On January 18, 2007, the Centers for Medicare and Medicaid Services (CMS) published a proposed rule that would eliminate the use of intergovernmental transfers (IGTs) in the Medicaid program. This proposal – if enacted – will severely reduce payments to public hospitals and nursing homes that provide critical care to vulnerable populations.

The issue of IGTs is not a new one.  Approximately 34 states have been using intergovernmental transfers to support Medicaid services and health care to uninsured individuals for at least 15 years. These financing arrangements have helped states maintain important health care services during tough fiscal times.

In March 2004, Center for Medicaid and State Operations Director Dennis Smith testified before the House Energy and Commerce/Health Subcommittee about concerns regarding the use of IGTs in state Medicaid programs.  While a few members expressed support for the elimination of IGTs that support nonhealth care programs, Smith found very little support from Capitol Hill to make the necessary legislative change that would have ended the practice of using IGTs to support the provision of health care services.

CMS attempted to eliminate IGTs through an administrative rule but backed down after congressional pressure mounted. Since that time, the issue has been included in the president’s budget; in response, 300 members of the House and 55 Senators expressed concern about the impact of the proposal and urged the president not to move forward. Many have questioned whether CMS has the statutory authority to regulate the way in which states are able to transfer funds to and from state university teaching hospitals, nursing homes and other public entities and have been soundly rejected by Congress to codify such changes. In fact, the provision was headed off – even as Congress was pondering ways to attain Medicaid savings as part of the Deficit Reduction Act of 2005. 

It is unlikely that the new congressional leadership will support efforts by CMS to move forward with this proposed rule because of the devastation it will cause to state Medicaid programs and safety net providers in those states; however, it is critical that Congress step in and request that CMS not implement this rule.

Key Issues

• The proposed rule, which is under comment period until March 19, seeks to change current law regarding the financing of the nonfederal share of Medicaid payments, requires new documentation for state public expenditures, and requires that providers receive and retain the full amount of the total cost of payments for services provided by the state.
• If enacted, the rule would severely limit Medicaid support for the mission of the public hospitals and nursing homes serving as safety-net providers. The proposed rule provides that only “units of government” may contribute to the nonfederal share of Medicaid expenditures and only with funding directly derived from tax revenues. Historically, all public providers have been able to participate in Medicaid funding using any source of available public funds.
• The proposed rule would leave states with gaping holes in the Medicaid budgets that can be plugged only by cutting Medicaid services, optional populations and payments to providers.
• CMS has estimated that the proposed rule will cut $3.9 billion out of the Medicaid system over five years, further exacerbating deep cuts made by the Deficit Reduction Act of 2005 and the Tax Relief and Health Care Act of 2006.