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CMS Proposes Increased Scrutiny of Medicaid Supplemental Payments and Related State Financing Arrangements

In what is widely considered to signal intensified focus by the Federal government on Medicaid supplemental payments and related State Medicaid financing mechanisms, the Centers for Medicare & Medicaid Services (CMS) on November 18, 2019 proposed the Medicaid Financing and Accountability Regulation (MFAR).  

According to a press release announcing the proposed rules, MFAR “would take historic steps to ensure transparency in Medicaid payments and clamp down on impermissible financing arrangements to ensure that federal Medicaid dollars are spent in ways that support the direct needs of Medicaid beneficiaries.” CMS has cited to a rapid increase both in overall Medicaid spending and in the Federal share of this spending. Within this, CMS has noted that supplemental payments have steadily increased as a percentage of total Medicaid payments to providers, and that other Federal agencies have made recommendations to CMS “to better oversee and understand Medicaid supplemental payments, disproportionate share hospital payments and the associated non-federal share.”

CMS Seeks to Increase Oversight to Address What It Sees as “Shady” Supplemental Payment Schemes 

Broadly stated, supplemental payments are those Medicaid payments made to providers above and beyond the State-determined base Medicaid payment rates for specific services. These supplemental payments serve as a vehicle for States to increase aggregate Medicaid payments to providers up to the permitted Federal limits. Supplemental payments are typically made under State plan authority, or through demonstration and managed care authorities. State shares of supplemental payments (also known as ”non-Federal shares”) are eligible for Federal matching payments if Federal requirements are met. These non-Federal shares are frequently derived from Intergovernmental Transfers (IGTs) and/or provider taxes and donations.

CMS has characterized as “shady” certain “schemes” deployed by some State Medicaid programs in making supplemental payments to providers, and in generating the non-Federal portion of Medicaid payments against which Federal matching funds are made. As a result, the proposed MFAR would dramatically enhance oversight of, and mandatory reporting by, State Medicaid programs. This would include:

  • A requirement for periodic reauthorization by CMS of all supplemental payments through a rigorous reporting and review process, coupled with enhanced periodic reporting of supplemental payments;  
  • Imposition of new substantive criteria regarding IGT and provider-derived State Medicaid funding, including provider tax and provider donation financing mechanisms;  and 
  • Increased disclosure and oversight in connection with the annual Disproportionate Share Hospital (DSH) audit process.

The Regulations Propose to Change the Supplemental Payment Methodology

The following are key features of the changes to the supplemental payment methodology:

  • All existing and proposed supplemental payment plans would sunset after no more than three years from the effective date of the rule and, in addition, would be approved by CMS for a maximum period of three years before re-approval must be sought. In seeking CMS approval, States would be required to produce, among other things, an explanation of the stated purpose and intended effects of the payment, the criteria used to determine which providers are eligible to receive payment, and a “comprehensive description” of the method used to calculate and distribute the payment to each provider. This would mandate production of provider-level data, as well as a monitoring plan.  
  • CMS would impose enhanced quarterly and annual supplemental payment reporting requirements, including information about providers receiving such payments. This would detail the amount of such payments, total Medicaid payments, and the volume of Medicaid services delivered by these providers. In addition, the State would be required to report comparable information for providers contributing to the non-Federal share through provider tax, provider donation, or other similar means.

Oversight of Non-Federal Share Funds Would Increase, and Existing Funding Mechanisms Could Be Called Into Question 

Numerous provisions of the proposed MFAR would increase oversight of, and potentially limit availability of, funds permitted to be used for a State’s non-Federal share. As it relates to provider tax and donation programs, the proposed rule takes the following overall view:

  • There would be increased regulatory scrutiny as to whether a provider tax program meets the requirement that it be health care-related and generally redistributive in nature, through broad authority for CMS to assess the overall impact of the arrangement and the relationship among participating parties. Approved tax waivers would be subject to increased monitoring. 
  • Health insurers would be a permitted tax class.
  • As it relates both to provider tax and donation programs, there would be closer review by CMS as to whether providers are impermissibly “held harmless” for the taxed amount or donation. CMS appears to be especially concerned that various existing donation arrangements may mask hold harmless arrangements. 

DSH Audits Would Be Modified

The proposed MFAR would modify the annual DSH audit process to require States to quantify individual audit findings by hospital. In addition, the rule seeks to ensure that DSH overpayments are timely discovered and either returned to the Federal government or redistributed to other hospitals. 

Given Wide Impact on State Medicaid Programs and Providers, Stakeholders Are Likely to Express Their Concerns During the Comment Period

The proposed MFAR, if implemented, would have a significant impact on State Medicaid programs and the Medicaid providers reimbursed under these programs. Reporting requirements would increase dramatically, including those related to the production of provider-level data. Supplemental payments would be subject to vigorous and ongoing review. New guidance might invalidate or call into question existing methods used by some States to generate the non-Federal share of Medicaid funding, whether through IGT, provider tax and/or provider donations. And finally, the DSH program would be subject to renewed scrutiny.

It is likely that the proposed MFAR will attract significant attention and objection from State Medicaid programs, Medicaid providers, and the associations that represent both. Comments to the proposed rule will be accepted through January 17, 2020. The Arent Fox Health Group regularly advises providers and associations on submitting comments on proposed regulations to CMS.  

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