Current Medicaid financing provisions stipulate that states are required to share in the cost of medical assistance expenditures but are permitted to utilize other units of state or local government to contribute to the financing of the non-federal share of medical assistance expenditures. In the proposed rule, CMS acknowledges the relationship between states and local units of government in financing the Medicaid program through intergovernmental transfers (IGTs) and certified public expenditures (CPEs). However, the proposed rule identifies a concern about the potential for states to establish payment methodologies on the basis of whether a unit of state or local government can provide the non-federal share to support Medicaid supplemental payments.

CMS explains that the proposed rule seeks to address these concerns through a number of strategies, including proposed improvements to reporting that would enable monitoring of changes in non-federal share funding after a SPA is approved. CMS proposes to clarify conditions for hold harmless arrangements by expressly prohibiting certain supplemental payment programs. CMS indicates that proposed new policies, as well as the proposed codification of existing policies will provide better information and guidance to identify existing and emerging financing issues, provide more clarity on allowable financing arrangements, promote accountability, and strengthen the fiscal integrity of the Medicaid program.

For supplemental payments approved three or more years prior to the effective date of the final rule, the proposed rule would expire the state plan authority two calendar years following the effective date of the final rule. For state plan provisions approved less than three years prior to the effective date of the final rule, the proposed rule will expire the state plan authority three years following the effective date of the final rule. States would be required to request a new CMS approval to continue a supplemental payment beyond the maximum three year approved period.

Submission of a state plan or state plan amendment for a supplemental payment would be required to include:

• 447.252(d) and § 447.302(c)
  • An explanation of how the state plan or SPA will result in payments that are consistent with efficiency, economy, quality of care, and access, along with the stated purpose and intended effects of the supplemental payment;
  • The criteria to determine which providers are eligible to receive the supplemental payment;
  • A comprehensive description of the methodology used to calculate and distribute the supplemental payment to each eligible provider;
  • The duration of the supplemental payment authority (not to exceed three years);
  • A monitoring plan to enable evaluation that provides assurances that payments are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area; and
  • For a SPA proposing to renew a supplemental payment for a subsequent approval period, an evaluation of the impacts on the Medicaid program during the current or most recent prior approval period.

States must provide a comprehensive description of the methodology used to calculate and distribute the supplemental payment, including all of the following:

• 447.252
  • The amount of the supplemental payment made to each eligible provider, if known, or, if the total amount is distributed using a formula based on data from one or more fiscal years, the total amount of the supplemental payments for the fiscal year or years available to all providers eligible to receive a supplemental payment;
  • If applicable, the specific criteria with respect to Medicaid service, utilization, or cost data from the proposed state plan rate year to be used as the basis for calculations regarding the amount and/or distribution of the supplemental payment;
  • The timing of the supplemental payment to each eligible provider;
  • Assurances that the total Medicaid payment to a provider will not exceed the applicable upper payment limits.

In the proposed rule, CMS indicates they are re-affirming the requirement that intergovernmental transfers (IGTs) must be derived from state or local tax revenues, replacing references to “public funds” with “state or local funds” as qualifying for use as the non-federal share of supplemental payments. Act. The proposed rule would limit permissible state or local funds that may be considered as the state share to the following sources:

• 433.51(b)
  • State general fund dollars appropriated by the state legislature directly to the state or local Medicaid agency.
  • Intergovernmental transfer of funds from units of government within a state (including Indian tribes), derived from state or local taxes (or funds appropriated to state university teaching hospitals), to the State Medicaid Agency and under its administrative control.
  • Certified public expenditures, which are certified by a unit of government within a state as representing expenditures eligible for FFP and meet all other requirements.

The proposed rule requires that intergovernmental transfers used as the non-federal share of Medicaid expenditures must be derived from state or local taxes (or funds appropriated to state university teaching hospitals) transferred from or certified by units of government.

Certified public expenditures would be specifically defined in regulation, as a result of the proposed rule, as an allowable source of state share in a manner consistent federal financial participation. The rule also describes the protocols states may use to identify allowable Medicaid expenditures associated with the use of a CPE as the source of the non-federal share of the total computable payment.

