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CMS Proposed Regulations to Disrupt Medicaid Supplemental Payments

December 11, 2019

The Centers for Medicare and Medicaid Services (CMS) recently issued the proposed Medicaid Fiscal Accountability Regulation (MFAR), which seeks to improve federal oversight of Medicaid supplemental payments and to codify fundamental changes to supplemental payment financing and distribution to better align with agency goals of transparency and value-driven care. If adopted as written, MFAR may upend state Medicaid budgets and those providers that rely on Medicaid supplemental payments to remain financially viable.

Approximately one out of every five Medicaid dollars paid to providers are supplemental payments, and some states have become overly reliant on these payments to close the gap between the Medicaid base rates and provider costs. Consider that in Louisiana, supplemental payments accounted for 61 percent of all Medicaid payments made to hospitals for the 2016 fiscal year. MFAR will affect these payments and threatens to jeopardize the state’s means to pay hospitals for their care of the Medicaid population.

Supplemental payments are unique to Medicaid, a cooperative program between the federal government and states under which the federal government gives assistance to states to provide medical services to Medicaid-eligible individuals. As part of this program, states must meet certain requirements, including funding their portion of Medicaid expenditures, which is matched at different rates by the federal government. States are given flexibility to design their own method of paying providers, but most payments can be broadly categorized as base payments for services and supplemental payments, which are typically made in a lump sum and are not tied to particular services.

Although Medicaid payment rates vary across states, on average, Medicaid base payments are below the costs of providing services to Medicaid enrollees and below the Medicare payment rates for comparable services. Supplemental payments are used by states to alleviate this Medicaid shortfall, and “supplement” the low base payments. States often rely on sources of funding other than state general funds for the non-federal share of these supplemental payments. The alternative sources of funding available for the supplemental payment expenditures is part of what makes these payments attractive to states, which, over time, have developed complex financing arrangements to maximize the funds available for additional federal match dollars.

If implemented, MFAR will disrupt this status quo with substantial repercussions for the Medicaid program. MFAR increases scrutiny of these supplemental payment systems, notoriously opaque and seen as incompatible with value-based payment reforms. The proposed rule seeks to reduce questionable financing mechanisms, limiting the types of funds that can serve as the state share of the expenditures, by, among other things, codifying an administrative decision issued in August 2018 that found that the state of Texas used impermissible, non “bona fide” provider donations to finance its share of Medicaid supplemental payments.

MFAR also includes changes relating to disproportionate share hospital payments, which, although distinct from supplemental payments both by statute and under the proposed rule, is an important means of providing additional funding to providers that disproportionately serve low-income individuals and the uninsured. Other notable changes under MFAR include:

  • The establishment of previously non-existent regulatory definitions for base and supplemental payments
  • The sun-setting of existing and new supplemental methodologies to require states to periodically seek new CMS approval to continue payments
  • Modifications relating to the assessment of provider classifications to determine eligibility to receive certain supplemental payments
  • The imposition of new supplemental payment reporting requirements
  • And the imposition of supplemental payment caps for physicians and other professionals, to name a few.

MFAR has an open comment period until January 17, 2020. The proposed rule will face opposition from various stakeholders, including state agencies and representatives, providers that disproportionately serve Medicaid enrollees, and advocacy groups. Because of the potential effect on federal funding for Medicaid programs, extensive comments to the rule are expected, as are significant efforts, both legal and political, to prevent its adoption and implementation.

Phelps is committed to keeping up to date on this important topic and representing stakeholders that stand to be affected by the proposed rule. For more information on how these regulations may impact you, please contact us.