# Medicaid Reimbursement Policy > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/crs%3ARL32644 ## Record - **Collection:** Congressional research report - **Document type:** CRS Report - **Published:** November 2, 2004 - **Citation:** RL32644 ## Text Order Code RL32644 CRS Report for Congress Received through the CRS Web Medicaid Reimbursement Policy Updated November 2, 2004 Mark Merlis Contractor to CRS Domestic Social Policy Division Congressional Research Service ˜ The Library of Congress Medicaid Reimbursement Policy Summary Under Medicaid law, states have considerable freedom to develop their own methods and standards for reimbursement of Medicaid services. Congress has periodically intervened to modify the broad guidelines within which states operate, and the Centers for Medicare and Medicaid Services (CMS) has used its regulatory authority to restrict certain state practices. Actual payment methodologies, however, are still left largely to the discretion of the states. Medicaid reimbursement policies play a central role in determining whether beneficiaries have access to services of adequate quality, as well as the nature of the services they receive. Because some providers, such as “safety-net” hospitals and clinics and nursing facilities are heavily dependent on Medicaid funding, payment levels can have broad effects on the delivery system and community access to care. In addition, because Medicaid is a major component of state and federal spending, decisions about reimbursement policies can have significant budgetary effects. For both hospitals and nursing homes, Medicaid payment rates in many states are below the actual costs facilities incur in providing care to Medicaid patients. Payment rates for other kinds of providers, such as physicians or dentists, cannot be directly compared to costs; however, Medicaid is often paying less for comparable services than Medicare or private insurers. Medicaid payment shortfalls have a variety of possible consequences. Providers may engage in “cost-shifting,” raising charges to private payers to make up their losses. In addition, the need to subsidize Medicaid patients may reduce their ability to fund care for people with no coverage at all. Some providers may adopt cost-cutting measures that potentially affect quality. Others may refuse to accept Medicaid patients or limit the number they will treat, since Medicaid law has no requirement prohibiting providers from doing so. This report provides a snapshot captured primarily through state plan amendments approved through November 2002, of the methods states use to establish payment rates for most major types of providers serving Medicaid clients. It also explores some of the critical issues affecting Medicaid payments rate setting. Where available, Medicaid rates are compared to other payers such as Medicare and private insurance. This report will not be updated. To assist Congress to review policy alternatives and understand the current status of Medicaid programs, the Congressional Research Service (CRS) is producing a series of reports on various aspects of Medicaid. This report is one in that series. This series will address Medicaid programs and policies comprehensively by covering background subjects including eligibility policy, benefits, and delivery systems and demonstration projects as well as analytic reports such as Medicaid’s role for low-income individuals, long-term care, and dual eligibles. Each of the reports includes a discussion of current issues, background information, data and analysis. Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Organization of This Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Use of State Plan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Basic Federal Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Major Policy Developments, 1980-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Boren Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 OBRA 81 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Prescription Drug Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Disproportionate Share Hospital (DSH) Payments, Provider Donations, and Provider Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Growth in Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Upper Payment Limits (UPLs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 State Fiscal Problems and Medicaid Cost Containment . . . . . . . . . . . . . . . 14 Acute Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Hospital Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Inpatient Payment Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Hospital-Specific Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Peer Group or Statewide Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Use of Case Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Other Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Administrative Days/Swing Beds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Outpatient Payment Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 DSH Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Current DSH Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Amount of DSH Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Adequacy of Hospital Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Physician and Dental Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Physician Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Dental Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Federally Qualified Health Centers and Rural Health Clinics . . . . . . . . . . . 60 Long-Term Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Nursing Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Payment Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Payment Levels and Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Intermediate Care Facilities for the Mentally Retarded . . . . . . . . . . . . . . . . 76 Home and Community-Based Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Non-Waiver Home and Personal Care . . . . . . . . . . . . . . . . . . . . . . . . . 83 Home and Community-Based Services Waivers . . . . . . . . . . . . . . . . . 86 Personal Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Case Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Budgeted or Bundled Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Rate-Setting Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Basic Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Reinsurance, Risk Sharing, and Incentive Payments . . . . . . . . . . . . . . 93 Risk Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Payment Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Prescription Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Pharmacy Reimbursement Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Upper Payment Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Multiple Source Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Other Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Dispensing Fees and Ingredient Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Dispensing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Ingredient Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Drug Rebate Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Single Source and Innovator Multiple Source Drugs . . . . . . . . . . . . 105 Non-innovator Multiple Source Drugs . . . . . . . . . . . . . . . . . . . . . . . 105 Recent State Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Supplemental Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Pharmacy Plus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Purchasing Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Cost Containment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Other Payment Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Federal Rules for Specified Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Home and Community-Based Care Option . . . . . . . . . . . . . . . . . . . . 110 Hospice Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Indian Health Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Laboratory Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Programs of All-Inclusive Care for the Elderly (PACE) . . . . . . . . . . 111 Volume Purchasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Coordination with Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 List of Tables Table 1. Selective Contracting Waivers, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Table 2. Effect of a Typical Provider Donation or Tax Program . . . . . . . . . . . . . 7 Table 3. Medicaid Beneficiaries and Medicaid Managed Care Arrangements, June 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Table 4. Typical Enhanced Payment Program . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Table 5. Transition Periods for Compliance with Upper Payment Limits . . . . . 12 Table 6. State Enhanced Payment Programs by Provider Type and Preliminary Transition Period in Years . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Table 7. Number of States Undertaking Medicaid Cost Containment Strategies, FY2002-FY2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Table 8. Number of States Planning Rate Changes for Selected Services, FY2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Table 9. Basic Payment Methodology, Inpatient Hospital Services, 2002 . . . . . 18 Table 10. Principal Outpatient Hospital Reimbursement Approach . . . . . . . . . . 26 Table 11. Federal DSH Allotments for 1998-2003 . . . . . . . . . . . . . . . . . . . . . . . 30 Table 12. Disproportionate Share Hospital Payments, as a Share of Total Hospital Payments and Total Net Medicaid Spending, 2001 . . . . . . . 33 Table 13. Disproportionate Share Hospital Payments by Type of Hospital and Hospital Ownership, Most Recent Reporting Year . . . . . . . . 37 Table 14. Hospitals Receiving Disproportionate Share Hospital Payments by Type of Hospital and Hospital Ownership, Most Recent Reporting Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Table 15. Hospital Payment-to-Cost Ratios, by Source of Revenue, 1991-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Table 16. Estimated Costs and Revenues, Medicaid and Self-Pay/ Other Patients, NAPH Member Hospitals, 2000 . . . . . . . . . . . . . . . . . . . . . 46 Table 17. Medicaid Payment Rates for Selected Physician Procedures, 2001 . . 49 Table 18. Medicaid Payment Rate as a Percentage of Medicare Physician Fee Schedule, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Table 19. Survey of Pediatricians on Medicaid Participation, 2000 . . . . . . . . . . 57 Table 20. Medicaid Fees, 2003, and Median Private Fees, 2002, for Selected Dental Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Table 21. Payment Methodologies for Nursing Facility Direct Care Component, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Table 22. Summary of State Wage Pass-Through Programs . . . . . . . . . . . . . . . 70 Table 23. Average Medicaid Shortfall Per Day, Medicaid Nursing Facility Payments in Responding States, 1999 and 2000 . . . . . . . . . . . . . . . . . . . . . 72 Table 24. Change in Daily Medicaid Nursing Facility Payment Rates and Daily Costs, 1999-2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Table 25. Medicaid Daily Nursing Facility Charges and Payment Rates, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Table 26. ICF-MR Residents at End of Year by Facility Size and Ownership, 1977 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Table 27. Basic Medicaid Payment Method, Direct Care Component, Non-State Intermediate Care Facilities for the Mentally Retarded, 2002 . . 78 Table 28. Medicaid Spending for Home and Community Care, FY2002 . . . . . 82 Table 29. Payment Methods for Non-Waiver Home Health Care and Personal Care Services, January 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Table 30. Principal Approach to MCO Rate-Setting, 2001 . . . . . . . . . . . . . . . . 91 Table 31. Factors in Capitation Payment, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . 93 Table 32. Reinsurance and Risk-Sharing Arrangements, 2002 . . . . . . . . . . . . . 