CMS Proposes Rule to Curb Medicaid Payments Amid Rising Costs

The Centers for Medicare & Medicaid Services (CMS) has released a proposed rule aimed at reducing supplemental Medicaid payments in line with recent federal legislation. This initiative seeks to implement constraints on state-directed payments within Medicaid programs, targeting inefficiencies and minimizing excessive program expenditures.

State-directed payments offer enhanced provider reimbursements within Medicaid managed care frameworks, often funded through state-specific strategies such as provider taxes to leverage federal funding. While these payments address inadequate baseline reimbursement, they have drawn scrutiny for potentially inflating federal contributions to Medicaid.

The increasing dependence on state-directed payments is evident, expanding from use in two states in 2016 to 41 currently, with projections showing a rise in financial scope from $107 billion in 2024 to $296 billion by 2034. The proposed regulation would cap state-directed payment rates at 100% of Medicare rates for states with Medicaid expansion, and 110% for those without, initially applying to new arrangements related to hospital and nursing services.

Temporary exemptions for existing payment arrangements will last through 2028, with phased reductions aligning payments with Medicare levels by decreasing 10 percentage points annually. CMS plans to phase out automatic rate increases in state-directed agreements starting in 2028, with measures also extending to Medicaid fee-for-service settings to enhance fiscal management.

Hospitals, major beneficiaries of state-directed payments, may face significant impacts, as these funds contribute substantially to their revenue streams, accounting for 4% to 10% of revenues for large operators like HCA Healthcare. The American Hospital Association supports CMS's goal for fiscal responsibility but warns of potential limitations on healthcare access due to funding reductions.

Despite the proposed restrictions on state-directed payments, CMS continues to approve new arrangements, adding considerable funds to providers, exemplified by the recently approved Florida payments. Stakeholders can submit input on the proposed rule within 60 days following its Federal Register publication, with a final rule expected later this year.