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CMS Issues Proposed Medicaid Fiscal Accountability Regulations CMS Issues Proposed Medicaid Fiscal Accountability Regulations

CMS Issues Proposed Medicaid Fiscal Accountability Regulations

On November 18, 2019, the Centers for Medicare and Medicaid Services ("CMS") proposed new regulations designed to increase transparency and oversight of the Medicaid financing system that were needed, according to CMS, to "strengthen the overall integrity of the Medicaid program." Topics specifically addressed in the proposed rules include Medicaid fee for service ("FFS") provider payments, disproportionate share hospital ("DSH") payments, Medicaid program financing and health care-related taxes and provider donations.

Fee for Service Provider Payments

Provider FFS payments are divided into two categories: base payments (primarily per- claim payments and adjustments attributable to services to a particular beneficiary) and supplemental payments (payments made in addition to the base payment). Supplemental payments are typically used to fill the gap between Medicaid base payments and Medicare rates and are limited by upper payment limits, or "UPLs," based on demonstration requirements for inpatient and outpatient settings. 

CMS expressed concern about the use of supplemental payments by states for two reasons. First, Medicaid supplemental payments have increased from 9.4% of all Medicaid payments in 2010 to 17.5% in 2017. Second, because states are relatively free to develop their own Medicaid payment rates, both base and supplemental, CMS has historically had very little oversight over the processes by which states establish these rates and policies. Citing a need to ensure supplemental payments are consistent with statutory requirements for economy, efficiency, quality of care and access to services, CMS has proposed improved reporting on oversight of supplemental payments by:
  • Requiring states to furnish provider-level payment details to support aggregate level information reported to CMS;
  • Requiring states to report provider-specific payment information received for state plan services and to identify the specific authority and source of the non-federal share (i.e., the state's share of Medicaid program dollars) for such payments;
  • Sun-setting all current and new supplemental payment methodologies after no more than three years and requiring states to request CMS approval to continue a supplemental payment beyond the three year maximum; and
  • Mandating the use of CMS templates and guidelines regarding acceptable UPL calculations.
Disproportionate Share Hospital Payments

Disproportionate share hospital payments are those made by a state to hospitals that serve a disproportionate share of low-income Medicaid and uninsured patients to reimburse such hospitals for uncompensated care. A particular hospital's DSH payments may not exceed its costs incurred in furnishing inpatient and outpatient hospital services during the year to Medicaid beneficiaries and uninsured patients, less any payments for such services received by the hospital. Citing concerns that it is often unable to determine whether a DSH overpayment has been made to a hospital and the amount of any such overpayment due to incomplete or missing audit data, CMS has proposed to require auditors of state DSH payments to quantify the financial impact of any finding, including those resulting from incomplete or missing data, which may affect the hospital's receipt of DSH payments in excess of its hospital-specific DSH limit. Also, states would be required to return such overpayments to the federal government and to report the redistribution of DSH overpayments.

Medicaid Program Financing / Health Care Related Taxes and Donations

Each state is required to share in the financing of its Medicaid program. Permissible means of financing a state's portion of Medicaid expenditures include the use of state general funds, typically derived from tax revenue appropriated directly to the state Medicaid agency. Other means of financing include revenue derived from health care-related taxes, when consistent with federal statutory requirements, bona fide donations from providers to the state and intergovernmental transfers ("IGTs") from non-state governmental entities to the state Medicaid agency, as long as such IGT funds are derived from state or local tax revenue or funds appropriated to state university teaching hospitals.

In a press release issued November 12, 2019 introducing the proposed regulations, CMS stated its belief that certain vulnerabilities in Medicaid financing "arise from high-risk financing mechanisms that states have used, or sought to use, to finance the state portion of Medicaid payments," and its knowledge of "numerous schemes states have used that are not consistent with federal statute.” CMS cites examples, including “states that generate extra payments for private nursing facilities that enter into arrangements with local governments to bypass tax and donation rules…. States can then use that tax revenue to generate additional payments, with no commensurate increase in state spending." In Indiana, there are many of these arrangements, utilizing IGT/UPL payments, between county hospitals and nursing facilities that could be impacted greatly by the proposed regulations.

To address these issues, CMS has proposed improvements in state reporting of supplemental payments and the sources of the non-federal share to allow CMS to monitor changes in non-federal share funding after a state plan amendment is approved and any associated increases in federal expenditures for supplemental payments relative to state expenditures. Additionally, CMS has proposed certain clarifications to existing regulations pertaining to program financing, including:
  • Reaffirmation that IGTs must be derived from state or local tax revenues;
  • Clarification that all of a state's claim of expenditure must be received and retained by the Medicaid provider; and
  • Clarification that a facility that enters into a transaction to change ownership of the facility on paper while remaining substantially unchanged in its operations cannot qualify for additional Medicaid payments on the basis of the purported ownership transfer.
Finally, the proposed regulations seek to clarify rules on the prohibition on financial arrangements, which CMS characterizes as intended to mask impermissible provider–related donations, prohibit states from structuring health care related taxes so as to unduly burden the Medicaid program and prohibit states from masking health care-related taxes in a tax program that also taxes non-health care items and services. CMS also proposes to include health insurers as a permissible tax class and to strengthen oversight and monitoring of approved tax waivers.

The full text of the proposed regulations may be found at Comments on the proposed regulations are due no later than 5 p.m. on January 17, 2020. We will continue to monitor this proposed rule. For additional information, please contact Kevin Woodhouse or Taryn Stone.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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