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Medicaid Fiscal Integrity: Protecting Taxpayers and Patients

Medicaid Fiscal Integrity: Protecting Taxpayers and Patients

Protecting Medicaid and ensuring it remains sustainable and able to provide access to high quality care for society’s most vulnerable populations is a top priority for the Trump administration.  Medicaid plays a critical role in the fabric of our nation’s health care safety net and the Trump administration has consistently worked to provide states with the flexibility needed to effectively manage their programs, ensure accountability for patient outcomes, and foster strong program integrity to ensure that taxpayer resources benefit Medicaid recipients.  The urgency of this responsibility is only underscored by the projections that the program is already the first or second largest budget item in every state[i], and total annual spending by the states and the federal government together is forecast to reach $1 trillion by the end of the decade[ii].

For many years, Congress[iii] and a growing chorus of oversight agencies like the Government Accountability Office (GAO)[iv] [v], the HHS Office of the Inspector General (OIG)[vi], and the Medicaid and CHIP Payment and Access Commission (MACPAC)[vii] have called for CMS to strengthen its oversight of Medicaid supplemental payments. The Trump administration is finally taking action.

Recently, CMS released the proposed Medicaid Fiscal Accountability Regulation (MFAR) that addresses long standing problems in the Medicaid program. The proposed rule is not intended to reduce Medicaid funding, but is aimed at strengthening accountability and increasing transparency to ensure that every Medicaid dollar is claimed and spent in accordance with federal law while supporting the interests of Medicaid recipients. 

A Shared State and Federal Responsibility

To understand the goals of this rule, it is important to first understand the nature of how the Medicaid program is financed. Medicaid is intended to be jointly funded by the states and the federal government, with both sharing responsibility for the costs of the program. Under the law, CMS matches every dollar that states contribute at various rates depending on the nature of the expense and the population of recipients to which the individual belongs. While the federal government finances the majority of the program, states are required to contribute their share based on the applicable match rate.  The match rate for most services furnished to most recipients – the federal medical assistance percentage, or FMAP – varies depending on the state and ranges from 50 percent to 77.76 percent.  Because Medicaid is an open-ended entitlement program, there are no limits on how much federal funding a state can draw down, when supported by qualifying expenditures the state has made for Medicaid.   Congress has provided some flexibility for states to use local and alternative funding sources for their contribution, but has also imposed some important conditions, including strict limitations on health care providers donating their own money to use as the state match.

The primary and most straightforward source of a state’s contribution to Medicaid comes from general fund dollars appropriated for the specific purpose of financing Medicaid costs. When states use their general funds to finance Medicaid, states and the federal government share an incentive to manage costs as effectively as possible, so there are generally no restrictions on their use.

Alternative Sources of State Financing

The statute does allow some alternative sources of funds to finance the state share.  States may impose health care related taxes to broadly raise revenue from health care providers that can then be used to finance additional Medicaid payments. However, there are important restrictions to prevent states from imposing a tax as a way to skirt restrictions around provider donations. In essence, states can’t raise tax revenue only from the providers who will benefit from additional Medicaid payments, and a tax generally must be evenly applied to all similarly situated providers.  The statute also allows smaller units of government – like counties and cities – to contribute the Medicaid match either through qualifying intergovernmental transfers (IGTs) or certified public expenditures (CPEs).

Provider Donations

Federal law places strict limitations on health care providers donating their own money as the state share, and IGTs and CPEs cannot be used as a means to circumvent restrictions on provider donations. You can imagine the perverse incentives that would otherwise result – an endless cycle of increased federal money with no skin in the game for states and no link to value.   For example, if a hospital donates $1,000 to the state, which is then used to draw down $2,000 in federal money, this results in a $3,000 payment back to the provider. The hospital turned $1,000 into $3,000, federal taxpayers are out $2,000, and the state contributed nothing other than some paperwork. Meanwhile, another hospital just a few miles down the road, that may be treating just as many Medicaid patients and even delivering better quality outcomes, might have received no additional reimbursement.  In this case, there is essentially no state contribution and the provider has an incentive to continue to increase donations to avail more and more federal dollars under Medicaid’s open-ended system.  Imagine that scenario extrapolated across all the states and on a scale that amounts to billions of dollars.

