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Trump Administration Should Withdraw Rule That Would Deepen State Budget Crisis, Make Medicaid Cuts Likelier

July 29, 2020: This post has been updated.

Medicaid is playing an increasingly significant role in addressing the health and economic impacts of COVID-19. Yet the Trump Administration is poised to finalize a rule that would make it harder for states to fund their share of Medicaid, and at an especially bad time — worsening a historic state budget crisis and raising the risk that states will make harmful Medicaid cuts, which would threaten Medicaid’s ability to respond to the health and economic impacts of COVID-19.

The “Medicaid Fiscal Accountability” rule (MFAR), which the Administration proposed in November, would force states to curtail their use of provider taxes and funds transferred from or certified by state and local government health care providers (intergovernmental transfers, or IGTs, and certified public expenditures, or CPEs, respectively). Along with state general revenue, these funds are the main ways that states fund their Medicaid programs.

The current crisis has exacerbated the impact of the proposed IGT restrictions. The rule would place an arbitrary limit on the types of funds that public hospitals and other providers, state agencies, and local governments could transfer to states, restricting IGTs to funds from local or state taxes or funds appropriated to state teaching hospitals, thereby prohibiting the transfer of hospitals’ commercial revenue or other non-federal funds (which is now allowed). As state and local tax revenues fall, prohibiting the use of other funds would have an even greater impact than originally supposed. In addition, overburdened state Medicaid agencies would lack the capacity to comply with the new rule, as the National Association of Medicaid Directors wrote.

Moreover, many changes that the rule would impose would take effect immediately when the rule is finalized, forcing states to quickly reduce their Medicaid spending or substitute general fund or other revenue for the funds they now receive through provider taxes, IGTs, and CPEs. Finding other sources of revenue would be hard in normal times but, now, it would likely be impossible for most states that are experiencing huge budget shortfalls.

States are facing huge budget shortfalls, now projected to total $555 billion through state fiscal year 2022, largely due to steep drops in state revenues. Forcing states to abandon or limit their use of provider taxes, IGTs, and CPEs at the same time that they’re experiencing these shortfalls would make it impossible for them to avoid cutting provider payments, especially payments to hospitals and nursing homes.

Due to the rule, state Medicaid programs could face total funding cuts of $37 billion to $49 billion a year, according to an analysis that Manatt Health prepared for the American Hospital Association in January.

Hospitals would be at particular risk, because payments funded through IGTs and CPEs comprise a significant share of Medicaid payments to hospitals — 27 percent in 2016, according to the Administration’s proposal. And most states rely on provider taxes to help fund their payments to nursing homes and other providers.

Many health care providers that serve Medicaid enrollees are struggling due to lower revenue from patient visits and higher costs for personal protective equipment and other pandemic-related measures. Payments from the $175 billion provider relief fund in the CARES Act and subsequent relief measures have begun to flow to Medicaid providers, but these one-time payments won’t make most providers whole or avoid the impact of reimbursement rate cuts that states will have to make to close their budget shortfalls without more federal help for state Medicaid programs. MFAR would worsen the problem and limit the effectiveness of the help that policymakers provide.

The temporary 6.2 percentage-point increase in the share of Medicaid costs that the federal government covers (known as the FMAP), enacted in the Families First Coronavirus Response Act of March, was a helpful first step in addressing COVID-19’s impact on state budgets, but it’s not enough to stave off harmful Medicaid cuts in the coming months. The President and Congress need to enact larger and longer-lasting increases in state FMAPs to reduce state per-dollar costs of total Medicaid funding, and policymakers should include such increases in the economic relief legislation that they’re now crafting.

As a starting point, however, policymakers should avoid making things worse. The House-passed Heroes Act would put a moratorium on MFAR until the end of the current public health emergency. But Congress shouldn’t have to act at all. The Administration should recognize that its rule, misguided from its inception, is even more so in the current health and economic crises and withdraw it.