CMS proposes to require that, for a state to use a CPE as a source of state share, the state must meet the requirements with respect to payments funded by the CPE.

• 447.206
  • Such payments, to a provider that is a unit of government, would be limited to the state or non-state government provider’s actual, incurred cost of providing covered services to Medicaid beneficiaries using reasonable cost allocation methods, or as applicable, Medicare cost principles.
  • CMS will codify their practice of relying upon the cost allocation principles in federal regulations, and, as applicable, Medicare cost principles as the methods and principles to identify Medicaid program expenditures eligible to support a CPE.
  • States must establish and implement documentation and audit protocols, which must include an annual cost report to be submitted by the state government provider or non-state government provider to the state agency that documents the provider’s costs incurred in furnishing services to Medicaid beneficiaries during the provider’s fiscal year.
  • Only the certified amount of the expenditure may be claimed for FFP. The claimed amount is limited because the CPE must only represent amounts that were spent providing the Medicaid services, which authorize federal matching funds for state Medicaid expenditures and allows funds certified by units of government within a state as the non-federal share of expenditures, respectively.
  • The certifying entity of the CPE must receive and retain the full FFP associated with the Medicaid payment.
  • CMS explains the requirement that certifying entities receive and retain the FFP a state claims from CMS is to prevent inappropriate recycling of federal funds and any other potential redirection of federal funds that would be prohibited under the statute.
  • States would be required to implement processes by which all claims for medical assistance would be processed through the MMIS in a manner that identifies the specific Medicaid services provided to specific enrollees.
  • States are required to utilize most recently filed cost reports to develop interim payments rates, which may be trended by an applicable health care-related index.
  • Final settlement will be performed annually by reconciling any interim payments to the finalized cost report for the state plan rate year in which any interim payment rates were made. Final settlement would be required to be made no more than 24 months from the relevant cost report year end, except under certain circumstances.
  • If CPEs are used as a source of non-federal share under the state plan, the state plan would be required to specify cost protocols in the service payment methodology applicable to the certifying provider, such protocols would be required to meet all of the following criteria:
    • 447.206(d)
    • Identify allowable cost using either a Medicare cost report, or a state-developed Medicaid cost report prepared in accordance with Medicare cost principles;
    • Define an interim rate methodology that would be used to pay a provider on an interim basis;
    • Describe an attestation process by which the certifying entity would attest that the costs are accurate and consistent with requirements;
    • Include, as necessary, a list of the covered Medicaid services being furnished by each provider certifying a CPE; and
    • Define a reconciliation and settlement process consistent with requirements.

The rule specifies that State funds provided as an IGT from a unit of government but that are contingent upon the receipt of funds by, or are actually replaced in the accounts of, the transferring unit of government from funds from unallowable sources, would be considered to be a provider-related donation that is non-bona fide.

The proposed rule requires that providers must receive and retain 100 percent of the payment. The rule specifies that payment methodologies must permit the provider to receive and retain the full amount of the total computable payment for services furnished under the approved State plan (or the approved provisions of a waiver or demonstration, if applicable).

• 447.207
  • CMS explains that the proposed rule implements provisions of the Social Security Act that require, among other things, that the state plan for medical assistance provide such methods of administration as are found by the Secretary to be necessary for the proper and efficient operation of the plan, and generally provide that no payment under the plan for any care or service provided to an individual shall be made to anyone other than such individual or the person or institution providing such care or service, under an assignment or power of attorney or otherwise, unless certain enumerated exceptions apply.
  • CMS will determine compliance with this provision by examining any associated transactions that are related to the provider’s total computable Medicaid payment to ensure that the state’s claimed expenditure, which serves as the basis for FFP, is consistent with the state’s net expenditure, and that the full amount of the non-federal share of the payment has been satisfied.
  • The term “state’s net expenditure” means a state’s Medicaid expenditure, less any returned funds or contributions from the provider to the state, related to the Medicaid payment. This view of a return of any portion of a Medicaid payment is consistent with the treatment of provider-related donations in which CMS will deduct the amount of an impermissible provider-related donation from a state’s medical assistance expenditures before calculating FFP.
  • Consideration for the state’s net expenditure would include a review of potential “hold harmless” arrangements, which provides that an impermissible hold harmless practice exists if the Medicaid payment is positively correlated to a donation, varies based only on the amount of a donation (including if payment is conditioned upon the receipt of a donation), or directly or indirectly guarantees to return any portion of a donation to the donating provider (or other party responsible for the donation).
  • CMS anticipate that “associated transactions” may include the payment of an administrative fee to the state as a fee for processing provider payments or IGTs. They indicate that in no event could administrative fees be calculated based on the amount a provider receives through Medicaid payments or amounts a unit of government contributes through an IGT as funds for the state share of Medicaid payments. CMS explains that structuring an administrative fee in this way would be tantamount to a Medicaid-only provider tax, which is not allowable.  Conversely, if a state charged a flat fee for claims processing that did not vary based on the volume of claims or amount of Medicaid payments processed, the payment of such a fee would not be considered an associated transaction.

