CMS proposes new cap on supplemental Medicaid payments

The Trump administration is taking another step to root out fraud, waste and abuse in the Medicaid program by introducing a new cap on some provider reimbursements.

In a proposed rule released yesterday, CMS floated a new cap on Medicaid Managed Care State Directed Payments, or SDPs, at 100% of the Medicare payment rates for expansion states and 110% for non-expansion states.

The rule would also apply similar payment caps to certain targeted Medicaid fee-for-service reimbursements and establish national standards to improve program accountability.

CMS said in a press release that the caps are a "sweeping crackdown" on state Medicaid payment methods that have raised rates above Medicare levels, contributing to an annual SDP that is expected to nearly triple to $296 billion by 2034.

The proposed changes, though, would save $775 billion during that period, including $510 billion in federal spending, the agency projected.

"Medicaid was never meant to be a blank check -- it was meant to be a lifeline -- and lifelines only work when they're strong, reliable, and built to last," said CMS Administrator Mehmet Oz, M.D., in the press release. "Right now, misaligned payment incentives and opaque financing arrangements are driving up costs without delivering better care."

"This rule restores balance by aligning Medicaid payments with Medicare standards, strengthening accountability, and ensuring taxpayer dollars support patients, not payment schemes," he continued. "When we hold the line on spending and put patients first, we protect Medicaid for the people who depend on it today and for generations to come."

An SDP arrangement is a mechanism in Medicaid managed care in which a state Medicaid agency requires contracted health plans to pay specific amounts or use specific methods to reimburse provider partners, such as minimum or maximum fee schedules, uniform rate increases and value-based payment models.

States use these SDP arrangements to funnel targeted funds to certain providers, such as safety-net hospitals and behavioral health clinics, in Medicaid managed care, thereby supplementing low program base rates.

The use of SDP arrangements has exploded, going from just two states in 2016 to 41 states now. These Medicaid payments now account for over a quarter of all Medicaid managed care spending, drawing the Trump administration's attention as it focuses on rooting out fraud, waste and abuse in the program.

States have found a loophole to garner extra federal money by cycling provider taxes through the Medicaid system, CMS explained.

States collect provider taxes from providers and use those funds to cover their share of Medicaid payments. But when states use SDP arrangements, they can direct Medicaid managed care plans to pay those same providers high reimbursement rates, with the federal government matching at least 50%.

The proposed rule seeks to close this loophole by providing "clear, enforceable guardrails" on Medicaid payments.

CMS aims to apply the payment caps by 2029, with some SDPs likely eligible for a temporary grandfathering period. The rule would also prohibit the use of uniform payment rate increases by 2028 for most SDP arrangements.

The American Hospital Association said in a statement that it is concerned about how the proposed rule will impact supplemental payments to providers in Medicaid.

"Health care related taxes and Medicaid supplemental payment programs are longstanding tools that help address chronically inadequate base Medicaid payment rates, and the changes to these financing systems and related provider payments will have very real consequences for access to care in communities across the nation," said Ashley Thompson, AHA senior vice president for public policy analysis and development.

"Projected reductions in funding for essential health care services will not only limit access to care for Medicaid patients," she continued. "When hospitals and providers are forced to reduce services -- or even close entirely -- everyone in a community is impacted."

The proposed caps on these payments could especially affect rural hospitals, the Federation of American Hospitals added, saying these hospitals "are often the largest employer and the only source of care for miles, and state directed payments are a critical part of that equation."

Jacqueline LaPointe is an Executive Editor at Xtelligent Healthcare Media, covering revenue cycle management, healthcare payers, health policy, and health IT since 2016.