February 21, 2020

Weekly line: This under-the-radar proposal could cut hospital Medicaid payments by $31B

Daily Briefing

    By Ashley Fuoco Antonelli, Senior Editor

    Back in November, the Trump administration released the proposed Medicaid Fiscal Accountability Rule (MFAR)—a rule that largely flew under the media's radar. But the wonky proposal has raised eyebrows among providers and major health care industry groups, who argue it could significantly cut providers' Medicaid payments.

    Here's what you need to know about the proposed rule—including why many major health care industry groups are pushing back.

    The proposed Medicaid Fiscal Accountability Rule: What is it?

    To understand how MFAR could change Medicaid payments, we first must understand all the ways that Medicaid reimburses providers.

    Medicaid, like many other forms of health insurance, pays providers for each patient they treat through a traditional fee-for-service arrangement. But providers in many states also receive supplemental payments, such as disproportionate-share hospital payments for uncompensated care and upper-payment-limit supplemental payments to account for differences between Medicaid's fee-for-service payment rates and Medicare payment rates.

    As the Wall Street Journal's Stephanie Armour explains, Medicaid regulations give states "leeway to use some outside funding sources" for those payments, "such as health-care related taxes, fees, and money from local governments." And those funding sources and the supplemental payments offer states more flexibility when setting up provider reimbursement rates—which can help states ensure Medicaid beneficiaries have access to care.

    But the supplemental payments and unique financing arrangements have been getting increased scrutiny from federal officials, who are concerned that states might be using the outside funding sources to receive inflated federal funding for Medicaid. They also argue that some health care providers who are funding Medicaid via applicable taxes and fees actually are reaping financial benefits from the arrangements, Armour writes.

    In response, CMS issued the MFAR proposal, which would establish new reporting requirements for supplemental Medicaid payments and financing arrangements. Currently, CMS requires states to submit aggregate information on both base and supplemental Medicaid payments. But the proposed rule would go further by requiring states to also submit information on Medicaid supplemental payments at the provider level and to identify the source of funds for supplemental payment amounts that are outside of the government's share.

    The proposed rule also would require states to sunset existing and new supplemental payment methodologies after no more than three years unless they seek CMS' permission to use the methodologies. In essence, as Modern Healthcare's Michael Brady notes, "[s]tates would probably have to restructure or abandon existing financing mechanisms" they currently rely on to implement Medicaid and pay providers—which he says "would be extremely disruptive."

    CMS under the proposed rule also would require states to use certain templates, guidelines, and limits on upper-payment limit calculations. For instance, the Kaiser Family Foundation notes that the proposed rule generally would limit supplemental payments to physicians and other clinicians to 50% of the base Medicaid payment rate in a given area, with the limit set to 75% in rural and certain underserved areas. That would be a big difference from the current limit for supplemental payments, which is 100% of the average commercial payment rate in an area.

    What's at stake?

    While CMS did not include its own estimate of the proposal's potential financial effects, Anil Shankar, a partner with Foley & Lardner, told Brady, "It's impossible to overstate how dramatic a change it would be for state Medicaid programs to have to comply with all of these rules at the same time."

    According to Brady, an analysis conducted by Manatt Health for the American Hospital Association (AHA) projected that the proposed changes could reduce total Medicaid funding by as much as $49 billion, or about 8%, each year. And Brady notes that reduction would come as supplemental payments have increasingly made up larger shares of Medicaid payments, rising from 9.4% of all Medicaid payments in 2010 to 17.5% of all Medicaid payments in 2017. In 2018, Medicaid supplemental payments totaled $48.3 billion, according to the Medicaid and CHIP Payment and Access Commission.

    Overall, the U.S. Chamber of Commerce has estimated that hospitals and health systems could see their Medicaid payments drop by between $23 billion and $31 billion annually if the proposed rule is finalized as is, which would represent about 12.8% to 16.9% of total hospital-program payments.

    How would these potential cuts affect care?

    Many experts and stakeholders throughout the health care industry—including AHA, the American Health Care Association (AHCA), and America's Essential Hospitals—have pushed back on the proposed rule, saying that while they understand CMS' goal of increasing transparency, the proposal could decimate state Medicaid programs—resulting in drastic cuts to provider payments and coverage rates, and ultimately reducing vulnerable Americans' access to care.

    Stakeholders also warned that the proposed changes could lead hospitals and providers to stop participating in Medicaid—and potentially cause some rural hospitals to close.

    For instance, Mark Parkinson, AHCA's president and CEO, and Rock Pollack, AHA's president and CEO, in a joint statement said, "Entire communities could lose access to care under this proposal, especially in rural areas where 15% of hospital revenue and nearly two-thirds of nursing facility revenue nationwide depend on Medicaid funding."

    Those comments were echoed by many other groups representing major stakeholders in both the health care industry, such as America's Health Insurance Plans, and in states, including the National Governors Association and the National Association of State Medicaid Directors. Some industry groups—including medical societies from all 50 states—have urged the administration to withdraw the proposal.

    What to watch

    The Trump administration hasn't yet said when or whether it plans to finalize the proposed rule, but officials are taking time to defend the proposal's aims.

    CMS Administrator Seema Verma in a blog post published last week wrote, "This proposed rule is not intended to reduce Medicaid payments, and alarmist estimates that this rule, if completed, will suddenly remove billions of dollars from the program and threaten beneficiary access are overblown and without credibility." She added, "Nothing in our proposed rule would stop states from using supplemental payments, provided that they are used and financed in a way that is in compliance with federal statute and regulations."

    And HHS Secretary Alex Azar during a Senate Finance Committee hearing the following day told lawmakers the administration would "try to be very reasonable" when implementing the proposed requirements. "[W]e're not trying to cut Medicaid through the MFAR regulation, we're just trying to make sure it's the right kind of spending," he said.

    However, it's worth noting that industry backlash has delayed some of the administration's other major health care plans, so the main thing to watch here is whether—and if so, how—the administration proceeds. Officials could be bullish on implementing the proposed changes as is, take a softer approach that incorporates stakeholders' feedback, or stall the proposed changes, as it has with some of its other proposals.

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