94 Table 33. Risk Adjustment Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Table 34. Change in Medicaid Managed Care Payment Rates, Section 1931 and Poverty-Related Groups, Selected States, 1998-2001 . . . . . . . . . 97 Table 35. Commercial and Medicaid-only MCO Plans and Enrollment, 1998-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Table 36. Pharmacy Dispensing Fees and Ingredient Reimbursement Basis, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Table 37. Effect of Rebates on Medicaid Drug Spending, FY2001 . . . . . . . . . 106 Table 38. Number of States Making Medicaid Prescription Drug Policy Changes, FY2003 and FY2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Table 39. Medicaid Benefits for Low-Income Medicare Beneficiaries . . . . . . 112 Table 40. Medicaid Payment Policies for Medicare Cost-Sharing . . . . . . . . . . 114 Medicaid Reimbursement Policy Introduction Under Medicaid law, states have considerable freedom to develop their own methods and standards for reimbursement of Medicaid services. Congress has periodically intervened to modify the broad guidelines within which states operate, and the Centers for Medicare and Medicaid Services (CMS) has used its regulatory authority to restrict certain state practices. Actual payment methodologies, however, are still left largely to the discretion of the states. Medicaid reimbursement policies play a central role in determining whether beneficiaries have access to services of adequate quality, as well as the nature of the services they receive. In addition, because some providers — such as “safety-net” hospitals and clinics and nursing facilities — are heavily dependent on Medicaid funding, payment levels can have broader effects on the delivery system and community access to care. Finally, because Medicaid is a major component of state and federal spending, decisions about reimbursement policies can have significant budgetary effects. Organization of This Report This report1 begins with a summary of basic federal requirements applicable to payments for all services and an overview of major developments in federal Medicaid reimbursement policy over the last 20 years. This overview provides a historical context for current policies and highlights some issues that have been perennial concerns for federal and state policymakers. The next four sections of the report provide a detailed discussion of Medicaid reimbursement for four basic categories of services or providers: Acute care, including hospital inpatient and outpatient services, services of physicians and dentists, and services of certain federally defined categories of health centers and clinics; ! Long-term care, including care in nursing facilities, intermediate care facilities for the mentally retarded (ICFs-MR), and home and community-based care; ! Managed care organizations (MCOs), which accept financial responsibility for a range of covered services in return for a fixed monthly payment per Medicaid enrollee; and ! Prescription drugs. ! 1 The CRS project liaison for this report is Jean Hearne, Specialist in Social Legislation in the Domestic Social Policy Division. She can be reached at extension 7-7362. CRS-2 For each service type, these sections summarize states’ payment methodologies, review current or recent policy issues, and, to the extent data are available, compare Medicaid payments to providers’ costs or to payments by other third parties. The final section of the report describes special federal payment rules for some specific classes of providers and explains how Medicaid payments coordinate with Medicare for individuals eligible for benefits under both programs. Use of State Plan Documents Most of the state-by-state comparisons of payment methodologies in this report are based on Medicaid state plans and state plan amendments (SPAs). The state plan for medical assistance is the basic document each state initially submitted in order to obtain approval of its Medicaid program. Major policy changes are reflected in SPAs that must also be approved by CMS. SPAs can be approved retroactively, meaning that a state can implement a policy before CMS has acted on its submission (at the risk of a denial of federal funding if the SPA is ultimately disapproved). CMS maintains a database of state plans and SPA documents on its Web site.2 Full state plans were captured in late 2000, with subsequent plan amendments added to the database as approved. SPAs reviewed for this document include all those approved through November 7, 2002. What this report provides, then, is a snapshot of payment methodologies under each state plan as approved on that date. These will not necessarily be the methodologies actually in use in November 2002, because approval of amendments can be retroactive. Some state plan documents relating to reimbursement methods are lengthy and complex, and some states have filed numerous SPAs that repeatedly modify the same sections of the plan. While every effort has been made to track the changes and identify the most current approved policy, there are undoubtedly errors or omissions. In a very few cases, it was impossible to ascertain a state’s policy for a particular service from the state plan, and state regulations or other documents were consulted. In these cases, which are identified in notes to the tables, the policy described may be the one in effect at the time the state documents were obtained, rather than in November 2002. Overview Basic Federal Rules Three basic federal statutory requirements apply to payment for all types of services. ! 2 Methods and procedures for making payments must be such as to assure that payments are “consistent with efficiency, economy, and quality of care.” The database can be accessed at [http://www.cms.hhs.gov/medicaid/stateplans]. CRS-3 CMS relies on this provision as a general authority to regulate state reimbursement methodologies. In particular, this provision is the basis for the upper payment limit (UPL) regulations, which require that Medicaid payments for a class of institutional providers not exceed, in the aggregate, the amount that would have been paid for comparable services under Medicare principles. Recent revisions in the UPL rules have had a major effect on state finances; this issue is discussed further below. ! Payments must be “sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area.” This provision explicitly connects the level of Medicaid payment rates with the willingness of providers to serve Medicaid beneficiaries. While payment levels are not the only factor affecting provider participation, there has been a tension between cost containment and access to care throughout the history of Medicaid. ! Providers must accept Medicaid reimbursement as payment in full, except for any beneficiary cost-sharing amounts provided for by the state plan or any amount due from a medically needy beneficiary with a spend-down liability.3 This means that a provider cannot bill a beneficiary when Medicaid’s allowed payment is less than the provider’s charge for a service. In contrast, Medicare allows limited balance billing by physicians and some other providers. Private insurance rules vary; plans with networks commonly restrict balance billing by network providers and permit it for out-of-network services. There is an additional set of basic rules for payment of institutional services, including hospitals, nursing facilities, and intermediate care facilities for the mentally retarded (ICFs-MR). Rates must be determined through a public process. States must publish proposed and final rates, including justifications and underlying methodologies; and providers, beneficiaries, and the public must be given an opportunity to comment. Beyond these general rules, actual payment requirements or methodologies are prescribed by law for only a few types of providers, such as disproportionate share hospitals (DSHs, those serving a high proportion of low-income patients), federally qualified health centers (FQHCs, which are Public Health Service grantees and similar entities), and hospices. There are also specific rules relating to payment for prescription drugs. All of these rules are described in later sections of this report. 3 A Medicaid applicant who is in a state providing optional coverage of the medically needy population and whose income or resources exceed the limits established by the state may “spend down” to eligibility by using the excess funds to pay medical bills. CRS-4 Major Policy Developments, 1980-2003 Over time, federal Medicaid reimbursement policy has focused on different, and sometimes conflicting, policy goals, such as cost containment, state flexibility, and access to care. Congress has set specific minimum or maximum levels of reimbursement for some types of services, while providing only general guidelines for others. It has sought to foreclose some payment schemes that have the effect of shifting financial burdens from states to the federal government. It has acted to protect some specific classes of providers, while enhancing states’ ability to bargain with others. This section provides a brief overview of major developments in Medicaid reimbursement policy over the last two decades. It is not meant to be a legislative history, but merely to highlight key issues and some of the shifts in congressional priorities and concerns. The Boren Amendment Until 1980, state Medicaid programs were required to follow Medicare reimbursement principles in paying institutional providers — hospitals and nursing facilities. Under the Medicare rules in effect at that time, this meant that states were required to use a retrospective reasonable cost system. States continued to have to assure that rates provided access to care. Payment amounts were determined after services were rendered and were based on the actual costs incurred by the provider in furnishing those services. In what is known as the “Boren amendment,” the Omnibus Reconciliation Act of 1980 (P.L. 96-499) repealed this requirement for nursing facility services, freeing states to establish new methodologies of their own. The Omnibus Budget Reconciliation Act of 1981 (OBRA 81, P.L. 97-35) applied the amendment to inpatient hospital services. The new rules provided simply that payment rates for hospitals and nursing facilities had to be “reasonable and adequate” to meet the costs of “efficiently and economically operated” facilities. For hospitals, the law also required payment adjustments for disproportionate share hospitals (DSHs). Nearly all states responded to the new flexibility by shifting from retrospective to prospective payment systems for both hospital and nursing facility services. Under prospective payment systems, rates may be set in advance and may not be related to the actual costs providers incur in furnishing services; or the state may set ceilings and pay the lesser of actual costs or the ceiling amount. States’ interest in these systems stemmed from concerns that providers paid on a full cost basis had no incentive to perform efficiently and might furnish unnecessary services. While the Boren amendment gave states the flexibility to develop new payment systems, it also established a benchmark against which those systems were to be measured: the state was required to find, and to provide assurances satisfactory to the Secretary, that its Medicaid rates were reasonable and adequate. In 1990, the Supreme Court affirmed that facilities had a right to seek judicial review of the reasonableness and adequacy of Medicaid rates (Wilder v. Virginia Hospital Association, 496 U.S. 498, 1990). The Wilder decision merely settled the question CRS-5 of whether the Boren amendment conferred rights on providers that could be enforced in court. Even before this decision, hospitals in some states had obtained court judgments that Medicaid payments were inadequate. Following Wilder, numerous states faced suits by hospitals and nursing homes. Congress ultimately responded by repealing the “reasonable and adequate” test in the Balanced Budget Act of 1997 (BBA, P.L. 105-34). Some hospitals have continued to file suits, relying on the requirement, still in the statute, that payments for all types of providers be sufficient to assure access to care. OBRA 81 Waivers OBRA 81 authorized the Secretary to waive specified requirements of Medicaid law so that states could operate innovative service programs. Two types of waivers were originally permitted: Section 1915(b) freedom-of-choice waivers, under which states could require beneficiaries to obtain services through a primary care case manager or a managed care plan, or from a limited set of contracting providers; and Section 1915(c) home and community-based services waivers, under which states could provide special services (generally non-medical personal care and supportive services) to limited populations of beneficiaries who would otherwise need institutional care.4 Both types of waivers require periodic CMS approval and are subject to cost-effectiveness tests. Congress has since authorized several other waiver options. A number of states have used Section 1915(b) freedom-of-choice waivers to operate selective contracting systems, under which beneficiaries needing a specified service are restricted to a limited set of providers whose payment rates are established by bidding or negotiation. Table 1 lists the selective contracting programs in effect as of September 2003. 