Updated: Nov 20, 2020
On November 18, 2019, the Centers for Medicare and Medicaid Services (“CMS”) published in the Federal Register a proposed regulation, entitled the Medicaid Fiscal Accountability Regulation (“MFAR”).
A combination of systemically low reimbursement rates in Medicaid programs, lack of federal enforcement to ensure that rates are consistent with quality of care and access, and the courts’ unwillingness to intervene on behalf of providers and enrollees to challenge these low rates has forced providers to partner with their states to work to increase reimbursement rates. In this effort, providers have worked within the confines permitted by the Medicaid Act to fund the state share of these increases through provider taxes, bona fide provider donations, intergovernmental transfers and certified public expenditures.
As background, the Medicaid Act permits states to utilize funding received from healthcare providers for the state share of Medicaid expenditures. For example, California relies on various provider taxes/fees, in addition to intergovernmental transfers and certified public expenditures to sustain the largest Medicaid program in the country, Medi-Cal. The major types of provider contributions to the state share include:
a.) Health care related taxes: (1) must be broad-based (applied to all items or services in a class of services furnished by non-Federal, non-public providers or applied to all non-Federal or non-public providers); (2) must be uniform (uniformly on the items, services or providers); and (3) may not hold providers harmless with respect to the tax (e.g., ensure that the provider is ensured to receive every dollar paid back). The broad-based and uniform standards may be waived by CMS if CMS determines that the tax is not generally redistributive and the amount of the tax is not directly correlated to Medicaid payments for the items or services for which the tax is imposed.
b.) A bona fide provider donation cannot be used for the state share of Medicaid funding if there is a relationship between the donation and Medicaid payments.
2. The Medicaid Act also prohibits the federal government from restricting federal expenditures where the state share is derived from State or local taxes either transferred from or certified by units of local government as the state share. These transfers are referred to as intergovernmental transfers (“IGTs”). These certified expenditures are called certified public expenditures (“CPEs”).
The use of an impermissible source of state share funding may trigger a reduction in federal financial participation from CMS.
Most states use the proceeds of these sources of provider-derived funding to increase payment rates to healthcare providers. These payment increases take numerous forms, including changes in the base payment methodology (e.g., California’s AB 1692 cost-based nursing home reimbursement methodology), increases to the base payment (e.g., California’s SB 523 emergency medical transport add-on payments), and supplemental payments (e.g., various hospital Upper Payment Limit programs).
Here are the major changes proposed by the MFAR that may impact healthcare providers:
1. Healthcare-Related Taxes: The MFAR proposes three major revisions to the permissible use of healthcare-related taxes for the state share of Medicaid expenditures.
a.) Expanding the Hold Harmless Standard: The MFAR further proposes to expand the situations in which CMS will find a hold harmless arrangement to include essentially any situation in which CMS determines that a taxpayer has a reasonable expectation that it will receive a return of any or all of the tax amount. This standard would apply regardless of whether the arrangement is reduced in writing or legally enforceable. It is unclear how CMS would actually apply this standard in the future in any provider tax situation, as in many standard programs, it is arguable that at least some taxpayers will have some indication based on their Medicaid activity that they may receive at least some portion of their tax revenues in the form of increased payments. In other words, to apply this standard as written potentially could threaten nearly every provider tax program in place in the country.
b.) Expansion of Test for Whether a Tax is Generally Redistributive: Many provider taxes require waivers of the broad-based or uniformity requirements because they are structured to distribute the impact of the taxes across the taxed industry. Historically, these waivers have been granted if the state can demonstrate that the tax passes certain standards (i.e., the P1/P2 and B1/B2 tests established in 42 C.F.R. section 433.68(e)). The MFAR proposes to expand the standard for whether a tax is generally redistributive beyond the historical mathematical standard to require that the state establish that the tax does not impose an undue burden on health care items or services paid for by Medicaid or the providers of such services. This would prohibit the following types of arrangements:
Placing a lower tax rate on a taxpayer group based on its low Medicaid activity.
Imposing a higher tax rate on any Medicaid activity (except as a result of excluding from taxation Medicare or Medicaid revenue or payments).
Excluding or imposing a lower tax rate on a taxpayer group with no Medicaid activity, with specified exceptions.