In another example, a private nursing homes make a deal to “sell” their license or enter into a lease arrangement with local government. Under this arrangement, however, the private nursing home maintains operational control of the facility, but by nominally changing their ownership status, the nursing home can suddenly be classified as “governmental.” The local government agrees to fund the state share of additional Medicaid payments on their behalf, and the additional payments are then split between the private operators of the nursing home and the local government. Everyone wins – except perhaps the patient and certainly the federal taxpayer. 

The Role of Supplemental Payments

In addition to how states contribute their share of the costs, their methods of paying providers can also introduce vulnerabilities. When most people imagine how health care providers get paid in Medicaid, they probably envision a scenario where a provider treats a patient, submits a claim for services rendered, and gets reimbursed at the established rate. While that is true most of the time, states have increasingly relied on the use of supplemental payments to health care providers.  In fact, these payments have increased steadily from 9.4 percent of all total reimbursement for eligible providers in FY 2010 to 17.5 percent in FY 2017.

Supplemental payments are legitimate payments that state Medicaid agencies can make to providers like physicians, hospitals, and nursing homes above and beyond the routine reimbursement they receive for services provided to Medicaid beneficiaries.  They are typically used to bolster reimbursement for care associated with high need patients, address challenges faced by rural health care providers, promote quality care, and help ensure access. 

While they can be an important source of revenue for safety-net providers, data indicate that these additional payments are used unevenly across states, leading to large funding inequities across the nation.  As providers come up with a creative strategies to put up the state’s match, they are essentially allowing the state to skirt its responsibility to finance part of the program while increasing Medicaid costs without any clear connection to the volume or quality of services delivered.  These “pay to play” schemes can lead to huge disparities, with some providers receiving net reimbursement at rates double or triple other providers, creating market distortion and unfair competition. 

A Careful and Collaborative Process

Nothing in our proposed rule would stop states from using supplemental payments, provided that they are used and financed in a way that is in compliance with federal statute and regulations.  This proposed rule is not intended to reduce Medicaid payments, and alarmist estimates that this rule, if finalized, will suddenly remove billions of dollars from the program and threaten beneficiary access are overblown and without credibility. If states have arrangements that need to evolve to comply with any final rule, we would work with them to make that a successful transition. But we do have a responsibility to answer the calls from oversight bodies and address practices that have allowed states to avoid contributing their fair share to the program, effectively increasing the federal contribution above what the law provides. Failure to do so would be deeply unfair to the federal taxpayers and to states that have played by the rules, and provide them little reason to continue their sound practices.

This proposed rule would also increase transparency by requiring that states report payment and financing information at the individual provider level – information that CMS and the public does not currently have.  This would help us work with states to ensure that Medicaid payments obtain the best value for the dollars spent and are meeting the most critical recipient needs in a state. 

That being said, we profoundly appreciate the many stakeholders that took the time to submit over 4,000 comments. We are reviewing them carefully, and we understand that potential changes in Medicaid financing and payment can have significant ripple effects at the local level. We will remain conscious of those operational concerns as we consider final rulemaking and work with states to potentially transition problematic arrangements into clearly permissible ones that support the safety net and ensure Medicaid beneficiaries have access to high quality health care. 

For more information, you can refer the CMS press release issued on November 12, 2019 here: https://www.cms.gov/newsroom/press-releases/trump-administration-proposes-historic-steps-strengthen-oversight-and-fiscal-integrity-medicaid and the fact sheet here: https://www.cms.gov/newsroom/fact-sheets/fact-sheet-2019-medicaid-fiscal-accountability-regulation-mfar

[i] NASBO State Expenditure Report

[ii] National Health Expenditure Data

[iii] Greater Transparency of Supplemental Payments Needed

[iv] More Transparency of and Accountability for Supplemental Payments Are Needed

[v] Medicaid: CMS Oversight of Provider Payments Is Hampered by Limited Data and Unclear Policy

[vi] Audit of Selected States’ Medicaid Disproportionate Share Hospital Programs

[vii] State Medicaid Payment Policies for Inpatient Hospital Services

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