Fitch warns about a potentially big hit to NFP hospitals from Medicaid payment changes

• New limitations would aim to restrict the use of provider taxes and intergovernmental transfers to draw down federal Medicaid funding.
• The proposed rule would limit Medicaid provider supplemental payments to three years.
• Higher tax rates on Medicaid services would be barred.

Not-for-profit (NFP) hospitals with large shares of Medicaid patients are especially vulnerable to a proposed rule that targets Medicaid provider taxes, supplemental payments and disproportionate share hospital payments, a credit rating agency warned.

In November, the Centers for Medicare & Medicaid Services (CMS) proposed the Medicaid Fiscal Accountability Rule (MFAR) to rein in the use of state supplemental payments and financing arrangements that have stretched the definitions of what is allowed by federal law.

Although states have a variety of ways in which they can respond to maintain their fiscal standing, according to a recent analysis by Fitch Ratings, the new policies could create risks for providers that rely on state funding.

“This is particularly true for NFP healthcare providers that have higher Medicaid exposure,” Fitch analysts wrote.

That assessment followed an analysis by the American Hospital Association that estimated the MFAR changes would cut Medicaid spending on hospitals nationally by between $23 billion and $30 billion.

In a Feb. 12 blog post, Seema Verma, administrator of the Centers for Medicare & Medicaid Services (CMS), sought to quell concerns that big cuts would come from the rule.

“This proposed rule is not intended to reduce Medicaid payments, and alarmist estimates that this rule, if finalized, will suddenly remove billions of dollars from the program and threaten beneficiary access are overblown and without credibility,” Verma wrote. “If states have arrangements that need to evolve, we will work with them to achieve a successful transition.”

Details of MFAR

Major provisions of the proposed rule include:

• Requiring states to furnish provider-level payment details
• Requiring states to report provider-specific payment information on payments received for state-plan services and through demonstration programs, and the source of the nonfederal share of these payments
• Allowing existing and new supplemental payment methodologies to be phased out after no more than three years
• Requiring states to request new CMS approval to continue a supplemental payment beyond the maximum three-year period.
• Mandating the use of federally approved templates and guidelines on acceptable upper payment limit calculations
• Creating regulatory definitions for Medicaid base and supplemental payments
• Reaffirming the statutory requirement that intergovernmental transfers must be derived from state or local tax revenues
• Clarifying that providers must receive and retain 100% of a Medicaid payment
• Barring additional payments to providers that change ownership on paper but remain substantially unchanged in their operations
• Clarifying the prohibition on financial arrangements designed to mask impermissible provider-related donations
• Prohibiting healthcare-related state taxes that unduly burden the Medicaid program, such as higher tax rates on Medicaid services than on non-Medicaid services
• Clarifying the statutory prohibition on state circumvention of healthcare-related tax requirements by masking healthcare-related taxes in a tax program that also taxes non-healthcare items and services
• Allowing health plans to be considered a permissible tax class

Medicaid DSH payment changes

Federal law requires states to submit an independent audit report each year on their Medicaid disproportionate share hospital (DSH) payments. The proposed rule would require that individual audit findings be quantified by hospital and would clarify reporting requirements.

Also, the rule would clarify the overpayment discovery and redistribution procedures for DSH payments.

Additionally, CMS would make DSH allotment information available to states and the public through Medicaid’s website.

Why the changes were proposed

The Trump administration said the changes were driven by a surge in Medicaid spending from $456 billion in 2013 to an estimated $576 billion in 2016, driven by a $100 billion increase in the federal share.

Supplemental payments, which are additional provider payments beyond base Medicaid payment for particular services, increased from 9.4% of payments in FY10 to 17.5% in FY17 and totaled $16.4 billion in 2016.

“With this significant growth comes an urgent responsibility to ensure sound stewardship and oversight of the Medicaid program,” a CMS fact sheet stated.