Excluding or imposing a lower tax rate on a taxpayer group that CMS believes is a proxy for having no or relatively lower Medicaid activity.
c.) Indirect Guarantee Test: The MFAR notably does not seek to amend the threshold for an indirect guarantee in 42 C.F.R. section 433.68(f)(3), which effectively establishes a threshold on provider taxes to 6 percent of taxpayer net revenue. This threshold was reduced to 5.5 percent for the period of January 1, 2008, through September 30, 2011.
d.) Waiver Approvals: The MFAR proposes to limit the approval of waivers of the broad-based or uniformity requirements to 3 years. The MFAR also proposes that states must ensure compliance of all provider taxes with the terms of the waiver continuously during the waiver period.
e.) Clarifying the Definition of a Health Care-Related Tax: The MFAR seeks to clarify when taxes not limited to health care items or services that treat health care items or services differentially may be considered to be health care-related. CMS expands the traditional inquiry as to when taxes are considered health care-related by proposing two examples of differential treatment: (1) the selective incorporation of a tax on health care items or services that are not reasonably related to the other services being taxed (e.g., a tax on telecommunication and inpatient hospital services would be considered health care-related); and (2) differential treatment of the health care items or services (e.g., the imposition of a higher tax rate on those health care items or services).
f.) New Class of Services: The MFAR adds the services of health insurers as a class of health care services and providers. Importantly, CMS reiterates its preamble text to the August 1993 final rule on provider taxes that it will consider three criteria in defining additional classes of health care items or services: (1) the class is not predominantly Medicare/Medicaid (not more than 50% Medicaid and not more than 80% Medicare, Medicaid and other federal programs); (2) the class is clearly identifiable; and (3) the class must be nationally recognized.
2. Bona Fide Provider Donations: The MFAR proposes to look beyond what a Legislature may enact by assessing whether a provider receives any direct or indirect guarantee of the return of its donation. Specifically, CMS proposes that it may consider the “totality of the circumstances” to determine whether the provider has a “reasonable expectation” of a return of all or a portion of the donation.
3. Revised Definitions of Public and Private Providers: The MFAR proposes definitions of State and non-State governmental providers, while recognizing that public and private institutions have a myriad of reasons to collaborate and ways to structure such collaborations. CMS expressed concern that some states had requested to re-designate the ownership category of providers to public such that the provider may make an intergovernmental transfer, often due to the sale of the real property of the provider to a public entity, even though the private entity continued to perform the critical responsibilities of ownership. Instead of establishing a bright line rule, the MFAR proposes that its determination of whether a provider is considered a governmental provider will be based on a totality of the circumstances, including, without limitation, consideration of the following factors:
a.) The identity and character of any entity or entities other than the provider that share responsibilities for the ownership or operation of the provider, such as (1) immediate authority for decision-making; (2) legal responsibilities for losses; (3) immediate authority for disposition of revenues; (4) immediate authority for personnel; (5) legal responsibility for taxes, if any; and (6) responsibility for medical malpractice insurance.
b.) The character of the entity/entities, including: (1) how the entity presents itself to the public; (2) whether the entity is only considered governmental for the purpose of Medicaid financing and payments; and (3) whether the entity exercises administrative control over appropriated funds and/or tax revenues.
Private providers would then be defined as non-public providers.
a.) Limit to actual, incurred cost: The MFAR seeks to limit the payments permissible under a CPE methodology to the public provider’s “actual, incurred cost” of providing covered services to Medicaid beneficiaries.
b.) Documentation and Audit Protocols: The State must establish and implement documentation and audit protocols, including an annual cost report to the State agency. Only those costs that are certified may be claimed for federal financial participation.
c.) Public Entities to Retain Federal Share: CMS seeks to limit the ability of states to “skim” a portion of the federal financial participation to governmental entities claiming CPE reimbursement by requiring that the certifying entity “must receive and retain” the full amount of the federal share associated with the CPE payment.
d.) Interim Payment Process: To implement CPE payments, the State Plan must establish cost protocols that: (1) identify allowable costs; (2) define an interim rate methodology to providers; (3) describe an attestation process for the accuracy of costs; (4) include a list of covered Medicaid services being furnished by each CPE provider; and (5) define a reconciliation and final settlement process.
