirement plan is funded by payroll deductions from eligible
employees' gross wages and matching amounts contributed by AHCCCS, These amounts satisfy the
statutory requirement that employees and AHCCCS contributions must cover the actuarially determined
current service costs of the retirement plan, plus amortization over a 30- year period of the unfunded past
service liability. Payroll deductions as a percentage of employee wages were 9.1 percent for retirement and
0.5 percent for long- term disability for 2008. The matching amount contributed to the retirement plan by
AHCCCS was $ 5,438 in 2008 and is included in administrative expenditures in the accompanying
government- wide and governmental fund financial statements.
Retirement benefit payments are obligations of the retirement plan and not AHCCCS. Actuarial and
financial data on the retirement plan are available from the retirement plan's separately issued
Comprehensive Annual Financial Report ( CAFR).
( 8) Budgetary basis of accounting
The financial statements of AHCCCS are prepared in conformity with U. S. generally accepted accounting
principles ( GAAP). AHCCCS, like all other State agencies, prepares its annual budget on a basis that
differs from the GAAP basis. The State's accounting system and Arizona Revised Statutes and policies
provide for an additional accounting period ( 13 th month) to make payments for goods or services received
or incurred by the end of the fiscal year and subsequently paid during the 13 th month. The bUd~ et basis
expenditures reported in the financial statements include both the fiscal year paid and the 13 h month
activity. The State does not have a legally adopted bUdget for revenues. Prior fiscal year expenditures of
$ 230,662 paid in the current fiscal year in accordance with the administrative adjustment procedures as
authorized by Arizona Revised Statutes are reported as a separate amount. AHCCCS' controlling statute
for programmatic payments administrative adjustment procedures varies from the statutory requirement of
other State agencies. AHCCCS is permitted to pay for approved system covered medical services
presented after the close of the fiscal year in which they were incurred with either remaining prior year or
current year available appropriations. Unexpended prior year available appropriations for programmatic
payments revert on December 31, 2008.
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NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
336.329
80.373
76,898
248,880
10,409
142
( 416.702)
( 21,878)
( 37,398)
( 353.304)
( 4.122)
General Fund
Actual
$
$
Non- appropriated expenditures of $ 2,006.336 in the general fund consist of federal and state matching
pass- through payments to other agencies.
Total GAAP basis fund balance
Contingencies
LItigation and Investigations - AHCCCS has been named as a defendant in a variety of litigation. all of
which are being defended by in- house and contracted legal counsel. It is the opinion of AHCCCS, upon
consultation with legal counsel, that none of these claims is likely to have a material adverse effect on its
financial statements. In addition, AHCCCS believes that the funding of any material adverse jUdgment,
sanction or repayment obligation in excess of its appropriation would require a special appropriation by the
State.
Management believes that AHCCCS is in compliance with fraud and abuse laws and regulations as well as
other applicable government laws and regulations. Compliance with such laws and regUlations can be
subject to future review and interpretation as well as regulatory actions unknown at this time.
Budgetary Basis of Accounting
The following is a reconciliation of the GAAP Statement of Revenues, Expenditures and Changes in Fund
Balances - Governmental Funds to the bUdgetary comparison schedules for the year ended June 30. 2008:
Compliance with laws and regUlations - AHCCCS is subject to numerous laws. regUlations and oversight
by the federal government. These laws and regulations include, but are not necessarily limited to, matters
such as government health care program participation requirements, reimbursement for member services
and Medicaid fraud and abuse. Violations of these laws and regUlations could result in expulsion from
government health care programs. together with the imposition of significant financial sanctions.