The proposed rule requires that, beginning October 1, of the first year following the year in which the final rule may take effect, and annually thereafter, by October 1 of each year, in accordance with the requirements … manner and format specified by the Secretary, each state would be required to submit a demonstration of compliance with the applicable UPL for each of the following services for which the state makes payment: inpatient hospital; outpatient hospital; nursing facility; ICF/IID; and institution for mental diseases (IMD). CMS is proposing to no longer require states to submit UPL demonstrations for psychiatric residential treatment facility (PRTF) and clinic services.

In preparing UPLs, the proposed rule requires states to use the data sources and adhere to the data standards, and acceptable UPL methodologies specified by CMS. CMS explains this provision is necessary “to ensure uniform reporting of UPL data and a full picture of Medicaid payments within each provider category for each category of services subject to a UPL in a given year.”

The proposed rule includes specific reporting requirements to identify the individual providers receiving payments, the authority for the payments, and the sum of all payments received by the individual providers. At the time the state submits its quarterly CMS-64, the state would be required to report certain information for each supplemental payment included on the CMS-64. The proposed reporting elements would not be reported on the CMS-64 itself, but would accompany that submission on a separate, supplemental report. These data submission requirements would include provider-level data on base and supplemental payments made under state plan and demonstration authority by service type.

• 447.288
  • For each supplemental payment reported on the CMS-64, states would be required to report the SPA transaction number or demonstration authority number which authorizes the supplemental payment; a listing of each provider that received a supplemental payment under state plan and/or demonstration authority, and, for each provider:
    • The provider’s legal name;
    • The primary physical address of the location or facility where services are provided, including street address, city, state, and ZIP code;
    • The National Provider Identifier (NPI);
    • The Medicaid identification number;
    • The employer identification number (EIN);
    • The service type for which the reported payment was made;
    • The provider specialty type;
    • The provider category (that is, state government provider, non-state government provider, or private provider);
    • The specific amount of the supplemental payment paid to each provider, including the total supplemental payment made to the provider authorized under the specified state plan or demonstration authority.
  • On an annual basis, the proposed rule requires states to also report not later than 60 days after the end of the state fiscal year, aggregate expenditure data for all data elements included in above plus the following:
    • The state reporting period;
    • The specific amount of Medicaid payments made to each provider
      • The total FFS base payments made to the provider under the state plan
      • The total Medicaid payments made to the provider under demonstration authority
      • The total amount received from Medicaid beneficiary cost-sharing requirements, donations, and any other funds received from third parties to support the provision of Medicaid services
      • The total supplemental payment made to the provider authorized under the specified state plan,
      • The total Medicaid supplemental payment made to the provider under the specified demonstration authority
      • The aggregate total of Medicaid payments made to the provider
    • The proposed rule also requires annual reporting, not later than 60 days after the end of the state fiscal year, of aggregate and provider-level information on each provider contributing to the state or any unit of local government any funds that are used as a source of non-federal share for any Medicaid supplemental payment. This proposed data submission requirement would include all of the data elements listed above, but would also require information related to financial contributions to the state Medicaid program, specifically including the following:
      • The total of each health care-related tax collected from the provider by any state authority or unit of local government;
      • The total of any costs certified as a CPE by the provider;
      • The total amount contributed by the provider to the state or a unit of local government in the form of an IGT;
      • The total of provider-related donations made by the provider or entity related to a health care provider, including in-cash and in-kind donations, to the state or a unit of local government, including state university teaching hospitals;
      • The total funds contributed by the provider (health care-related taxes, CPEs, IGTs, provider-related donations, and any other funds contributed to the state as the non-federal share of a Medicaid payment).