5. IGTs: The MFAR proposes to limit intergovernmental transfers from non-State units of government to funds that are derived from State or local taxes (or funds appropriated to State university teaching hospitals). The MFAR also proposes to clarify that these IGTs cannot be sourced from other unallowable sources (i.e., non-bona fide provider donations from private providers).
6. Payments for Services:
a.) Supplemental Payments:
The MFAR defines supplemental payments as a Medicaid payment in addition to base payments that cannot be attributed to a particular provider claim for specific services provided to an individual beneficiary and often made to the provider in a lump sum. This contrasts with a base payment, which would be defined as a payment made to a provider that is documented at the beneficiary level in the Medicaid Statistical Information Service and made for specific Medicaid services rendered to individual Medicaid beneficiaries (including payment adjustments, add-ons, or other additional payments attributable to a particular service provided to the beneficiary).
The MFAR proposes to limit state plan approval for supplemental payments for 3 years. In addition to currently required state plan elements, the MFAR would require a state plan amendment for supplemental payments to include: (1) the duration of the supplemental payment authority; (2) a monitoring plan to ensure that the supplemental payment remains consistent with the Medicaid Act requirement that payments to providers be consistent with efficiency and economy (42 U.S.C. section 1396a(a)(30)(A)) and to enable evaluation of the effects of the supplemental payment program; and (3) for any renewal request, an evaluation of the impacts during the current or most recent prior approval period with respect to providers and beneficiaries, including an analysis of the impact of the supplemental payment on compliance with 42 U.S.C. section 1396a(a)(30)(A).
The MFAR would impose reporting obligations for supplemental payments, including aggregate and provider-level information on base and supplemental payments, listings of each provider that received a supplemental payment, the specific amount of the supplemental payment made to the provider, and aggregate and provider-level information on contributions from providers to the State or any unit of local government used as the state share for Medicaid supplemental payments.
b.) Aggregate Upper Payment Limits: The MFAR proposes to update the regulations governing upper payment limits for hospital inpatient and outpatient services to the greater of the amount that would have been paid under Medicare or the cost of such services. The MFAR also proposes changes to the reporting process for upper payment limit demonstrations.
c.) Reducing Payment Variability: The MFAR seeks to prohibit variation in Medicaid fee-for-service payments based on the beneficiary’s enrollment category. This is intended to limit states from increasing payments for services that receive higher federal matching, which CMS views as a way for states to increase their federal matching percentages.
d.) The MFAR proposes to impose additional audit and oversight on DSH payments. The MFAR would require auditors to quantify the financial impact of any finding, which may affect whether the hospital had received DSH payments within its hospital-specific DSH limit. In addition, the MFAR would require states to report DSH overpayments identified through annual DSH audits and return such overpayments to CMS. The MFAR would further establish reporting requirements on the distribution of overpayments, which would be required to occur within 2 years of discovery.
e.) Practitioner Supplemental Payments: The MFAR proposes to limit supplemental payments to practitioners to: (1) 50% of the total fee-for-service base payments paid to an eligible provider for practitioner services (if not in a health professional shortage area); or (2) for services in a health professional shortage area, up to 75% of the total fee-for-service base payments. This is a significant reduction for some practitioner supplemental payment programs, which can sometimes result in payments to practitioners at 300 to 400% of Medicare. CMS estimates the impact of this provision to be up to $222 million nationally.
This proposed rulemaking reflects a significant shift in policy to restrict the flexibility granted to states to fund and implement Medicaid programs. As is apparent given the summary above, the proposed rulemaking is at the same time detailed, but lacks bright line rules. In other words, without further clarification, CMS appears potentially to be retaining significant discretion to make policy decisions later that could even further impair the ability of states to operate Medicaid programs of the magnitude that exist today.
Stakeholders in state Medicaid programs, including healthcare providers, would be well advised to carefully review this proposed rulemaking for potential impacts. Comments will be accepted at regulations.gov until 5 p.m. on January 17, 2020.
For more information on the proposed MFAR, please contact Felicia Y Sze.
 The term “tax” is used as a reference to the term in federal law. It does not refer to the classification given under state law to various health care related exactments, which may be named taxes, assessments, fees, etc.
 42 U.S.C. § 1396b(w).
 There is no upper payment limit applicable to Medicaid practitioner services.