On November 12, 2019, the Centers for Medicare & Medicaid Services (CMS) published a proposed rule for public inspection entitled Medicaid Fiscal Accountability Regulation. CMS states that the intent of the proposed rule is to ensure that state supplemental payments and financing arrangements under the Medicaid program are consistent with federal statutory requirements. In a fact sheet released concurrently with the proposed rule, CMS describes that in recent years Medicaid spending has increased from $456 billion in 2013 to roughly $576 billion in 2016, and supplemental payments to states for particular Medicaid services have increased from 9.4 percent of all other payments in FY 2010 to 17.5 percent in FY 2017. The proposed rule also states that 48 states reported using at least one type of supplemental payment methodology under the Medicaid state plan. If implemented as proposed, the rule will significantly affect the manner in which states finance their Medicaid programs.
Proposed Requirements on State Reporting of Supplemental Payments
Under current law, states are required to provide CMS with aggregate payment information for base and supplemental payments made to Medicaid providers. As the Government Accountability Office has indicated, there has historically been limited reporting on provider level supplemental payments received. CMS proposes to require states to submit provider-level payment detail to the agency on its aggregate payment information received through Upper Payment Level demonstrations. The proposed rule would mandate states to report information for each supplemental payment included on the CMS-64 by supplying information on an additional supplemental report. States would be required to include information that helps CMS identify the providers that receive base and supplemental payments through the state plan services and demonstration programs and identify the specific authority for these payments. In addition, CMS proposes to require states to identify the source of the non-federal share that paid for these services.
New Definitions Relating to Supplemental Payments
CMS proposes definitions for “base” and “supplemental” payments. CMS proposes “base payment” to mean “a payment, other than a supplemental payment, made to a provider in accordance with the payment methodology authorized in the state plan or is paid to the provider through its participation with a Medicaid MCO entity under the authority in 42 C.F.R. § 438.” CMS proposes “supplemental payments” to mean “a Medicaid payment to a provider that is in addition to the base payments to the provider, other than DSH payments under 42 C.F.R. § 447, subpart E, made under state plan authority or demonstration authority.”
Additionally, CMS proposes to amend 42 C.F.R. § 433.52 to provide new definitions for “Medicaid activity” and “net effect.” CMS proposes “Medicaid activity” to mean “any measure of the degree or amount of health care items or services related to the Medicaid program or utilized by Medicaid beneficiaries, including, but not limited to, Medicaid patient bed days, the percentage of an entity’s net patient revenue attributable to Medicaid, Medicaid utilization, units of medical equipment sold to individuals utilizing Medicaid to pay for or supply such equipment or Medicaid member months covered by a health plan.” CMS would define “net effect” to mean “the overall impact of an arrangement, considering the actions of all of the entities participating in the arrangement, including all relevant financial transactions or transfers of value, in cash or in kind, among participating entities.” CMS further states that it will determine the net effect of an arrangement by considering the totality of the circumstances, which will include the “reasonable expectations” of the participating entities and may include the consideration “of reciprocal actions without regard to whether the arrangement or a component of the arrangement is reduced to writing or is legally enforceable by any entity.” These definitions would apply to hold harmless prohibitions related to provider taxes and provider-related donations.
State Reliance on Provider to Fund Non-federal Share
Intergovernmental transfers (IGT): An IGT is a transfer of funds from a government entity to the state Medicaid agency for use as the non-federal share of Medicaid expenditures. The proposed rule would re-affirm the statutory requirement that IGTs must be derived from state or local tax revenues instead of “public funds.” CMS proposes to more clearly define the allowable sources of non-federal share and replace references to “public funds” with “state or local funds” to make the regulatory text more consistent with the statutory language.
Certified Public Expenditures (CPE): States allow providers that are state or local government entities to expend funds to provide services to Medicaid beneficiaries or support the Medicaid program administrative activity. These providers must document the funds spent providing covered services and certify the expenditures to the state. A state may claim federal financial participation (FFP) based on the government entity’s certification. The proposed rule would implement additional requirements for CPEs. Specifically, CMS proposes to limit Medicaid payments funded by CPE to reimbursement not in excess of the provider’s actual, incurred cost of providing services to Medicaid beneficiaries using reasonable methods of identifying and allocating costs to Medicaid. The state would have to establish and implement documentation and audit protocols, including an annual cost report to be submitted by the state government provider or non-state government provider to the agency documenting the provider’s costs during the fiscal year. Only the certified amount of the expenditure may be claimed for FFP.