For a number of years, states have been making supplemental payments that are targeted to certain practitioners, such as physicians and other licensed professionals, under the Medicaid state plan. Most commonly, states have targeted supplemental payments to practitioners affiliated with and furnishing services in academic medical centers and safety net hospitals. These payments have used what is commonly described as an average commercial rate (ACR) calculation. Predominantly, such ACR payments are funded by IGTs from local government sources or state university teaching hospitals. Under this proposed rule, CMS will end the use of ACR supplemental payments based on their concerns that the payments are not economic and efficient, and that they present a clear oversight risk because they are based on proprietary commercial payment data and thus not verifiable or auditable.

• 447.406
  • In proposing these requirements, CMS explains they will establish an appropriate and auditable upper bound to better ensure that practitioner payments are consistent with economy and efficiency by ensuring the supplemental payments have a reasonable relationship to the base rate methodologies that have been approved by CMS.
  • The proposed rule defines Medicaid practitioner supplemental payments as an amount that may not exceed the following:
    • 50 percent of the total fee-for-service base payments authorized under the State plan paid to an eligible provider for the practitioner services during the relevant period; or
    • For services provided within HRSA-designated geographic health professional shortage areas (HPSA) or Medicare-defined rural areas, 75 percent of the total fee-for-service base payments authorized under the State plan paid to the eligible provider for the practitioner services during the relevant period.
  • CMS indicates they recognize that states may need time to come into compliance with the proposed new limits. For states whose state plans currently provide for Medicaid practitioner supplemental payments, CMS will provide a transition period.
    • For state plan provisions approved three or more years prior to the effective date of the final rule, the proposed rule would expire the state plan authority two calendar years following the effective date of the final rule.
    • For state plan provisions approved less than three years prior to the effective date of the final rule, the proposed rule will expire the state plan authority three years following the effective date of the final rule.
  • By the end of the transition period, a state without an approved SPA bringing the Medicaid practitioner supplemental payment program into compliance with the requirements of this section would not be authorized to continue making the supplemental payments.
  • States would no longer be required to submit annual ACR demonstrations for the annual UPL submission requirements outlined in the SMDL 13-003 for states that make targeted physician supplemental payments for physician services. Instead, CMS expects that the state plan would include a comprehensive written statement of the Medicaid FFS base payment and Medicaid practitioner supplemental payment methodologies.

Timely reporting of information to CMS is a requirement of the proposed rule. If a state fails to timely, completely and accurately report information, CMS may reduce future grant awards through deferral by the amount of FFP they estimate is attributable to payments made to the provider or providers as to which the state has not reported properly, until such time as the state complies with the reporting requirements. CMS explains this reporting is necessary to ensure that states comply with applicable federal statutory and regulatory requirements and is necessary for the proper and efficient administration of the state Medicaid plan.

[1] There is some apparent misstatement in the proposed rule. After indicating a transition period will be used under §447.406(d) (see FR 63765), the proposed rule indicates “for Medicaid practitioner supplemental payments that were approved on or before the effective date of any final rule, the state would be required to submit and obtain CMS approval for a SPA to comply with the requirements of this section”. The proposed rule further indicates that “Otherwise, the authority for state plan provisions that authorize the Medicaid practitioner supplemental payments that are approved as of the effective date of any final rule would be limited according to the timeframe described in § 447.302(d).” This section is described by CMS as “for state plan provisions approved 3 or more years prior to the effective date of the final rule, we propose that the state plan authority would expire 2 calendar years following the effective date of the final rule. For state plan provisions approved less than 3 years prior to the effective date of the final rule, we propose that the state plan authority would expire 3 years following the effective date of the final rule.” § 447.406(d) is not included in § 447.406 (see FR page 63785).