4 The waivers are commonly referred to by the sections of the Social Security Act that set rules for them. CRS-6 Table 1. Selective Contracting Waivers, 2003 State Service Arkansas Non-emergency transportation California Inpatient hospital Florida Non-emergency transportation Georgia Non-emergency transportation Kentucky Non-emergency transportation Louisiana Mail order pharmacya New York Non-emergency transportation Oregon Non-emergency transportation Texas Inpatient hospital, psychiatric hospital Utah Non-emergency transportation Washington Inpatient hospital Source: CMS descriptions of waiver programs, available at [http://www.cms.hhs.gov/medicaid/waivers/waivermap.asp.] a. Asthma and diabetes pharmaceuticals and supplies. Every state except Arizona has one or more home and community-based programs, serving the aged, persons with disabilities, and/or persons with mental retardation or developmental disabilities. Payment for waiver services is discussed later in this report. Prescription Drug Rebates Medicaid programs are major purchasers of prescription drugs, chiefly because of their role in providing drug coverage to low-income aged and disabled people. Other large-volume purchasers, such as private insurers, pharmaceutical benefit managers (PBMs), and hospital buying groups, often get substantial discounts or rebates from drug manufacturers. To assure that Medicaid programs received similar benefits, the Omnibus Budget Reconciliation Act of 1990 (OBRA 90, P.L. 101-508) required manufacturers to give rebates to states for drugs paid for by Medicaid. The rebate formulas are designed to assure that states pay the lowest price offered by the manufacturer to any other high-volume purchaser. In return, the state must generally cover all the drugs marketed by the manufacturer. There is ongoing debate over how the rebates are calculated and whether Medicaid programs really are getting the “best price.” Rebates reduced Medicaid drug spending by 20% in 2001.5 Still, spending for drugs is one of the fastest growing components of Medicaid budgets. Restricting drug spending has been a major focus of recent state cost containment efforts (see the last part of this section). 5 See Table 37. CRS-7 Disproportionate Share Hospital (DSH) Payments, Provider Donations, and Provider Taxes In response to the 1981 requirement that hospital payment systems take account of the situation of DSHs, some states developed plans to make supplemental payments to these hospitals. These plans potentially conflicted with the Secretary’s regulation capping aggregate Medicaid reimbursement at Medicare levels. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA, P.L. 99-272) prohibited the Secretary from limiting states’ payment adjustments to DSHs. Until 1987, states were free to establish their own criteria for classifying facilities as DSHs and to develop their own reimbursement methods for these hospitals. The Omnibus Budget Reconciliation Act of 1987 (OBRA 87, P.L. 100-203) defined certain facilities that states had to designate as DSHs and set minimum payment requirements for them. These requirements, which have since been amended several times, are described in the discussion of inpatient hospital reimbursement, below. The COBRA provision that prohibited the Secretary from limiting DSH payments meant that these were the only Medicaid payments not subject to any form of upper limit. Beginning in the late 1980s states began to exploit this loophole by developing various financing schemes intended to draw extra federal matching funds. A state might make an extra payment to a hospital, claim federal matching, and then recapture part or all of the payment by taxing the hospital. Alternatively, the hospital might agree to donate part of the extra payment to the state. Or, in the case of a hospital operated by state or local government, the money could be recovered through an intergovernmental transfer — a transfer of funds from another state agency to the Medicaid program or from local government to the state. Table 2 illustrates how a typical provider tax or donation program might work in a state whose federal matching percentage was 60%. The state pays the hospital $100. The state reports the payment to CMS and receives $60 in federal matching funds. The hospital gives back $80 — either as a donation or because the state imposes a “provider-specific” tax on its payments. The hospital is still ahead by $20, and the state has gained $40 to spend on other Medicaid services or simply absorb into its general fund. A state could potentially operate its entire Medicaid program with no actual state expenditures. Table 2. Effect of a Typical Provider Donation or Tax Program (state with 60% federal matching rate) State pays hospital $100 State reports payment to CMS, receiving matching fund Hospital donation or tax paid to state Net gain/loss (sum of transactions one to three) State government $ (100) $60 $80 $40 Hospital $100 Federal government $(60) $(80) $20 $(60) Source: Congressional Research Service. While these schemes could be used with any kind of provider payment, the use of the DSH loophole was attractive because the state could pay (and then recover) CRS-8 any amount at all. DSH payments rose from an estimated $569 million in 1989 to a projected $8 billion, or 12% of total Medicaid spending, by 1992. The Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 (P.L. 102-234) prohibited the use of most provider donations and phased out the use of provider taxes that were not “broad-based” — that is, taxes that were levied against a provider’s Medicaid receipts and not receipts from other sources. The Act did not restrict the use of intergovernmental transfers, on the grounds that the federal government had no authority to regulate these arrangements, but instead sought to limit potential federal exposure by capping the total amount of DSH payments. Beginning in 1992, national aggregate DSH payment adjustments during each fiscal year were limited to 12% of total Medicaid spending for that year. “High DSH” states, those whose payments were already above the 12% limit, were allowed to increase their payments by no more than the projected growth in their overall Medicaid spending. Other states were allowed larger increases, with each state receiving an allocation calculated to assure that aggregate national payments did not exceed the national cap. The BBA replaced this system of calculating DSH limits with fixed annual limits for each state. These limits, and subsequent amendments, are described in the discussion of inpatient hospital reimbursement, below. The Omnibus Budget Reconciliation Act of 1993 (OBRA 93, P.L. 103-66) further limited DSH payments by capping payments to any single facility. The sum of regular and DSH payments to a hospital could not exceed the sum of the hospital’s costs for treating Medicaid beneficiaries and uninsured patients. Growth in Managed Care States have been contracting with health maintenance organizations (HMOs) or similar prepaid capitated plans to enroll Medicaid beneficiaries since the late 1960s.6 OBRA 81 made it easier for states to enter into these contracts and also authorized a different form of managed care, primary care case management (PCCM). Under these programs, beneficiaries’ services were still paid on a fee-for-service basis, but were coordinated by a primary care physician. Using a freedom-of-choice waiver, states could require beneficiaries to participate in PCCM or to choose between PCCM and a prepaid plan. Enrollment in managed care arrangements grew steadily through the 1980s and early 1990s. By 1996, 40% of beneficiaries received at least some services through some form of managed care.7 The BBA gave states greater flexibility to contract with health maintenance organizations (HMOs) or similar managed care organizations (MCOs) and to require beneficiaries to enroll in these plans or PCCM programs 6 Capitated plans receive a fixed per capita payment (usually monthly), in exchange for which they accept financial risk for providing a defined scope of services to each enrolled beneficiary. 7 CMS, Managed Care Trends, 1991-1996, at [http://www.cms.hhs.gov/medicaid/ managedcare/trends1.asp] as of Sept. 2003. CRS-9 without a waiver. By mid-2002, the proportion of beneficiaries in some form of managed care had reached 58%. Table 3 gives Medicaid enrollment figures as of June 2002. Forty percent of enrollees were in some form of full-risk arrangement; that is, a capitated plan provided their basic Medicaid services. Another 14% were in PCCM programs, receiving care on a fee-for-service basis, while 25% were in prepaid health plans, almost all of which provide only one type of service, such as behavioral health care, dental care, or non-emergency transportation. (Note that enrollees in these special plans can also be in an MCO or PCCM program.) In sum, then, 60% of beneficiaries were still receiving most or all of their services on a fee-for-service basis. Table 3. Medicaid Beneficiaries and Medicaid Managed Care Arrangements, June 2002 Full-risk arrangements Commercial MCO Medicaid-only MCO Health insuring organization PACE and other Primary care case management Prepaid health plan No managed care Total Beneficiaries (thousands) 16,168 9,734 5,723 511 199 5,615 10,166 17,030 40,175 Percentage 40.2 24.2 14.2 1.3 0.5 14.0 25.3 42.4 Source: CMS, Managed Care Enrollment by Program Type, June 30, [http://www.cms.hhs.gov/medicaid/managedcare/plansum2.pdf], as of Sept. 2003. 