Medicaid Final Rules Hand Hospitals Win On Supplemental Payments

The Biden administration finalized two rules on Monday making notable changes to Medicaid that regulators say will improve transparency and access in the safety-net program, including wait time standards for appointments and curbing profits for home health agencies.

However, the rules hand hospitals a win by finalizing a higher ceiling for supplemental Medicaid payments and delaying oversight of concerning funding arrangements, despite calls for more oversight in the area.

States are forbidden from making supplemental payments for services covered in managed care contracts, when states contract with private insurers to administer the care of beneficiaries in the safety-net program. However, there are exceptions for state-directed payments, or SDPs, to providers.

The payments, which are approved by the CMS on an annual basis, have grown dramatically, making it easier for states to inflate total Medicaid costs and pass more cost onto the federal government, according to the Committee for a Responsible Federal Budget.

In the final rule, the CMS elected not to cap annual SDPs, but instead established their upper payment limit at the average commercial rate. The upper payment limit is the maximum amount states can pay providers and receive matching funds from the federal government.

As a result, states can set Medicaid managed care payment rates at levels equal to those paid by commercial plans to providers of the same service, resulting in much higher reimbursement. For comparison, other supplemental payments to hospitals have upper payment limits based on lower Medicare rates.

Hospital groups, including the American Hospital Association and the Federation of American Hospitals, cheered the CMS’ decision, as the payments can be a significant source of revenue for hospitals.

For context, hospital giant HCA disclosed $3.9 billion of total state supplemental payments last year, while operator UHS disclosed $840 million, according to TD Cowen analyst Gary Taylor.

“The AHA appreciates that CMS acknowledges the critical role hospitals play in state Medicaid financing and the importance of supplemental payments to sustain beneficiary access to care in light of low Medicaid base payment rates, including rates paid through managed care organizations,” Ashley Thompson, the AHA’s senior vice president for public policy, said in a statement.

Regulators hedged in the rule that “there are a few proposals … that are likely to exert some minor downward pressure on the rate of growth in SDP spending.”

However, the CMS said it expects total SDPs to grow from $78 billion to $99 billion in the next five years.

Financing gimmicks can continue — for now

In another win for hospitals, the CMS also decided to delay enforcement of a controversial policy aimed at stopping financing schemes regulators say undermine Medicaid’s fiscal integrity.

The proposed rule targeted taxes that states impose on providers to help them pay for the state’s share of Medicaid funding. States levying the taxes can receive higher federal funding for Medicaid as a result.

The federal government forbids states from returning those taxes, whether directly or indirectly, to providers as part of “hold harmless” agreements. However, some states are doing so in the form of SDPs, according to regulators.

It’s unclear how widespread such arrangements are, though they’re happening in at least a few states. Regulators said they’ve identified a “growing number” of SDPs that “raise financing concerns.”

Last year, the state of Texas sued the CMS to keep the arrangements in place, and a district judge in June issued an injunction forbidding the CMS from acting against them.

The final rule still requires providers to attest that they are not participating in the “hold harmless” arrangements. However, the CMS is delaying enforcement of the stipulation until legal challenges to the rule play out.

Hospitals argue the CMS is overstepping its authority by forbidding the arrangements.

“Because Medicaid payments are jointly financed by states and the federal government, it is important that states continue to use all permissible sources of Medicaid financing, including provider taxes. Although we disagree with CMS’ proposed reinterpretation of current provider tax rules, we appreciate its decision to delay the new financing attestation requirement until 2028,” Bruce Siegel, CEO of America’s Essential Hospitals, said in a Monday statement.

After reviewing the practice late last year, the Government Accountability Office said the CMS is at risk of approving ineffective state-directed payments, due to weak fiscal guardrails.

Home health profits capped

The rules also require Medicaid managed care plans to comply with maximum national standards on wait times for appointments, including 15 business days for routine primary care and gynecological services.

They also require states to conduct secret shopper surveys once a year to ensure plans’ compliance with those standards, and the accuracy of their provider directories.

The stipulations are aimed at improving ongoing access issues in Medicaid managed care, an area of little federal oversight, according to the GAO.

Provider groups slammed the CMS finalizing a requirement that 80% of Medicaid payments for home health and personal care services be spent on wages, as opposed to administrative overhead or profit.

The government’s decision to cap potential profits at 20% of Medicaid payments, while passing the large majority of payments through to direct care workers in wages and benefits, is “unworkable” and beyond the CMS’ statutory authority, argued the National Association for Home Care & Hospice.

“This is a misguided policy that will result in agency closures, force providers to exit the Medicaid program, and will ultimately make access issues worse around the country,” NAHCH said in a statement Monday.

However, the CMS extended the timeline for compliance to six years, up from the four years proposed in the rule’s first draft. That pushes the impact of the rule to 2030 — “a win” for the industry, TD Cowen analyst Ryan Langston wrote in a Tuesday note.

The rule also requires states to disclose how much they pay for home care services and to establish an advisory group to consult on payments to providers.