More Medicaid programs increase hospital payment rates

• The majority of states increased hospitals’ Medicaid inpatient and outpatient payment rates in FY19.
• About half of the states with Medicaid plans have established minimum provider payment rates.
• Medicaid enrollment and spending are projected to increase in FY20.

Hospitals’ Medicaid payment rates have increased after a recent rate-cutting trend, according to new data from directors of those programs.

The latest survey of Medicaid program directors conducted by the Kaiser Family Foundation (KFF) found that in FY19, most states increased hospitals’ inpatient rates (27 states) and outpatient rates (28 states). And the improvement will expand in FY20, when adopted budgets call for increasing inpatient rates (32 states) and outpatient rates (28 states).

More states increased rates than cut rates in FY19 (with 24 states cutting inpatient rates and three cutting outpatient rates) and will do so again in FY20 (when 18 states are set to cut inpatient rates and three are set to cut outpatient rates).

States’ shift toward raising hospitals’ Medicaid payment rates reversed a bias toward cuts in FY18, when 28 states cut inpatient hospital rates and five cut outpatient rates, according to an earlier survey. 

The rate-increase trend comes at a time when Medicaid hospital payments cover only 87 cents of every dollar spent by hospitals caring for Medicaid patients, according to the latest analysis (based on 2017 rates) by the American Hospital Association.

Almost half of states require minimum plan rates

The number of states using Medicaid health plans to manage at least part of their programs increased to 40 in FY19. And since such plans use other arrangements, fee-for-service (FFS) rate changes are less meaningful as a measure. To address provider payments under such plans, some states set provider payment requirements.

Nearly half of the states with Medicaid plans (19 states) require minimum provider payment rates (for inpatient hospital, outpatient hospital or primary care physicians) as part of their contracts with those plans.

Fewer states using Medicaid plans (17) require them to change provider payment rates in accordance with FFS payment rate changes (using either uniform dollar or percent changes) for inpatient hospital, outpatient hospital or primary care physicians.

More provider taxes, fees levied to pay for Medicaid

States also are increasing their already-strong reliance on provider taxes and fees as a funding source for their Medicaid programs.

In FY19, 49 states and Washington, D.C., had provider taxes in place, compared with only 21 states as recently as FY03.

Hospital taxes (used by 43 states) remained a frequently used provider tax in FY19. And the total number of states with hospital taxes will increase to 44 in FY20, when Texas launches a tax.

Another new provider tax planned for FY20 will be levied on hospital-based physicians in Wyoming.

Seventeen states reported planning increases in one or more provider taxes in FY20, while six states reported planning decreases. Additionally, 32 states had at least one provider tax of more than 5.5% of a provider’s net patient revenues, which is close to the 6% federal limit on such taxes.

Such provider taxes have drawn criticism from those who view them as a mechanism for garnering more federal funding than was intended by statute because the state share is boosted by providers benefitting from the program instead of state general funds. If proposals to further limit such taxes are successful, the KFF report warns many states will face “financial implications” in their Medicaid programs.

Overall trends in Medicaid

State officials largely attributed a 1.7% Medicaid enrollment decline in FY19 and a relatively small 0.8% projected increase in FY20 to a stronger economy. Smaller effects on enrollment were attributed to changes in renewal processes, new functionality of upgraded eligibility systems and enhanced verification processes and data-matching efforts.

Total spending growth slowed from 4.2% in FY18 to 2.9% in FY19, which states attributed primarily to enrollment declines. The increase was sharply lower than the 5.3% spending bump that had been projected for FY19. States again are projecting that spending will accelerate in FY20, rising by 6.2%, due to increases in prescription drug costs, provider rates and costs for the elderly and people with disabilities.

Among the examples of a shift to value-based payment (VBP) in state Medicaid programs:

• Twenty-one states in FY19 identified a specific target in their Medicaid health plan contracts for the percentage of provider payments or plan members that managed care organizations must cover through APMs.
• Three states plan to add a target percentage in FY20.
• Fourteen states’ health plan contracts included incentives or penalties for meeting or failing to meet APM targets in FY19.
• Two states and Washington, D.C., plan to add penalties or incentives in FY20.
• Eight states had FY19 contracts that required health plans to participate in a state-directed VBP initiative.
• Twelve states in FY19 required health plans to develop a VBP strategy using state-specified guidelines.
• Five states planned to require health plans to develop a VBP strategy using state-specified guidelines in FY20.