2002, at Notes: This table provides duplicated figures by plan type. The total number of enrollees includes 8,830,530 individuals who were enrolled in more than one managed care plan. PACE stands for programs of all-inclusive care for the elderly. Under the PACE programs, Medicare and state Medicaid programs make integrated capitation payments for preventive, acute and long-term care services to MCO-like organizations that furnish services to frail elderly people. Upper Payment Limits (UPLs) Since the 1970s, federal regulations have required that total Medicaid payments for a service type, such as hospital or nursing facility services, could not exceed the amount that would have been spent for the same services under Medicare reimbursement principles. The UPLs originally applied in the aggregate; a state could, for example, pay one hospital more than Medicare would have paid and another hospital less, so long as total payments did not exceed the limit. After the use of provider taxes and donations was limited in 1991, states could still recover Medicaid payments made to governmental providers through intergovernmental transfers. States’ ability to use these mechanisms was limited by the cap on total DSH payments and on DSH payments to any one facility. However, states found that they could draw extra Federal matching funds by exploiting the fact that UPL limits were aggregate rather than facility-specific. CRS-10 Table 4 illustrates how what came to be known as “enhanced payment” programs worked. Private hospitals have actual costs of $80 million, while county-owned hospitals have costs of $20 million. The state pays private hospitals 80% of their costs, or $64 million, meaning that it can pay the county hospitals $36 million and still be within the aggregate UPL of $100 million. (The shortfall in payments to the private hospitals might be made up through DSH payments, which do not count toward the UPL.) The state claims $60 million in federal reimbursement, and the county hospitals return the excess payment to the state. While the state has nominally spent $40 million on hospital services, it has actually spent only $24 million, while the county hospitals have been paid their full costs. The federal government has spent $60 million to the state’s $24 million; in effect, the federal share of hospital spending is 71% instead of 60%. Table 4. Typical Enhanced Payment Program (state with 60% federal matching rate; millions of dollars) Cost under Medicare principles Medicaid payments Federal matching Nominal state spending Private hospitals $80 $64 $38.4 $25.6 County hospitals $20 $36 $21.6 $14.4 Total $100 $100 60.0 40.0 Intergovernmental transfer Net state spending $25.6 $16.0 $(1.6) $24.0 Source: Congressional Research Service. By FY2000, 28 states had adopted enhanced payment programs, making an estimated $10.3 billion in extra payments to hospitals, nursing facilities, and, in one state, community mental health centers. The DHHS Office of the Inspector General estimated that states were drawing $5.8 billion in excess federal matching payments through these programs.8 The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA, P.L. 106-554) required the Secretary to adopt a new regulation that would establish three separate UPLs for each category of institutional care (hospital, nursing facility, ICF-MR, and clinic): one for state facilities, one for private facilities, and one for non-state governmental facilities.9 The Act specified that there was to be a five-year transition period for programs operating under a state plan or state plan amendment approved or in effect before October 1, 1992. In January 2001, the Clinton Administration published a final rule that limited payments to 100% of the UPLs for state and private facilities and 150% for non-state 8 U.S. Department of Health and Human Services (HHS), Office of the Inspector General, Review of Medicaid Enhanced Payments to Local Public Providers and the Use of Intergovernmental Transfers, A-03-00-002 16, Sept. 2001. 9 A separate UPL for state facilities had been established by regulation in 1987, but private and non-state public facilities had been left under a single UPL, allowing for programs like the one illustrated. CRS-11 governmental facilities. To lessen the fiscal shock to states that had become dependent on the extra Federal matching, states making payments above the 150% limit were allowed a transition period to phase down to the limit. The length of the phase-down depended on when the state had adopted its plan. (Table 5 reflects modifications in the transition periods adopted in a final rule published in September 2001.) CRS-12 Table 5. Transition Periods for Compliance with Upper Payment Limits Group definition Group 1A Group 1B Group 2 Group 3 Plan effective on or after October 1, 1999 and approved before January 22, 2001 Plan effective on or after October 1, 1999, submitted before March 13, 2001, and approved on or after January 22, 2001 Approved plan effective after October 1, 1992 and before October 1, 1999 Approved plan effective on or before October 1, 1992 Base period for determining amount of excess payments that must be phased out When phase-out begin State fiscal year 2000 March 13, 2001 SFY2003 First state fiscal year that begins after September 30, 2002, i.e., SFY2003 or SFY2004 Percentage reduction in excess payments each year of the phase-out Not specified; states must be in compliance by end of phase-out period Excess payments must be reduced in 25% increments over each of four years SFY2003SFY2006 Excess payments must be reduced in 15% increments over each of five years SFY2004SFY2008a, plus 15% reduction for the portion of SFY2009 occurring before October 1,2008 with the final 10% reduction achieved as of October 1, 2008 When phase-out ends — date by which full compliance with UPLs is required September 30, 2002 End of SFY 2006 September 30, 2008 November 5, 2001 or one year from effective date of plan, whichever is later Source: CRS Report RL31021, Medicaid Upper Payment Limits and Intergovernmental Transfers: Current Issues and Recent Regulatory and Legislative Action, by Elicia Herz. a. This schedule applies to states that begin the phase-out in SFY2004. For states that begin the phase-out in SFY2003, the schedule is modified accordingly (i.e., the process begins in SFY2003). See row labeled “when phase-out begins.” CRS-13 In January 2002, the Bush Administration issued a new final rule that reduced the UPL for non-state governmental facilities to the same 100% applicable to state and private facilities. The transition periods for states paying above 150% were modified only slightly, except that they now had to reach 100% instead of 150% by the end of the period — meaning larger cuts in payments and federal matching at each step. (States that were paying more than 100% but less than 150% of the UPL were allowed no transition to bring their payments within the 100% limits.) The change was projected to save $9 billion in federal funds for FY2002-FY2006. Table 6 shows CMS’s preliminary analysis of state enhanced payment programs and their phase-out periods, as of January 22, 2004. Table 6. State Enhanced Payment Programs by Provider Type and Preliminary Transition Period in Years (as of January 22, 2004) Inpatient hospital Outpatient hospital * Alabama 5 Alaska 2 Arkansas 5 * Nursing facility 5* 2 California 8 Georgia 5a Illinois 8 8 Iowa 2 Kansas 2 Louisiana 2 Michigan Missouri 5 1 5 2 Nebraska 8 New Hampshire 5 New Jersey 2 New York 5 North Dakota 5 Oregon 5 Pennsylvania 8 South Dakota 2 Tennessee 2 Virginia 1 Washington 1 5 Wisconsin Programs 8 7 5 19 CRS-14 Source: CMS communication to the Congressional Research Service (CRS), Feb. 17, 2004. Note: One and two-year transition periods have expired. * May not qualify for a transition period. State Fiscal Problems and Medicaid Cost Containment Because of revenue shortfalls resulting from the economic downturn and rising spending pressures, most states have faced serious budget imbalances beginning in FY2002. They have responded by cutting expenditure growth, raising revenues, and drawing on reserve funds. For FY2004, two-thirds of states plan expenditure increases of less than 5%, and 19 plan to spend less in FY2004 than in FY2003.10 A recent survey has found that every state and the District of Columbia took some measures to control Medicaid spending growth in FY2003 and that each plans further measures for FY2004. Table 7 shows the types of cost containment measures implemented in FY2002 and FY2003 and planned for FY2004. Nearly every state has reduced or frozen payment rates for some types of providers. Most have also acted to control prescription drug spending; as will be discussed in the section on drug payment, below, these measures have not always involved changes in payment methods. States have so far been slightly less likely to drop coverage of beneficiaries, reduce benefits, or increase copayments paid by beneficiaries for services. Table 7. Number of States Undertaking Medicaid Cost Containment Strategies, FY2002-FY2004 FY2002 FY2003 Planned FY2004 Controlling drug costs 32 46 44 Reducing/ freezing provider payment 22 50 49 Reducing/restricting eligibility 8 25 18 Reducing benefits 9 18 20 Increasing copayments 4 17 21 Source: V. Smith, et al., States Respond to Fiscal Pressure: State Medicaid Spending Growth and Cost Containment in Fiscal Years 2003 and 2004, Kaiser Commission on Medicaid and the Uninsured, 2003. Table 8 shows the major service types for which states plan rate changes for FY2004. States are more likely to freeze or decrease payments to hospitals and physicians, and more likely to increase payments for nursing homes and MCOs. In the case of nursing home rates, the survey authors note that some states have statutory requirements for annual inflation increases. Another possible factor is that 10 National Governors Association and National Association of State Budget Officers, The Fiscal Survey of States 2003, June 2003. CRS-15 nursing homes and MCOs with Medicaid contracts may rely much more heavily on Medicaid than other providers and may be unable to cost-shift to other purchasers. Table 8. Number of States Planning Rate Changes for Selected Services, FY2004 Increase Freeze Decrease Hospitals 19 22 10 Physicians 11 35 3 Nursing homes 29 13 6 Managed care organizations (MCOs) 20 14 5 Any of these 37 47 22 Source: V. Smith, et al., States Respond to Fiscal Pressure: State Medicaid Spending Growth and Cost Containment in Fiscal Years 2003 and 2004, Kaiser Commission on Medicaid and the Uninsured, (Washington, 2003). It should be emphasized that the information in this report generally reflects payment methods and payment levels in effect before most states faced budget shortfalls. Many states that improved their provider payments during periods of economic growth may now have cut back. General payment methodologies — how states decide the relative amounts paid to different providers for different services — may or may not have been affected. However, states that have not changed methodologies may achieve savings by imposing uniform cuts, or simply by granting rate increases below the rate of inflation in the cost of goods and services providers must buy. Therefore, the discussions in this report of the adequacy of Medicaid payment to assure access or quality may not reflect current conditions. Acute Care Hospital Services Medicaid payments for hospital services take three forms: Payments for services to individual inpatients and outpatients, Lump-sum disproportionate share hospital (DSH) payment adjustments, and ! In states with UPL plans, additional lump sum distributions. ! ! In FY2001, DSH payments made up close to one-third of all direct payments to general or community hospitals (including inpatient and outpatient payments), and half of payments to inpatient psychiatric facilities. (See Table 13) Comparable figures for UPL plans are not available. However, the HHS Office of the Inspector General estimated that total UPL payments to hospitals for inpatient and outpatient services were about $4.5 billion in FY2000. This would have been 14% of total inpatient non-DSH and outpatient spending in that year. CRS-16 This section describes states’ basic methodologies for establishing payments for individual inpatients and outpatients. It then summarizes current rules relating to DSH and UPL payments and provides data on the size and distribution of these payments. Finally, it reviews available evidence on the extent to which Medicaid payments meet hospitals’ costs for Medicaid beneficiaries, as well as whether DSH or UPL supplements help hospitals that treat uninsured patients. Inpatient Payment Methods All states now use some form of prospective system as their basic method for setting inpatient hospital payments. That is, payment amounts per day or per case are fixed at the start of a year and are generally not subject to retrospective adjustment on the basis of actual costs incurred. States may establish a different rate for each participating hospital, may use one rate for all hospitals in a defined peer group, or may have one statewide rate. Two-thirds of the states have adopted some form of case mix adjustment, under which reimbursement varies according to the intensity of services required or the expected resources used by each individual patient. These adjustments, discussed further below, can be applied regardless of the state’s method for setting basic rates. Some states’ systems allow additional reimbursement for “outliers,” patients whose costs or length of inpatient stay are significantly higher than the average for comparable patients. Medicaid law requires states with prospective systems — effectively all states now — to make outlier adjustments for high-cost or long-staying infants under one year old in any hospital, and for children under six in a DSH hospital.11 Table 9, based on an analysis of state Medicaid plans, shows the method in use and approved by CMS as of November 2002. The table classes states according to whether hospitals receive hospital-specific rates, receive rates set for a whole group of hospitals or for all hospitals in the state, or are paid under some other method. For states using some form of case mix adjustment, the table indicates the method. Finally, where applicable, it identifies the facility characteristics states use in establishing peer groups of hospitals. Several general points about the table and the accompanying discussion should be noted: ! 