Hospitals Concerned About Medicaid State-Directed Payment Changes

Eight leading healthcare industry groups are urging CMS to abandon proposed restrictions on provider-based Medicaid funding sources, citing coverage and cost consequences if the proposals are finalized.

The American Hospital Association (AHA), Association of American Medical Colleges (AAMC), and Federation of American Hospitals (FAH) were among the group of trade associations signing the November 29th letter to HHS Secretary Xavier Becerra. The letter expressed deep concern that certain proposed policies to increase Medicaid coverage and access to care for beneficiaries might jeopardize states’ access to critical financial resources, especially as states unwind pandemic-era flexibilities.

“For decades, and in accordance with federal law, hospitals have played a crucial role in helping states finance their Medicaid programs,” the letter stated. “This assistance is needed now more than ever as states face unprecedented challenges due to the unwinding of the COVID-19 related continuous coverage requirements. The return to normal renewal processes requires all available resources to mitigate unnecessary coverage loss and, therefore, this is a particularly precarious time to put additional stress or restrictions on state Medicaid programs.”

In April, CMS released proposed regulations that address a state’s authority to direct the amount Medicaid managed care plans reimburse providers. The regulations would strengthen a states’ authority to direct payments to clinicians and hospitals as long as those payments align with CMS’ goal of improving care access for Medicaid beneficiaries.

The regulations would also codify a state’s ability to reimburse up to average commercial rates and provide additional flexibility in how states design and execute directed payments.

These state-directed payments aim to boost reimbursement rates to providers to support access to care, high-quality care, and delivery system reform. Historically, states have been able to direct plans to make the payments for a broad or narrow set of services and specify the provider type eligible for the payments, as well as set the level of directed payments—for example, by tying the rate to a percentage of Medicare or commercial rates.

However, the Commonwealth Fund reports that the proposed changes come at a time when the size and financing of state-directed payments are under increasing scrutiny and judicial review.

The group of trade associations explained in the letter that state Medicaid programs historically have low provider reimbursement rates, creating a need for supplemental funding like state-directed payments. Growing fiscal pressures on states have also negatively impacted state Medicaid budgets over the last couple of years.

While the associations agree with CMS’ proposal to establish the average commercial rate (ACR) as the upper payment limit for inpatient and outpatient hospital services, they fear certain proposals in the regulations, including proposed restrictions on state use of provider-based funding like provider taxes, might harm Medicaid payments.

“We also are concerned about CMS’ proposed alternatives to artificially limit the growth in SDPs [state-directed payments], particularly for hospital-based SDPs,” the associations wrote in the letter. “Limiting SDP amounts to the Medicare rate or an aggregate cap in total payments as a percentage of managed care spending would add to the financial stress hospitals currently face. Median hospital operating margins were negative throughout 2022 and into the beginning of 2023.1 It is no surprise, therefore, that we have seen record hospital closures in recent years, and many hospitals are struggling to maintain full service lines.”

The letter urged CMS to not move forward with the proposed restrictions on provider-based Medicaid funding.

“Such restrictions could have dire consequences for coverage and access to care as states would be unable to replace lost funds with other sources of revenue. More importantly, finalizing such policies could have a disproportionate impact on access to care for the historically marginalized populations Medicaid is intended to serve,” the letter stated.