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Proposed Medicaid Financing Rule Could Jeopardize Care for Millions

Public comments are due Saturday on a proposed rule from the Centers for Medicare and Medicaid Services (CMS) that would affect how states fund Medicaid. Were CMS to finalize the rule, it could prompt states to cut benefits and eligibility as well as provider payments, jeopardizing access to care for millions of Medicaid beneficiaries, as CBPP’s comments explain.

Most states pay their share of Medicaid costs through a combination of three sources: (1) general revenue, (2) taxes on providers, and (3) funds transferred from or certified by state and local government health care providers (called intergovernmental transfers, or IGTs, and certified public expenditures, or CPEs, respectively). The rule would force many states to curtail their use of provider taxes, IGTs, and CPEs. If states couldn’t make up the funds, they would have to cut benefits and eligibility as well as provider payments, particularly payments to hospitals and nursing homes.

Payments through these financing arrangements represent a large share of Medicaid’s hospital reimbursements. As the rule notes, payments on top of hospitals’ base rates that include supplemental payments, disproportionate share hospital payments, and uncompensated care payments — made under a state’s section 1115 demonstration authority and largely funded through IGTs and CPEs — comprised 27 percent of Medicaid payments to hospitals in 2016. Every state except Alaska uses provider taxes as a financing mechanism, according to the Kaiser Family Foundation.

The rule would make immediate, significant changes to the use of provider taxes, IGTs, and CPEs. It would limit the types of funds that public hospitals and other providers, state agencies, and local governments can transfer to the state to help pay the state’s share of Medicaid costs. That would eliminate their ability to transfer commercial revenue or other non-federal funds, leaving big gaps in states’ ability to fund their Medicaid programs.

The rule would also subject provider taxes and other financing arrangements to new, vague tests that would give CMS substantial discretion whether to approve them, causing significant uncertainty and potential disruption for state budgets.

The rule’s complex subject matter has made it hard for stakeholders, especially beneficiaries and their advocates, to develop comments that are based on a full analysis and understanding of its potential impact on access to care. Stakeholders also lack information on how each state uses these financing mechanisms, making it impossible to analyze the differential impacts that the rule will have on states and localities and across different groups of providers. In fact, CMS cites this information gap as one of its reasons for proposing the rule. And the rule’s regulatory impact analysis says the fiscal impact on Medicaid is “unknown.”

Before changing the rules on how states finance their share of Medicaid spending, CMS should get the information it needs to determine whether supplemental payments, provider taxes, and other financing arrangements are consistent with statutory requirements; whether these arrangements advance Medicaid’s objectives; whether changes in the rules governing these arrangements are necessary; and what the impact of any such changes would be.

Making changes without solid information could hurt Medicaid beneficiaries by upsetting longstanding, legitimate financing arrangements. States would have to substitute general or other revenue for the revenue they now receive through provider taxes, IGTs, and CPEs, which would be hard in many states. States that couldn’t adequately finance their share of Medicaid spending would likely have to make harmful cuts in provider payments, benefits, or eligibility.