11 The systems described in the table and in the following discussion are those used for most acute general hospitals in the state. States may use different modes of payment for particular classes of facilities. For example, states may use prospective payment for acute general hospitals and a reasonable cost system for psychiatric, rehabilitation, or other specialized hospitals. Some general hospitals — for example, those that are state-owned, or small hospitals in rural areas — may receive special treatment. In addition, states that The provision, in Section 1902(s) of the Social Security Act, also prohibits imposition for such cases of any day limit or (for infants) any dollar limit in the state plan. CRS-17 negotiate rates with preferred providers under a selective contracting system may have a separate payment methodology for emergency or other services obtained outside that system. ! Many states that use peer-group or statewide payment systems provide hospital-specific add-ons for certain categories of costs, such as capital costs (interest, depreciation, and other costs related to owning a physical facility) and graduate medical education costs (costs directly or indirectly related to training residents). ! In two states, Arizona and Tennessee, nearly all beneficiaries are enrolled in MCOs, and some other states have very high rates of MCO enrollment. The methods shown are for cases in which the state pays a hospital directly (for example, because a beneficiary is in an aid category exempt from MCO enrollment), not the methods used by MCOs in paying their contracting hospitals. CRS-18 Table 9. Basic Payment Methodology, Inpatient Hospital Services, 2002 Basic payment methodology Hospital specific rate State Alabama Alaska Subject to rate of increase limits only Subject to peer group ceiling Subject to statewide ceiling Peer group or statewide rate Blend of hospitalspecific and statewide rate Peer group rate Statewide rate Facility characteristics used to define peer groups Notes Regional hospital coalitions receive per eligible amount x x Only for services outside AHCCCS Admission type x Selective contracting California Rates negotiated with each contractor Diagnosisrelated group (DRG) x Location, specialty x x x DRG x x Hawaii Idaho Illinois Indiana Method of case mix adjustment (if any) Selective contracting Arizona Arkansas Colorado Connecticut Delaware District of Columbia Florida Georgia Other payment method x Admission type County Specialty Teaching, number discharges Hospital loss limited to 10% Hospitals <41 beds guaranteed cost, larger guaranteed 85% of cost x x x DRG DRG CRS-19 Basic payment methodology Hospital specific rate State Subject to rate of increase limits only Subject to peer group ceiling Iowa Blend of hospitalspecific and statewide rate Peer group rate Statewide rate Other payment method x Kansas Method of case mix adjustment (if any) DRG x x x DRG Michigan x DRG Collapsed DRGs Nevada New Hampshire Urban/rural, size Size, Medicaid volume, specialty Size, teaching, specialty State rate-setting commission sets hospital-specific rates Bonus for hospital with lower costs or lower rate of increase Bonus for hospital with lower costs All-payer Massachusetts Nebraska Notes x Maryland Minnesota Mississippi Missouri Montana Facility characteristics used to define peer groups DRG x Kentucky Louisiana Maine Subject to statewide ceiling Peer group or statewide rate x x Size x x DRG x DRG Admission type, length of stay range x DRG x Urban/rural, size CRS-20 Basic payment methodology Hospital specific rate State Subject to rate of increase limits only Subject to peer group ceiling Subject to statewide ceiling Peer group or statewide rate Blend of hospitalspecific and statewide rate Peer group rate New Jersey x New Mexico DRG x DRG DRG DRG x x Ohio Oklahoma x x DRG DRG x Multipayer (see note) South Carolina South Dakota x DRG DRG x x Selective contracting Texas Utah DRG 8 care levels x Rhode Island Tennessee Method of case mix adjustment (if any) x Facility characteristics used to define peer groups Notes DRG x New York North Carolina North Dakota Oregon Pennsylvania Statewide rate Other payment method DRG 4 types Geography, teaching, size Teaching, referral, regional, community Geography, specialty, size Lower rate of increase for hospital with higher profit margin Maxicap: state and Blue Cross negotiate rates with hospital association Hospital-specific per diem for infrequent or highly variable DRGs Only for services outside TennCare Rates negotiated with each contractor Statewide rate used for low variability or low-cost DRGs CRS-21 Basic payment methodology Hospital specific rate State Subject to rate of increase limits only Subject to peer group ceiling Subject to statewide ceiling Peer group or statewide rate Blend of hospitalspecific and statewide rate Vermont Virginia Peer group rate Statewide rate Other payment method x x Selective contracting Washington Method of case mix adjustment (if any) Facility characteristics used to define peer groups Admission type DRG Teaching, size x DRG Wisconsin x DRG Wyoming Number of states using method x 10 5 6 10 care levels 3 10 11 6 Shared savings when costs below rates DRG weight times fixed amount negotiated with each contractor DRG West Virginia Notes Urban/rural, size Location, specialty Incentive for cost below ceiling 33 (27 DRG) Source: Medicaid state plans and amendments approved as of Nov. 7, 2002, except as follows: Alabama Medicaid Administrative Code, at [http://www.medicaid.state.al.us /MANUALS/AdminCode/ad_ch_37.htm], as of Aug. 20, 2003. Maryland Health Services Cost Review Commission, Report to the Governor Fiscal Year 2001, at [http://www.hscrc.state.md.us/hscrc_publications/pdfs/gov_report_2001_1.pdf], as of July 31, 2003. Nevada Medicaid Rates and Cost Containment Unit Rate Matrix, at [http://dhcfp.state.nv.us/pdf%20forms/RateSummary_03-17-03.pdf], as of Aug. 1, 2003. Rhode Island Medicaid Program, Annual Report, Fiscal Year 2002, at [http://www.dhs.state.ri.us/dhs/reports/MA_AnnualReport_2002.pdf], as of Aug. 20, 2003. Notes: AHCCCS = the Arizona Health Care Cost Containment System, the managed care program that serves most Medicaid beneficiaries in Arizona. DRG = diagnosis-related groups. DRGs represent a system of classifying any inpatient stay into groups for purposes of payment. DRG systems relate the type of patients a hospital treats to the costs incurred by the hospital. According to this classification system, patients who have similar diagnoses and undergo similar procedures are placed together in the same diagnosis-related group. DRG definitions may also take into account other patient characteristics, such as common sex, age, and discharge status. [http://167.7.127.236/hd/termsdef.html.] CRS-22 Hospital-Specific Rates. In 24 states, fixed per diem or per case payment rates are established for each hospital, using historic data on that hospital’s Medicaid costs and some form of fixed update factor for inflation. A hospital whose costs rise faster than the update will therefore lose money. Some states use an objective inflation index, such as CMS-released estimates of price changes for a “market basket” of goods and services commonly purchased by hospitals. Often, however, annual updates are set by legislation and regulation and may be higher or lower than actual inflation. Oregon uses update factors that vary inversely with each hospital’s operating margin (or profit); the effect is to grant lower increases to hospitals earning a profit on their Medicaid patients. Of the states using hospital-specific rates, five use peer group ceilings; the hospital’s rate is based on the lesser of its own costs or some percentile of costs for similar hospitals. Hospital characteristics used to establish peer groups include size, location, presence of a teaching program, specialized services (for example, pediatric hospitals), and volume of Medicaid services. Six states use a statewide ceiling for all general hospitals, based on a percentile of all hospitals’ costs or, in the case of Arkansas, a legislatively fixed per diem limit ($675 for 2002). Finally, three states use a blend of hospital-specific and peer group or statewide experience to set payment ceilings. For example, the operating cost component of Iowa rates is based on 50% of the hospital’s cost and 50% of the statewide average. One effect of systems using ceilings is that, while a hospital with costs above the ceiling will lose money, a hospital with costs below the ceiling will receive a rate derived from its base-year costs. It can earn a profit only if it can reduce its costs still further; it is not rewarded for being more efficient than its competitors. Wyoming provides incentive payments to hospitals with costs below the statewide ceiling. Two states, Georgia and Idaho, limit the losses that can be incurred by hospitals. Peer Group or Statewide Rates. In 21 states, a fixed rate is set for an entire class of hospitals or for all hospitals in the state. In most of these states, part or all of the fixed rate is adjusted (as in Medicare’s inpatient prospective payment system, or PPS) for higher or lower labor costs in the hospital’s market area. In fixed rate systems, unlike ceiling systems, a hospital with costs below the rate can realize a profit. Three states, Massachusetts, Michigan, and Vermont, provide additional bonuses to lower-cost hospitals. Use of Case Mix. Nearly two-thirds of the states have adopted some form of case mix adjustment, under which reimbursement varies according to some measure of the intensity of services required or the resources used by each individual patient. Most of these use the diagnosis-related groups (DRGs) developed for Medicare hospital reimbursement. Patients are assigned to one of 540 DRGs on the basis of admitting diagnosis, procedures performed, presence of complications, or other characteristics.12 Each DRG has an assigned weight — for example, 0.8889 for an uncomplicated appendectomy or 9.7823 for a liver transplant-which is then multiplied by the fixed rate established for the hospital. So, if a hospital’s standard 12 Not all of the 540 codes are actually in use. CRS-23 rate were $5,000, it would be paid $4,445 for the appendectomy and $48,912 for the liver transplant. Because Medicaid patients may be different from Medicare patients, the weighting factors established for DRGs under Medicare may not be appropriate for Medicaid reimbursement. Most states using DRGs have developed their own weights on the basis of Medicaid-specific data. Some states use alternative DRG classification systems, such as the DRGs developed for the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) or New York’s All Patient DRGs. These groupings add additional categories for types of patients, such as maternity cases or newborns, rarely treated under Medicare. Minnesota has collapsed the DRGs into a smaller number of diagnostic categories. Some states that have not adopted DRG classifications nevertheless modify reimbursement according to the type of patient served. Some of these use admission types — for example medical/surgical, maternity, psychiatric — while others assign cases to a limited number of level-of-care groupings. Nevada additionally adjusts its per case rates using length-of-stay ranges. Other Methods. Four states have used 1915(b) freedom-of-choice waivers