The majority members of the Senate Finance Committee released a report last month that delves into the mysterious world of Medicaid supplemental payments.  We thought we'd go through it here, especially in light of some of the litigation going on across the country involving Medicaid disproportionate share (DSH) payments, a form of Medicaid supplemental payments.

The Finance Committee report found that total Medicaid supplemental payments in fiscal year 2016 totaled nearly $50 billion, and of that amount, 60%, or nearly $30 billion, was attributable to non-DSH supplemental payments.  The federal share of that $30 billion was $16.5 billion; states covered the remaining $13.5 billion.

One of the Finance Committee's principal concerns with this large expenditure of funds is the lack of transparency as to what those funds are used for.  Whereas with traditional Medicaid payments for a medical service, Medicaid spending can be traced to a particular beneficiary's claim, that is not the case with supplemental payments.  Rather, these payments are made in the aggregate, which the Committee notes “is insufficient to gain an understanding of payments at a more granular level.”  The Committee goes on to say that CMS oversight of some supplemental payments “is extremely lax and … lends itself to less transparency.”

The Committee classifies supplemental payments into two categories:  DSH payments and non-DSH payments.  We've written about DSH payments before.  The focus of the Committee's report is non-DSH payments, and there are two specific types of payments the report focuses on:  upper payment limit (UPL) supplemental payments and demonstration supplemental payments.  Let's take a look at both.

UPL supplemental payments are possible because of an old Medicaid policy that dates back to hospital reimbursement changes that Congress made to the Medicare and Medicaid programs in 1981.  It's not a statutory requirement at all – it's a policy that CMS (then HCFA) articulated in program regulations when the Reagan Administration and Congress de-linked Medicare and Medicaid hospital reimbursement principles, allowing states more flexibility to structure hospital payments.[1]  Under the policy, Medicaid payments for a hospital service cannot exceed what Medicare would have paid for that same service.[2]

But from the very beginning, CMS has applied this policy in the aggregate, rather than on a hospital-by-hospital or a claim-by-claim basis.  In the words of the regulation, the policy is assessed “by the group of facilities.”[3]  In other words, a state Medicaid plan is free to pay a hospital or a group of hospitals more than Medicare for a particular service, so long as, in the aggregate, all hospitals in the state are paid less than Medicare would have paid those hospitals.  Since 2002, the UPL has been applied by class of hospitals:  state-owned; non-state government owned; and private.  So, if Medicare would have paid all private hospitals in the state $300 million for services provided to Medicaid patients, and Medicaid, in reality, only paid $200 million, the hospital is safely under the UPL cap even if for some hospitals or for some patients Medicaid paid more than Medicare would have paid.  That $100 million gap can constitute the basis for a UPL supplemental payment.[4]

Let's say that a state wants to make an excess payment to a particular class of acute care hospitals – perhaps because they focus on opioid addiction treatment.  As long as the state can raise its share of the funds – and the Finance Committee report demonstrates the multiple options that a state has to do so – they can spend up to $100 million and CMS will match the payment in accordance with the state's matching payment formula (called the FMAP).  And it is these excess payments that the Committee has focused on its report.  According to the Committee, there is less accountability and transparency as to exactly what these funds are used for, because they are not accounted for on a claim-by-claim basis.

The other class of non-DSH supplemental payments that the Committee adresses is demonstration supplemental payments.  As we've written about in the past, CMS has significant discretion to waive the otherwise-applicable payment rules of Medicaid for states that wish to conduct demonstration or pilot projects that will promote the objectives of the program.  Many times, those demonstration programs contain supplemental payments.  For example, during the Obama Administration, demonstration supplemental payments were used to promote delivery system reform.  Some states have used these payments to pay for the ACA Medicaid expansion.  Other uses of demonstration supplemental payments have been for state uncompensated care pools or to provide payments to institutes for mental disease, whose services for adults between the ages of 21 – 65 cannot otherwise be covered by Medicaid.

Here again, the Committee expressed concern over the lack of transparency into non-DSH supplemental payments.  The report explains that “the Committee's oversight of Medicaid payments … to providers are hampered by not having access to supplemental payments distributions.”  This is important, the Committee explains, not just for its own use but the oversight needs of the Government Accountability Office and the Office of Inspector General.

It is not clear what will happen next in light of the Committee's report.  It is likely that some form of health legislation will be enacted by Congress this year and it is possible that the Finance Committee – which has jurisdiction over the Medicaid program – will adopt some additional reporting requirements on supplemental payments.  In the meantime, the Committee has pointed out the need for additional transparency into nearly $50 billion in Medicaid expenditures.

[1] Omnibus Budget Reconciliation Act of 1981 § 2173(c), Pub. L. No. 97-35, 95 Stat. 357, 808 – 09 (Aug. 13, 1981)

[2] 42 C.F.R. §§ 447.272 (inpatient) and 447.321 (outpatient).

[3] 42 C.F.R. § 447.272(b)(1).

[4] The gap could actually be more than $100 million, since DSH payments do not count toward the UPL.  42 C.F.R. § 447.272(c)(2).