A widespread Medicaid funding mechanism could help increase healthcare access for some of America’s most vulnerable patients, but needs additional transparency, according to key congressional advisors.
Spending through the arrangements, called state directed payments, is projected to skyrocket, exacerbating concerns that states could be using creative financing schemes to inflate Medicaid funding from the federal government.
Higher state directed payments could also create a windfall for the hospital industry. Caring for Medicaid patients has historically been a low-margin or altogether unprofitable business, but hospitals are already reporting millions of dollars in extra quarterly revenue from the supplemental funding — and those sums are only expected to grow, according to analysts.
Meanwhile, the CMS, government watchdogs and public policy researchers are operating mostly in the dark. States are supposed to evaluate directed payments’ success, but those reviews are often incomplete and not publicly available. That’s also the case for data on how directed payments are funded and where dollars are being spent.
“We’re assuming nobody is doing anything untoward here, but if it’s transparent we can see what everyone’s doing and why,” said MACPAC Commissioner Heidi Allen during the congressional advisory group’s meeting on Thursday.
An exploding Medicaid payment mechanism
Historically, states have been forbidden from making supplemental payments for services covered in managed care contracts, wherein states contract with private insurers to administer the care of Medicaid beneficiaries.
But in 2016, the CMS made an exception for directed payments. The arrangements — which must be approved by federal regulators — include establishing a base rate plans must pay for services; a uniform rate increase requiring plans pay a set dollar or percent increase in payment, in addition to negotiated payment rates; and requiring plans to enact value-based models like shared savings arrangements.
Directed payments have seen “substantial growth” in the last eight years, Asher Wang, a policy analyst with MACPAC, said during the meeting last week.
Of the roughly 500 state directed payment arrangements currently in place, the CMS approved more than 300 between February 2023 and August 2024, according to new MACPAC research.
Those new arrangements are estimated to increase spending by $110.2 billion each year. That’s roughly four times larger than the $24.7 billion in projected spending from arrangements approved by the end of 2020, the analysis found.
Directed payments are popular with states because they increase payment to providers, hopefully incentivizing more hospitals and doctors to participate in Medicaid.
Medicaid rates are generally much lower than those paid by Medicare or commercial plans, and providers can face unique billing hurdles in the program. As a result, many providers don’t accept the insurance — roughly one-third of all physicians refuse to accept new Medicaid patients — leaving Medicaid patients struggling to find a doctor.
State directed payments can help make up the gap, MACPAC commissioners said Thursday. More generous Medicaid payment rates are associated with higher rates of doctors accepting new Medicaid patients, research has shown.
Increasing Medicaid access can have a major impact, given roughly 80 million Americans are covered by the safety-net insurance.
“The directed payments, at least in the states that we operate in, are used to increase access to care. And they’re used as a way to ensure that we’ve got providers who want to participate in the program because they end up increasing the rates,” said Commissioner Carolyn Ingram. Ingram is plan president of insurer Molina Healthcare, which brings in the lion’s share of its revenue from contracts with Medicaid states.
Yet the link between directed payments and healthcare access isn’t entirely clear. Evaluation measures vary across states. And, given the recent implementation of many of these payments, the CMS has little oversight into whether states are meeting stated goals or not, according to MACPAC analysts.
“It’s not clear the extent to which state directed payments have made meaningful improvements in access,” Wang said.
Provider financing raising eyebrows
MACPAC is joining other congressional watchdogs in raising concerns about a lack of supervision over directed payments. One particular issue is how states are raking in and distributing the novel funds.
States rely heavily on taxes on providers and intergovernmental transfers — which allow government entities like state- or county-owned public hospitals to transfer funding to the state — to finance their share of directed payments, MACPAC analysts said.
Those arrangements give states a limited stake in the cost of the arrangements, and could be inflating the federal share of Medicaid spending without the state having to dip into its own revenues, according to the Government Accountability Office.
That’s because the federal government pays states a set match rate of at least 50% of their Medicaid expenditures. States could be taxing providers to bump up reported state spending, allowing them to nab higher federal funding before they repay providers for part or all of the initial tax, according to experts.
There are also concerns that hospitals could be coordinating among themselves to share directed payments to ensure facilities are made whole for their taxes.
Such agreements are not allowed, but are happening in at least a few states. Both Texas and Florida have sued the CMS to keep the arrangements in place.
MACPAC found 29 directed payment arrangements in the U.S. that were projected to increase provider payments by more than $1 billion annually.
Of those, 24 were targeted to hospital systems, and 26 were financed by provider taxes or intergovernmental transfers, according to the advisory board’s report.
‘Key new vehicle’ for Medicaid funds
To address some of these issues, the CMS finalized a rule this spring reshaping how states can structure directed payments and putting more stringent reporting requirements in place. However, regulators could go farther to make sure directed payments are effective, MACPAC commissioners agreed.
“Transparency around this is really important in understanding where these dollars are going and how they’re being utilized,” said Commissioner Michael Nardone, an independent consultant on Medicaid policy, during Thursday’s meeting.
The CMS should require states to report how they’re collecting funds to finance their share of directed payments, and the cost of that share, analysts recommended.
Specifically, it’s important to better understand how providers are being taxed, along with financing contributions from individual providers and how much money each provider receives in directed payments, said Chris Park, MACPAC’s policy director and data analytics advisor.
MACPAC has been asking Washington to collect more detailed information on how states loop providers into funding Medicaid for almost a decade.
Meanwhile, hospitals are gearing up for an unexpected jackpot of funding from Medicaid as states adopt more directed payments and dollars flowing through the pathways grow.
Despite measures to boost program integrity in the CMS’ April rule, regulators elected not to cap directed payments in the regulation. Instead, the CMS established an upper payment limit — a point at which the federal government stops matching state funds — at the average commercial rate.
As a result, states can set Medicaid managed care payment rates at levels equal to those paid by commercial plans to providers of the same service, resulting in much higher reimbursement.
In October, TD Cowen raised price targets for for-profit hospital giants HCA and Universal Health Services, citing the chance of significantly higher Medicaid revenue due to the change.
Major hospital operators could boost their annualized earnings by 8% to 19% thanks to directed payments, according to the investment bank’s analysis of the arrangements nationwide.
The report called the payments the “key new vehicle driving higher Medicaid reimbursement growth for hospitals.”
Some of the biggest systems in the U.S. are already reporting topline growth from the funding. During the second quarter this year, HCA, UHS and Tenet reported additional revenues from directed payments ranging from $30 million to $125 million.