to develop hospital contracting systems, while two states have systems under which Medicaid and other payers use common reimbursement methods. Selective Contracting. Under Section 1915(b), a state may receive a waiver of Medicaid requirements, including the requirement that beneficiaries be allowed a free choice of medical providers, in order to allow the development of innovative delivery or reimbursement systems. One of the available options for states is to limit program participation (except for emergency services) to providers who meet reimbursement, quality, and utilization standards approved by the state. Certain payment rules cannot be waived under this option, including requirements for additional payment to disproportionate share hospitals (see below) and requirements for prompt payment to providers. Alabama, California, Texas, and Washington have used this authority to restrict the inpatient hospitals from which beneficiaries may obtain services. (Illinois operated a similar system until 1991.) Alabama’s program is statewide. In the other states the waiver applies only in selected counties or areas; however, a large share of beneficiaries live in the covered area. Except in emergencies or other exceptional cases, these beneficiaries may use only hospitals selected for participation through a system of competitive negotiation. In California and Texas, reimbursement rates for the participating hospitals are established in the course of the negotiation. In Washington, what is negotiated is the hospital’s “conversion factor,” a fixed dollar amount that is multiplied by the weighting factor for a DRG to produce a final payment amount for each case. Under Alabama’s Partnership Hospital Program, groups of hospitals in a geographic area form a prepaid inpatient health plan that is reimbursed on a capitated (fixed per beneficiary per month) basis; the plan in turn makes payments to its participating hospitals. All Medicaid beneficiaries are automatically enrolled, except CRS-24 those who are also Medicare beneficiaries and certain pregnant women participating in a separate Maternity Care program.13 Multi-payer Systems. Beginning in the 1970s, several states established “all-payer” hospital rate-setting systems. In these systems, all insurers or other payers in the state, including Medicare and Medicaid, agreed to pay uniform rates or use a standard reimbursement methodology for inpatient services. Only one state, Maryland, still has an all-payer system in which Medicare participates.14 A state rate-setting commission sets each hospital’s allowable prices for specific service units, such as a day of routine care or a particular laboratory test. The prices are set at levels expected to result in a target average charge per case for each facility. A key feature of the system is that every payer contributes to hospitals’ costs for treating uninsured patients. In Rhode Island, the state and Blue Cross jointly negotiate with the state hospital association an annual statewide ceiling (the “Maxicap”) on reimbursable expenses for the 12 voluntary hospitals in the state. Within this ceiling, an operating budget is developed for each hospital, and rates paid by Medicaid and Blue Cross are set to meet these budgets. Administrative Days/Swing Beds. Under Medicare, small rural hospitals may enter into “swing bed” agreements with CMS, under which beds may be used either for inpatient hospital care or for care equivalent in intensity to that furnished by a nursing facility. Costs are allocated and reimbursement adjusted to reflect the level of care furnished to each patient. A Medicaid program may also allow for swing beds, but only in hospitals that have entered into a Medicare swing bed arrangement. The state may develop a specific payment methodology for swing bed days of care at the nursing facility level or may pay at a rate based on average payments for comparable services in freestanding nursing facilities. The swing bed program assists hospitals that are underused and also helps to meet local shortages of nursing facility beds. Sometimes a hospital which is not a swing bed facility will provide care to a patient at the nursing facility level of intensity because a place cannot be found for the patient in an appropriate facility and the patient cannot be discharged. The days of inpatient care received by patients in this situation are known as “administrative days.” Prior to 1997, Medicaid payment for an administrative day was limited to the statewide average Medicaid payment rate for a day of care in a skilled nursing facility. Most states have continued this practice despite the repeal of the provision in the BBA. 13 Note that, because the plans provide inpatient services only, they are not subject to the Section 1903(m)(2) requirements for Medicaid managed care organizations. 14 To retain the Medicare waiver, a system must hold cumulative growth in cost per Medicare admission from 1981 to the present at or below national average growth. CRS-25 Outpatient Payment Methods Because hospitals furnish a wide variety of services on an outpatient basis — from emergency room visits to surgery to diagnostic tests — many states use several different payment methodologies. For example, a state might pay a flat per-visit fee for a clinic visit, use a fee schedule for surgery, and pay on a cost basis for some specialized services. Because states vary in their service definitions, there is no ready way of comparing methods for particular services across states. Table 10 attempts to identify the “principal” payment approach in each state, with notes on variants in some states, without depicting the full complexity of state systems. About half of the states still base outpatient reimbursement largely on hospital-specific costs. Of these, 15 pay actual costs or prospective rates based on historic costs with a limit on annual increases. One state, Florida, uses a peer group ceiling comparable to those common in inpatient hospital and nursing facility payment. Another 11 states pay a fixed percentage of actual costs; that is, their systems explicitly pay each facility less than its costs. One goal of such systems may be to discourage use of hospitals for services that could be rendered in a noninstitutional setting. Sixteen states use fee schedules, varying payment by the surgical or other procedures performed. For at least some services, several states pay the same rates regardless of whether the service is performed in a hospital or in a physician’s office. Again, the aim is to avoid incentives for use of the more costly setting. Only four states have adopted systems comparable to Medicare’s new prospective system for outpatient hospital services. Under this system, services are classified into one of 383 ambulatory patient classifications (APCs), groups of services expected to require comparable resources. As in the inpatient DRG system, payment for each APC is at a fixed rate times a weight that reflects resource use for the APC relative to that of other APCs. One state has adopted Medicare’s system directly; others use their own classification system or prices. Of the remaining states, Maryland uses the same all-payer system, and Rhode Island the same multi-payer negotiation, as for inpatient care. (Hawaii also negotiates some rates.) Utah pays a percentage of charges, rather than costs, while Arkansas uses Blue Cross customary charge screens. Finally, Delaware pays blended rates based on a mix of hospital-specific and statewide experience. CRS-26 Table 10. Principal Outpatient Hospital Reimbursement Approach Hospitalspecific rate based on State Alaska Cost Percent of cost Fee schedule Case payment x x Arkansas x x x Colorado 72% Connecticut x x Rate-of-increase limit Delaware Florida x x 90% Hawaii 75% Some rates negotiated Iowa x Radiology/surgery based on schedule for comparable non-hospital service x Indiana x Kansas x Based on schedule for comparable non-hospital service x Louisiana 83% Massachusetts x Maryland Maine Michigan Minnesota Blended hospital/statewide rate x Illinois Kentucky Visit rates blend of hospital-specific, state average; other services cost-based Cost up to ceiling set at 80th percentile for county Georgia Idaho Percent of Blue Cross customary charges Only for non-AHCCCS patients California District of Columbia Notes Rate-of-increase limit Alabama Arizona Other State-developed prices x State rate-setting commission sets hospital-specific rates x x x Uses Medicare prices CRS-27 Hospitalspecific rate based on State Cost Missouri Mississippi Percent of cost Other Notes x x North Carolina 93% of cost for services not on schedule 80% x Nebraska New Hampshire Case payment 90% Montana North Dakota Fee schedule 85% x New Jersey 94.2% New Mexico 97% Nevada x New York x Ohio x Oklahoma x Oregon 59% Pennsylvania x Rhode Island x South Carolina State and Blue Cross negotiate rates with hospital association x South Dakota x Tennessee x Texas Only for services outside TennCare 80.3% 84.48% of cost for high-volume providers Utah x Percent of charges: 77% urban, 93% rural Virginia x Emergency room paid at all-inclusive rate Vermont x Services available in physicians’ offices paid at physician rate Washington Wisconsin x x State-developed prices Per visit rates based on past hospitalspecific costs, rate of increase limit West Virginia x Wyoming x CRS-28 Hospitalspecific rate based on State Cost Percent of cost Fee schedule Case payment Other Number of states using method 15 11 16 4 5 Notes Source: Medicaid state plans and amendments approved as of Nov. 7, 2002, except as follows: Maine: MaineCare Benefits Manual, Chapter III, Section 45, 01-015 CMR (Code of Maine Rules) Chapter 101, at [http://www.state.me.us/sos/cec/rcn/apa/10/ch101.htm], as of July 31, 2003. Maryland: Maryland Health Services Cost Review Commission, Report to the Governor Fiscal Year 2001, at [http://www.hscrc.state.md.us/hscrc_publications/pdfs/gov_report_2001_1.pdf], as of July 31, 2003. Nevada: Nevada Medicaid Rates and Cost Containment Unit Rate Matrix, [http://dhcfp.state.nv.us/pdf%20forms/RateSummary_03-17-03.pdf], as of July 31, 2003. Rhode Island: Rhode Island Medicaid Program, Annual Report, Fiscal Year 2002, at [http://www.dhs.state.ri.us/dhs/reports/MA_AnnualReport_2002.pdf], as of Aug. 20, 2003. Washington, at [http://fortress.wa.gov/dshs/maa/hrates/opps/Policy_Summary.htm], as of Aug. 6, 2003. DSH Payments15 Current DSH Requirements. Federal Medicaid law requires that states make additional payments to hospitals that serve a disproportionate share of Medicaid and other low-income patients. The statute defines which hospitals must receive DSH payments and which hospitals may never receive DSH payments. States can decide on their own whether to make payments to hospitals that are in neither category. Similarly, the law sets minimum payment amounts that must be made for certain hospitals and maximum payment amounts for individual hospitals and for all hospitals in the state. Again, states are free to set their payments at any level between the minimum required and the maximum permitted. Individual state plan specifications for DSH payments are often extremely complex, defining numerous classes of facilities and varying payment amounts; some states amend this section of their plan every year. Accordingly, this section will not offer a comparison of the way different states have designed their DSH programs, but will merely summarize the current requirements. Hospitals That Must Receive DSH Payments. A hospital must be deemed a DSH hospital if either of the following is true: ! Its Medicaid utilization rate is more than one standard deviation above the average Medicaid utilization rate for all Medicaid-participating hospitals in the state.16 The Medicaid 15 For additional information on DSH payments, see CRS Report 97-483, Medicaid Disproportionate Share Payments, by Jean Hearne. 