Budgetary Basis Fund Balance, June 30, 2008
ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
Budgetary basis of accounting ( continued)
Increases to fund balance:
Due from State and county governments
Due from the " federal government
Due from other Fund
Receivables and other
Total increases
Decrease to fund balance:
Deferred revenue
Due to State and county governments
Accrued programmatic costs
Payables and other
Total decreases
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ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
( 9) Contingencies ( continued)
Budget neutrality agreement - AHCCCS' Waiver from CMS provides federal funding for certain non categorically
linked populations including those made eligible by the November 2000 passage of
Proposition 204. The Waiver requires that over the term of the agreement ( April 1, 2001 through
September 30, 2011), that the population covered by the Waiver be budget neutral for CMS. AHCCCS
negotiated an extension of the Waiver with CMS that extends the budget neutrality for an additional period
of five years. In addition, the Waiver was amended to include the Arizona Long Term Care program
expenditures making th~ m subject to budget neutrality beginning October 1, 20Q6. Under budget neutrality,
CMS will not pay more for medical services with the Waiver than it would without the Waiver. The Waiver
Special Terms and Conditions ( STC) include a monitoring arrangement that requires AHCCCS to report the
financial results of the Waiver on a quarterly basis. It also established a diminishing annual threshold of the
amount by which AHCCCS is able to exceed the bUdget neutrality limit on an interim basis before being
required to submit a corrective action plan.. The STC reporting limit thresholds are monitored on a Federal
Fiscal Year basis. The STC limit threshold for the first six limit periods ( April 1, 2001 through September
30, 2007) is 1.0 percent. The threshold declines bY. 0.25 percent for limit periods seven through nine and is
zero percent for the limit period ended September 30, 2011. As of June 30, 2008, reported date of service
expenditures associated with the six limit periods ended September 30, 2007 are below the limit by $ 375.8
million, or 2.13 percent. Through June 30, 2008, AHCCCS remains under the cumulative reporting limit
threshold. The budget neutrality calculation is dependent on a number of variables including the number of
members, the eligibility category of members and the general economy and its impact on unemployment,
medical inflation and policy decisions that may impact program costs made by the Legislature. Given the
uncertainty surrounding these factors, AHCCCS is not presently able to determine if the bUdget neutrality
limit will be exceeded or if it is exceeded that CMS will require repayment of the excess. Management
believes that as of June 30, 2008, AHCCCS does not have any liability to CMS related to the bUdget
neutrality agreement. Accordingly, the accompanying basic financial statements have not been adjusted for
the impact of any liability AHCCCS may have related to the Waiver budget neutrality agreement.
( 10) Interfund receivables. payables and transfers
Interfund activity is defined as transactions between funds administered by AHCCCS. The interfund
balances as of June 30, 2008 consist of transfers from the Other Funds to the General Fund in the amount
of $ 10,409.
In the government- wide statement of activities, the interfund activity has been eliminated. The total net
transfers out of $ 40,394 reported on the statement of activities represents transfer activities to other State
agencies.
( 11) Transactions with other State agencies and counties
Transactions with other State agencies and counties - AHCCCS contracts for administrative and
programmatic services from other State agencies. Charges for administrative services are based on the
performing agencies' actual cost. Charges for programmatic services are generally based on actuarially
determined capitation rates. The following is a summary of contracted services provided:
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NOTES TO FINANCIAL STATEMENTS
Year Ended June 30, 2008
( dollar amounts expressed in thousands)
92,770
14,215
2,056
209
362
200
109812
Expenditures
$
$
Expenditures
$ 873,496
1.020 j 579
$ 1894075
Arizona Department of Economic Security
Arizona Department of Health Services
The amount passed through to ADES is classified as long- term care capitation and the amount passed
through to ADHS is   classified as capitation- mental health services and Children's Rehabilitative Services
expenditures in the accompanying Statement of Revenues, Expenditures and Changes in Fund Balances  Governmental
Funds. The following is a summary of transactions with these State agencies for the
services described above for the year ended June 30, 2008.
Revenues include $ 315,705 from Arizona counties during fiscal year 2008. To the extent expenditures for
long- term care services are less than county and State contributions, AHCCCS is required to remit such
amounts equally to the State and the counties. Laws 2008, Chapter 288, Section 11 requires AHCCCS, in
fiscal year 2009, to transfer apprOXimately $ 17,831 of the county share of refunds for fiscal year 2007 and
fiscal year 2008 to the budget neutrality compliance fund. At June 30, 2008, AHCCCS has accrued
$ 20,528 relating to the remaining amount that county and State contributions   exceeded related
expenditures. This amount is included in the due to federal, State and county governments in the
accompanying Balance Sheet - Governmental Funds.
ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM
The following is a summary of transactions with these State agencies for the administrative se