CMS states that in recent years states have been “drawing down FFP to match CPEs, retaining the federal share and using these federal funds as the non-federal share for other Medicaid payments.” CMS proposes to require certifying entities to receive and retain the FFP a state claims from CMS to prevent inappropriate recycling of federal funds and other potential redirection of federal funds. CMS also proposes requiring payment methodologies to permit the provider to receive and retain the full amount of the total computable payment for services funded under the approved state plan. The Secretary would determine compliance with this provision by examining associated transactions related to the provider’s total Medicaid payment to ensure the claimed expenditure, which serves as the basis for FFP, is consistent with the state’s net expenditure and that the full amount of non-federal share payment has been satisfied.
Health Care-Related Taxes and Donations
Section 1903(w)(3)(A) of the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments defines a health care-related tax as a tax that is related to the provision or payment of health care items or services, or provides for treatment of individuals or entities providing or paying for such items or services. Specifically, if at least 85% of the tax burden falls on health care providers, it is considered to be related to health care items or services.
CMS expresses concerns about certain states and private health care providers designing complex financing structures to “mask non-bona fide, provider-related donations used to fund the non-federal share of Medicaid payments.” According to CMS, these arrangements appear to obfuscate the source of non-federal share and avoid required reductions to state medical assistance expenditures. This proposed rule would clarify the hold-harmless definition related to donations to account for the net effect of complex donation arrangements. Hold harmless arrangements would exist “when a state payment is made available to a taxpayer or a party related to the taxpayer… in the reasonable expectation that the payment would result in the taxpayer being held harmless for any part of the tax.” (73 FR 9694). When identifying the presence of a hold harmless arrangement in health care-related taxes, the sum total of all the elements must be viewed collectively. According to CMS, the proposed rule does not change policy or approach, but rather simply clarifies prohibited practices.
CMS proposes a tax must not impose undue burden on health care items or services paid for by Medicaid or on a provider of such items and services that are reimbursed by Medicaid, and proposes a requirement on states to ensure compliance with the undue burden prohibition. In addition, CMS proposes to add a new class of health care items and services to the list of permissible classes. Specifically, CMS proposes to establish services of health insurers, besides services of managed care organizations, as a new permissible class. CMS also proposes revisions to the provider tax waiver requirements, limiting the waiver approval to 3 years and imposing requirements on states to ensure compliance with waiver conditions.
Disproportionate Share Hospital (DSH) Payments
The Social Security Act allows states to make DSH payments to qualifying hospitals that serve a disproportionate share of low income patients with special needs. Payments made under the DSH statutory authority are not considered part of the base rate payments or supplemental payments, because they are made under a separate, distinct statutory authority. Currently, states must submit an independent audit report for each plan rate year, due approximately three years after the completion of the rate year.
CMS explains that it is often unable to determine whether a DSH overpayment to a provider has occurred and the underlying cause and amount of the overpayment, because audits do not determine the actual financial impact of missing information. To address this purported lack of quantification, CMS proposes revising the definition of “independent certified audit” to include the requirement for auditors to quantify the financial impact of any finding which may affect whether each hospital has received DSH payments for which it is eligible. If it is not practicable to determine the actual amount, CMS proposes requiring an estimated financial impact for each audit finding.
Current regulations require CMS to publish the annual DSH allotments in the Federal Register. CMS proposes eliminating this requirement and making DSH allotment information available to states and the public through the Medicaid website and Medicaid Benefit & Expenditure System to make it more easily accessible to stakeholders.
The proposed rule was published in the Federal Register on November 18, 2019, and CMS will accept public comments for 60 days following publication. Comments may be submitted electronically to www.regulations.gov or by mail to: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2393-P, P.O. Box 8016, Baltimore, MD 21244-8016.
*Special thanks to Hayley White and Rachel Park, Law Clerks and District of Columbia Bar licenses pending, for their assistance in preparing this post.