16 The “standard deviation” used in the first criterion is a statistical measure of the dispersion of hospitals’ utilization rates around the average; the use of this measure (continued...) CRS-29 utilization rate is defined as the number of days of care furnished to Medicaid beneficiaries during a given period divided by the total number of days of care provided during the period. ! Its low-income utilization rate is at least 25%. The low-income utilization rate is the sum of two fractions: Medicaid payments plus state and local subsidies divided by total patient care revenues, and inpatient charges attributable to charity care (other than charity care subsidized by state or local government) divided by total inpatient charges. In computing either of these measures, states are now required to include Medicaid patients whose stays were paid for by an MCO, rather than directly by the state. Hospitals That May Not Receive DSH Payments. A state may not make DSH payments to a hospital whose Medicaid utilization rate is less than 1%. In addition, a hospital may not be deemed a DSH hospital unless it has on staff at least two obstetricians who are prepared to accept Medicaid patients. This requirement does not apply to children’s hospitals or to those that do not furnish non-emergency obstetrical care; rural hospitals may use other attending physicians for obstetrical care. Minimum DSH Payment. In computing the amount of the supplementary payment, the state must use one of three methods. It may (a) use the formula for comparable payments under Medicare, with special adjustments for children’s hospitals; (b) provide for a fixed payment increase or percentage increase for DSHs plus an additional increase for hospitals whose Medicaid utilization is more than one standard deviation above the statewide mean; or (c) develop its own methodology which may vary payments to different types of hospitals, so long as all hospitals of each type are treated equally and payments are reasonably related to hospitals’ Medicaid or low-income volume. The payments are required even if they result in Medicaid payments to a hospital in excess of the hospital’s usual charges to the public for similar services. Maximum Payment to an Individual Hospital. The DSH payment cannot exceed the sum of (a) the hospital’s costs for Medicaid patients that are not already met through non-DSH Medicaid hospital payments and (b) the hospital’s costs for patients without health insurance or other third-party coverage.17 (Third-party payment does not include state and local subsidies for indigent care.) California has a permanent waiver to pay certain “high disproportionate share” public hospitals up to 175% of this limit. BIPA granted a similar exemption to all states, but only for the two state fiscal years beginning on or after September 30, 2002. 16 (...continued) identifies hospitals whose Medicaid utilization is unusually high. 17 Note that non-DSH Medicaid payments include enhanced payments under UPL arrangements. Centers for Medicare and Medicaid Services, State Medicaid Director Letter, no. 02-013, Aug. 16, 2003. CRS-30 Maximum DSH Payments to Mental Hospitals. The BBA limited total DSH payments to mental hospitals during a year to the lesser of the dollar amount of such payments in FY1995 or a percentage of the state’s DSH allotment (see below) for the year. This percentage was initially based on the percentage of the state’s FY1995 payments that went to mental hospitals, then was phased down to 50% for FY2001, 40% for FY2002, and 33% for FY2003 and later years. DSH Allotments. The Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 (P.L. 102-234) limited national aggregate spending for DSH payments to 12% of total Medicaid program spending, roughly the level projected for FY1992. “High” DSH states — those with DSH payments already exceeding 12% of their Medicaid spending — could not increase the percentage of spending devoted to DSH payments. That is, those payments could not increase faster than the rate of growth in the state’s overall Medicaid spending. Other states were allowed to raise their DSH payments, subject to an allocation system that would keep aggregate national payments within the cap. The BBA of 1997 replaced this formulaic allocation with a table of specified allotments for each of the years FY1998 through FY2002. These allotments effectively froze states with very low DSH payments at their 1995 payment levels and required higher-spending states to gradually reduce their payments. After 2002, each state’s annual allotment would increase at the rate of the medical care component of the CPI-U. BIPA froze the allotments for FY2001 and FY2002 at the FY2000 levels, meaning high-DSH states would not have to reduce their spending so rapidly. For FY2003, however, the DSH allotment returned to the level prescribed by the BBA — that is the original published FY2002 allotment plus inflation. Table 11 shows the allotments for FY1998 through FY2003. The reversion to the BBA rules for FY2003 meant that total allotments dropped about 11% in a single year, and some states’ allotments dropped by as much as 25%. Table 11. Federal DSH Allotments for 1998-2003 (millions of dollars) 1998 1999 2000 2001 2002 2003 Alabama 293 269 248 257 263 250 Alaska 10 10 10 10 11 9 Arizona 81 81 81 84 86 82 Arkansas 2 2 2 19 19 19 California 1,085 1,068 986 1,021 1,047 890 Colorado 93 85 79 82 84 75 Connecticut 200 194 164 170 174 162 Delaware 4 4 4 4 4 4 District of Columbia 23 23 32 33 34 32 Florida 207 203 197 204 209 162 Georgia 253 248 241 249 256 218 a 0 0 0 0 0 0 1 1 1 7 7 7 Hawaii Idaho CRS-31 1998 1999 2000 2001 2002 2003 Illinois 203 199 193 200 205 175 Indiana 201 197 191 198 203 174 Iowa 8 8 8 17 17 18 Kansas 51 49 42 43 45 33 Kentucky 137 134 130 135 138 118 Louisiana 880 795 713 713 713 631 Maine 103 99 84 87 89 85 Maryland 72 70 68 70 72 62 Massachusetts 288 282 273 283 290 248 Michigan 249 244 237 245 252 215 Minnesota 33 33 33 34 35 33 Mississippi 143 141 136 141 144 124 Missouri 436 423 379 392 402 385 Montana .2 .2 .2 5 5 5 Nebraska 5 5 5 12 13 13 Nevada 37 37 37 38 39 38 New Hampshire 140 136 130 130 132 132 New Jersey 600 582 515 533 547 523 New Mexico 5 9 9 9 10 9 1,512 1,482 1,436 1,486 1,525 1,304 North Carolina 278 272 264 273 280 240 North Dakota 1 1 1 4 4 4 Ohio 382 374 363 376 385 330 Oklahoma 16 16 16 17 17 16 Oregon 20 20 20 21 21 20 Pennsylvania 529 518 502 520 533 456 Rhode Island 62 60 58 60 62 53 South Carolina 313 303 262 271 278 266 South Dakota 1 1 1 5 5 5 Tennesseea 0 0 0 0 0 0 Texas 979 950 806 834 856 776 Utah 3 3 3 8 9 9 Vermont 18 18 18 19 19 18 Virginia 70 68 66 68 70 71 Washington 174 171 166 172 176 150 West Virginia 64 63 61 63 65 55 Wisconsin 7 7 7 41 42 42 Wyoming b b b b b b 10,272 9,958 9,278 9,662 9,893 8,748 New York Total CRS-32 Source: U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services, “Medicaid Program; Disproportionate Share Hospital Payments,” 69 Federal Register 15850-15884, Mar. 26, 2004. a. Does not make DSH payments b. Allotments round to less than $1 million. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173) provides a one-time 16% increase in the FY2004 allotment for each state. A state’s allotment will be frozen at this 2004 level until the year for which the Secretary estimates that the allotment that would have been available under the previous rules (that is, the FY2003 allotment plus cumulative inflation) equals or exceeds the 2004 amount. For that year, the state would receive the allotment determined under the previous rules; for subsequent years, allotments would again increase at the rate of the medical care component of the CPI-U. There is an exception for a “low DSH” state, one whose FY2000 DSH spending was greater than zero but less than 3% of the state’s total Medicaid spending. A low DSH state will receive the 16% increase in its allotment for FY2004 and an additional 16% increase for each fiscal year through FY2008. For FY2009 and later years, the allotment would increase with the medical care component of the CPI-U. Amount of DSH Payments. Table 12 shows DSH payments as a percentage of total spending for general and mental hospital services, and as a percentage of all Medicaid spending, in FY2001. Overall, DSH payments account for about a third of payments for general hospitals and nearly half of payments for mental hospitals. About 21% of total DSH payments went to mental hospitals.18 18 Some states show payments to inpatient mental hospitals that exceed the 50% of total DSH ceiling as imposed under the BBA. This may be because CMS-64 reports for a given year can reflect spending related to a prior year. CRS-33 Table 12. Disproportionate Share Hospital Payments, as a Share of Total Hospital Payments and Total Net Medicaid Spending, 2001 General hospital State Regular Inpatient mental hospital Percent DSH DSH Regular DSH Percent DSH IMH as percent of total DSH DSH as percent of total Medicaid spendinga Alaska 161 5 3% 14 9 39% 65% 2% Alabama 316 363 53% 36 3 9% 1% 13% Arkansas 364 22 6% 68 1 1% 4% 1% Arizona 141 74 35% 0 28 99% 28% 4% California 4,356 1,926 31% 1,021 — 0% 0% 8% Colorado 303 186 38% 2 0 1% 0% 9% Connecticut 224 203 48% 9 88 90% 30% 9% District of Columbia 246 79 24% 29 4 12% 5% 8% Delaware 26 — 0% 11 4 28% 100% 1% Florida 1,661 189 10% 9 150 94% 44% 4% Georgia 1,874 425 18% 28 — 0% 0% 8% Hawaii 82 — 0% — — 0% Iowa 242 14 6% 21 — 0% 0% 1% Idaho 126 10 7% 7 — 0% 0% 1% Illinois 2,757 264 9% 40 115 74% 30% 5% Indiana 737 514 41% 182 142 44% 22% 16% Kansas 171 11 6% 31 36 54% 77% 3% Kentucky 613 155 20% 44 36 46% 19% 6% Louisiana 687 795 54% 7 77 92% 9% 21% CRS-34 General hospital State Massachusetts Regular Inpatient mental hospital Percent DSH DSH Regular DSH Percent DSH IMH as percent of total DSH DSH as percent of total Medicaid spendinga 1,098 382 26% 44 103 70% 21% 7% Maryland 447 31 7% 146 31 18% 50% 2% Maine 200 — 0% 19 49 73% 100% 4% Michigan 1,079 217 17% 37 215 85% 50% 6% Minnesota 272 62 18% 31 3 8% 4% 2% Missouri 897 279 24% 11 176 94% 39% 10% Mississippi 659 179 21% 40 — 0% 0% 7% Montana 93 0 0% — — 0% 0% 0% North Carolina 1,484 240 14% 26 175 87% 42% 7% North Dakota 55 0 1% 3 1 18% 57% 0% Nebraska 155 0 0% 3 — 0% 0% 0% New Hampshire 72 131 64% 3 28 90% 17% 18% New Jersey 891 705 44% 102 413 80% 37% 16% New Mexico 229 15 6% 2 0 13% 2% 1% Nevada 140 76 35% 15 — 0% 0% 11% New York 6,402 1,881 23% 500 574 53% 23% 8% Ohio 1,486 544 27% 279 93 25% 15% 8% Oklahoma 138 21 13% 25 1 5% 6% 1% Oregon 188 13 7% 40 17 30% 57% 1% Pennsylvania 570 361 39% 152 400 72% 53% 7% Rhode Island 181 79 30% 19 2 8% 2% 7% CRS-35 General hospital State Regular Inpatient mental hospital Percent DSH DSH Regular DSH Percent DSH IMH as percent of total DSH DSH as percent of total Medicaid spendinga South Carolina 604 321 35% 34 51 60% 14% 12% South Dakota 85 0 0% 3 1 19% 70% 0% Tennessee 471 — 0% 2 — 0% — — Texas — 1,111 NA 52 235 82% 17% 12% Utah 124 1 0% 11 0 2% 25% 0% Virginia 520 235 31% 163 2 1% 1% 8% Vermont 75 27 26% 0 — 0% 0% 4% Washington 564 213 27% 60 115 66% 35% 8% West Virginia 236 79 25% 22 23 52% 23% 7% Wyoming 44 0 1% 15 — 0% 0% 0% 34,848 12,448 26% 3,456 3,406 50% 21% 7% U.S. total (excluding territories) Source: Medicaid Financial Management Report (CMS-64), FY 2001. General hospital includes inpatient and outpatient spending. a. Total does not include administrative spending. CRS-36 Note that the non-DSH figures include any enhanced payments under UPL programs. In addition, the figures on the DSH share of general hospital spending should be viewed with caution, because states with large numbers of enrollees in MCOs may make DSH payments, but not regular payments, on behalf of those enrollees. Tables 13 and 14 provide some further perspective on how states are allocating their DSH funds. These tables are based on the most recent annual DSH report filed by each state and posted on the CMS website.19 While submission of annual reports is required by the statute, one state with DSH spending, Georgia, has never filed a report, while others have not done so for some years. (Some states have filed reports that do not fully categorize all hospitals by type or ownership. These omissions have been corrected when there were only a few instances in a state and the information was readily available from other sources.) States vary widely in the degree to which they have targeted payments at public hospitals and mental hospitals. In some states, nearly all the payments went to private general hospitals; in others, nearly all payments went to public mental hospitals. (These are states for which only older reports are available, so that the figures do not reflect the BBA-required phase-down of the share of payments going to mental hospitals.) In addition, some states are distributing the funds among a large number of hospitals, while other make DSH payments only to a handful of facilities. 