Dive Brief:
The CMS has submitted a proposed regulation to the Office of Management and Budget for review that may signal a coming overhaul of controversial financing mechanisms that allow states to draw more Medicaid funding from the federal government.
On Saturday, regulators sent a regulation titled “Preserving Medicaid Funding for Vulnerable Populations — Closing a Health Care-Related Lax Loophole” to the OMB. That loophole could be state directed payments, which allow states to make supplemental payments for services covered in Medicaid managed care contracts, according to analysts.
Directed payments have been rising sharply, creating a windfall for the hospital industry. However, the arrangements have been targeted by top conservatives, including a key architect of the Project 2025 blueprint, as they look to cut costs and combat fraud and abuse in Medicaid.
Dive Insight:
The full text of the CMS’ proposal isn’t yet available, but its abstract says the rule would “update existing regulations that govern the process for States to obtain a waiver of the statutory requirements that health care-related taxes are broad based and uniform to ensure that taxes passing the statistical test are generally redistributive.”
Along with the regulation’s title, that description suggests a potential reform of Medicaid provider tax programs, according to TD Cowen analyst Ryan Langston.
The arrangements, which must be approved by federal regulators, allow states to sidestep restrictions in Medicaid managed care that prevent them from making additional payments for specific services. They include establishing a base rate plans must pay for services and a uniform rate increase requiring plans pay a set dollar or percent increase in payment, in addition to negotiated payment rates.
Directed payments are popular with providers, who say they provide a necessary cushion that allows them to continue participating in Medicaid — historically a low-margin or altogether unprofitable business.
However, concerns about the arrangements have been rising amid projections they’ll increase Medicaid spending by $110.2 billion each year, according to MACPAC, an influential group that advises Congress on Medicaid reform.
At issue is how states take in and distribute the 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, according to MACPAC.
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. That’s due to how Medicaid is financed, whereby the federal government pays states a match rate of at least half of their Medicaid spending.
As a result, 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, experts say.
It’s impossible to say what reforms the CMS is targeting until the rule is published, but changes could entail stronger oversight of the arrangements or preventing hospitals from sharing directed payments among themselves to ensure facilities are made whole for their share of the taxes.
Major hospitals are almost certain to lobby heavily against any changes to directed payments, given the arrangements increase their Medicaid reimbursement. Some for-profit chains have recently cited millions of dollars in extra quarterly revenue from the supplemental funding.
Yet curbing the arrangements has emerged as one potential strategy for Republicans looking to cut federal spending. Currently, Congress is in the middle of a budgeting process that calls for the House Energy and Commerce Committee to cut $880 billion in spending — much of which is expected to come from Medicaid.
Medicaid’s popularity among voters may prevent drastic cuts. But reforming directed payments is backed by a variety of healthcare stakeholders, including MACPAC, which has called for more transparency in Medicaid financing, along with powerful Republicans in the White House.
For example, Russell Vought, the director of the OMB, was a key contributor to Project 2025, which calls for significant financing reform for Medicaid — including ending “state financing loopholes.” The Paragon Health Institute, an influential right-leaning think tank, has also called for Washington to end “Medicaid money laundering” from state taxes on providers.
“While we believe this proposed rule could be deeply unpopular and receive significant industry pushback, it does not mean CMS would not finalize any proposed provisions of the rule,” Langston wrote in a note Monday.