19 [http://www.cms.hhs.gov/dsh/default.asp]. CRS-37 Table 13. Disproportionate Share Hospital Payments by Type of Hospital and Hospital Ownership, Most Recent Reporting Year General hospital Inpatient mental health facility Year DSH payments (millions) Alabama 1998 $ 14 0.1% 0.0% 0.0% Alaska 2000 395 10.8% 0.0% Arizona 1998 2 9.7% Arkansas 1999 122 California 2000 Colorado State Public Private Unknown ownership Public Private Unknown ownership 99.9% 0.0% 0.0% 87.8% 1.4% 0.0% 0.0% 68.8% 9.6% 0.0% 11.9% 0.0% 86.8% 13.2% 0.0% 0.0% 0.0% 0.0% 1,908 75.4% 24.4% 0.2% 0.0% 0.0% 0.0% 1999 175 90.3% 9.7% 0.0% 0.0% 0.0% 0.0% Connecticut 2001 291 0.0% 69.9% 0.0% 30.1% 0.0% 0.0% Delaware 1999 33 14.9% 76.7% 0.0% 8.4% 0.0% 0.0% District of Columbia 1999 35 0.0% 0.0% 0.0% 100.0% 0.0% 0.0% Florida 1998 371 11.6% 88.4% 0.0% 0.0% 0.0% 0.0% Idaho 2000 14 92.8% 7.2% 0.0% 0.0% 0.0% 0.0% Illinois 2000 1 41.3% 58.7% 0.0% 0.0% 0.0% 0.0% Indiana 1998 433 0.0% 0.0% 62.8% 0.0% 0.0% 37.2% Iowa 2001 116 29.5% 6.0% 0.0% 64.5% 0.0% 0.0% Kansas 1999 44 5.9% 6.0% 0.0% 88.0% 0.0% 0.0% Kentucky 2000 184 0.0% 0.0% 80.9% 17.7% 1.4% 0.0% Louisiana 1998 734 98.9% 0.4% 0.7% 0.0% 0.0% 0.1% Georgiaa Hawaiib CRS-38 General hospital Inpatient mental health facility Year DSH payments (millions) Maine 2001 553 26.7% 55.3% 0.0% Maryland 2001 81 0.2% 49.8% Massachusetts 2000 50 0.0% Michigan 1998 215 Minnesota 1997 56 Mississippi 1998 Missouri State Public Private Unknown ownership Public Private Unknown ownership 17.8% 0.3% 0.0% 0.0% 50.0% 0.0% 0.0% 0.0% 0.0% 76.6% 23.4% 0.0% 0.8% 1.1% 0.0% 98.1% 0.0% 0.0% 455 0.0% 0.0% 60.8% 0.0% 0.0% 39.2% 2001 183 98.7% 1.1% 0.0% 0.0% 0.2% 0.0% Montana 2000 0 c 0.0% 0.0% 97.8% 0.0% 0.0% 2.2% Nebraska 1999 339 44.3% 6.6% 0.0% 49.1% 0.0% 0.0% Nevada 1998 1 0.0% 43.3% 0.0% 56.7% 0.0% 0.0% New Hampshire 2001 4 45.6% 1.2% 0.0% 0.0% 53.2% 0.0% New Jersey 1999 175 74.9% 10.3% 0.0% 14.8% 0.0% 0.0% New Mexico 2000 983 0.0% 0.0% 51.9% 0.0% 0.0% 48.1% New York 2001 12 80.0% 19.5% 0.0% 0.0% 0.4% 0.0% North Carolina 1998 74 90.6% 9.4% 0.0% 0.0% 0.0% 0.0% North Dakota 2001 1,191 44.3% 31.2% 0.0% 24.0% 0.5% 0.0% Ohio 2001 636 0.0% 0.0% 85.3% 0.0% 0.0% 14.7% Oklahoma 1999 23 1.8% 83.7% 0.0% 12.4% 2.1% 0.0% Oregon 2000 25 19.6% 1.6% 0.0% 78.8% 0.0% 0.0% Pennsylvania 1999 52 0.0% 0.0% 100.0% 0.0% 0.0% 0.0% Rhode Island 2001 81 10.3% 87.8% 0.0% 0.0% 1.9% 0.0% CRS-39 General hospital Inpatient mental health facility State Year DSH payments (millions) South Carolina 1999 434 56.5% 35.0% 0.0% South Dakota 2001 1 4.1% 26.1% Texas 2001 1,183 56.8% Utah 2001 4 Vermont 2001 Virginia Private Unknown ownership 8.3% 0.2% 0.0% 0.0% 69.9% 0.0% 0.0% 23.3% 0.0% 19.8% 0.1% 0.0% 43.7% 36.5% 0.0% 19.8% 0.0% 0.0% 164 81.1% 13.6% 0.0% 0.0% 5.3% 0.0% 1999 26 0.0% 100.0% 0.0% 0.0% 0.0% 0.0% Washington 2000 277 54.7% 5.4% 0.0% 39.6% 0.4% 0.0% West Virginia 2000 11 0.2% 75.0% 0.0% 24.0% 0.8% 0.0% Wisconsin 1998 80 14.2% 71.5% 0.0% 14.4% 0.0% 0.0% Wyoming 1999 $ 0b 0.9% 99.1% 0.0% 0.0% 0.0% 0.0% Tennessee Public Private Unknown ownership Public b Source: State DSH reports, latest available year. a. No DSH report filed. b. Does not make DSH payments. CRS-40 Table 14. Hospitals Receiving Disproportionate Share Hospital Payments by Type of Hospital and Hospital Ownership, Most Recent Reporting Year General hospital Inpatient mental health facility Year Hospitals receiving DSH payments Alabama 1998 12 25% 0% 67% 8% 0% 0% Alaska 2000 2 50% 0% 0% 50% 0% 0% Arkansas 1999 11 18% 45% 27% 0% 9% 0% Arizona 1998 30 7% 93% 0% 0% 0% 0% California 2000 131 29% 62% 8% 1% 0% 0% Colorado 1999 65 35% 58% 0% 3% 3% 0% Connecticut 2001 33 0% 94% 0% 6% 0% 0% District of Columbia 1999 9 11% 78% 0% 11% 0% 0% Delaware 1999 1 0% 0% 0% 100% 0% 0% Florida 1998 78 18% 82% 0% 0% 0% 0% Iowa 2001 27 59% 41% 0% 0% 0% 0% Idaho 2000 36 67% 33% 0% 0% 0% 0% Illinois 2000 88 0% 0% 82% 0% 0% 18% Indiana 1998 10 30% 20% 0% 50% 0% 0% Kansas 1999 31 61% 29% 0% 10% 0% 0% Kentucky 2000 117 0% 0% 90% 3% 8% 0% Louisiana 1998 85 61% 11% 16% 0% 0% 12% State Georgia Public Private Unknown ownership Public Unknown ownership Private a Hawaiib CRS-41 General hospital Inpatient mental health facility Year Hospitals receiving DSH payments Massachusetts 2000 83 8% 81% 0% 10% 1% 0% Maryland 2001 20 10% 55% 0% 35% 0% 0% Maine 2001 4 0% 0% 0% 50% 50% 0% Michigan 1998 22 9% 64% 0% 27% 0% 0% Minnesota 1997 1 0% 0% 100% 0% 0% 0% Missouri 2001 141 0% 0% 89% 0% 0% 11% Mississippi 1998 55 45% 45% 0% 0% 9% 0% Montana 2000 8 0% 0% 75% 0% 0% 25% North Carolina 1998 133 53% 32% 6% 6% 4% 0% North Dakota 2001 7 0% 86% 0% 14% 0% 0% Nebraska 1999 12 25% 25% 0% 0% 50% 0% New Hampshire 2001 29 83% 14% 0% 3% 0% 0% New Jersey 1999 77 0% 0% 82% 0% 0% 18% New Mexico 2000 25 24% 68% 0% 0% 8% 0% Nevada 1998 11 73% 27% 0% 0% 0% 0% New York 2001 265 10% 80% 0% 9% 0% 0% Ohio 2001 173 0% 0% 97% 0% 0% 3% Oklahoma 1999 14 7% 21% 0% 36% 36% 0% Oregon 2000 11 18% 64% 0% 18% 0% 0% Pennsylvania 1999 1 0% 0% 100% 0% 0% 0% Rhode Island 2001 14 7% 79% 0% 0% 14% 0% South Carolina 1999 52 50% 42% 0% 6% 2% 0% State Public Private Unknown ownership Public Unknown ownership Private CRS-42 General hospital Inpatient mental health facility Year Hospitals receiving DSH payments 2001 12 8% 83% 0% 8% 0% 0% Texas 2001 171 53% 39% 0% 6% 2% 0% Utah 2001 29 3% 93% 0% 3% 0% 0% Virginia 1999 42 5% 76% 0% 0% 19% 0% Vermont 2001 14 0% 100% 0% 0% 0% 0% Washington 2000 61 70% 25% 0% 2% 3% 0% Wisconsin 1998 25 4% 68% 0% 16% 12% 0% West Virginia 2000 59 3% 95% 0% 2% 0% 0% Wyoming 1999 3 33% 67% 0% 0% 0% 0% State South Dakota Public Private Unknown ownership Public Unknown ownership Private Tennesseeb Source: State DSH reports, latest available year. a. No DSH report filed. b. Does not make DSH payments. CRS-43 These data alone cannot indicate which states are using DSH payments for the intended purpose of helping hospitals with low-income and uninsured patients, and which are probably recovering the funds through transfers or using them to pay for non-Medicaid residents of psychiatric facilities. States vary, for example, in the share of general hospitals operated by government units, and those with few public general hospitals (such as Maryland) are likely to make more payments to private providers than states where public hospitals are more common. Adequacy of Hospital Reimbursement Since the shift away from cost-based reimbursement that began in the 1980s, aggregate Medicaid payments to hospitals (including regular inpatient and outpatient payments and DSH payments) have consistently been less than the total costs hospitals incur in treating Medicaid beneficiaries. However, the gap narrowed dramatically during the 1990s. The only comprehensive source of data on Medicaid hospital costs and payments is an annual survey of community hospitals conducted by the American Hospital Association (AHA). The survey includes questions about gross Medicaid charges and actual Medicaid payments received by each hospital. Hospitals’ charges are generally in excess of their actual costs. AHA estimates actual costs for Medicaid patients at each hospital by using that hospital’s overall cost-to-charge ratio; the estimate may be inaccurate if the ratio is actually different for Medicaid and non-Medicaid patients. It should also be noted that 35% of hospitals — especially public and for-profit hospitals — did not participate in the most recent survey; values for these hospitals have been imputed. Table 15 shows payments by Medicaid and other major payers as a percentage of costs in 1991 through 2001. Nationally, aggregate Medicaid payments were 81.6% of estimated costs for Medicaid beneficiaries in 1991. The ratio rose steadily through the decade; by 2001, aggregate Medicaid payments — including regular and DSH payments — equaled 98% of costs.20 While this is a significant improvement, hospitals overall are still losing money on Medicaid patients. AHA estimates that 73% of hospitals had negative inpatient margins in 2000.21 One likely factor in Medicaid losses is that states have been granting annual increases lower than the rate of inflation. A study for Oregon’s hospital association by Lewin Associates contends that, over a 10-year period, Medicaid payment rates increased 13%, while inflation was 33%. In addition, the study notes that rates for each hospital continued to be based on data from 1987. This means that rates do not account for changes in case mix or other factors that might cause one hospital’s costs to rise faster than another’s. Examination of state plan documents indicates that a number of other states allow long intervals to pass without “rebasing” their hospital cost data. 20 The Medicaid payment figures are net revenues; that is, they do not include any amounts that might have been returned to the state through intergovernmental transfers or other mechanisms. 21 AHA, Cracks in the Foundation: Averting a Crisis in America’s Hospitals, Aug. 2000. CRS-44 Table 15. Hospital Payment-to-Cost Ratios, by Source of Revenue, 1991-2001 (in percentages) Year Medicare Medicaid Uncompensated care Private payers 1991 88.4 81.6 19.6 129.7 1992 88.8 90.9 18.9 131.3 1993 89.4 93.1 19.5 129.3 1994 96.9 93.7 19.3 124.4 1995 99.3 93.8 18.0 123.9 1996 102.4 94.8 17.3 121.5 1997 103.6 95.9 14.1 117.6 1998 102.6 97.9 13.2 113.6 1999 101.1 96.7 13.2 112.3 2000 100.2 96.1 12.1 112.5 2001 99.4 98.0 12.2 113.2 Source: Medicare Payment Advisory Commission (MedPAC), Report to the Congress, Medicare Payment Policy, Mar. 2003, based on data from the American Hospital Association annual survey of hospitals. Note: Payment-to-cost ratios indicate the relative degree to which payments from each payer cover the costs of treating its patients. Operating subsidies from state and local governments are considered payments for uncompensated care, up to the level of each hospital’s uncompensated care costs. Data are for community hospitals and reflect all types of patient care services. Imputed values are used for missing data (about 35% of observations),which corrects for underrepresentation of proprietary and public hospitals relative to voluntary institutions. Most Medicare and Medicaid managed care patients are included in the private payers category. The costs allocated to Medicare and Medicaid include CMS’s allowed and nonallowed costs. [This note by MedPAC means that its method for estimating hospitals’ costs for Medicare and Medicaid patients does not take account of federal rules for determining whether specific costs are reimbursable.] Hospital losses are not due solely to reimbursement methods. Coverage limitations also play a role. For example, under Maryland’s all-payer system, Medicaid pays the same daily rates as Medicare and private insurers. However, the state has imposed a limit on the number of covered inpatient days. The result is a loss for uncovered days that is passed on to all payers in the form of higher rates.22 Hospitals and private insurers have always contended that Medicaid losses must be made up through higher charges to other payers, a phenomenon known as cost-shifting. Private insurers pay more than the costs of treatment for their enrollees, while both Medicaid and Medicare pay less than cost. What is striking is how much cost-shifting has diminished. As Table 15 shows, charges to private payers were nearly 30% above costs in 1991, largely to compensate for Medicare and Medicaid losses. By 2001, private payers paid 13% above costs. Some of the change is probably attributable to pressure for lower prices from major managed care plans 22 “Maryland Health Cuts to Mean Higher Insurance Rates,” Baltimore Sun, Aug. 3, 2003, p. 1D. CRS-45 and other insurers. But hospitals might have been more willing to accept lower prices from private payers because their losses from the public programs had dropped so much. One final point to be made about the figures in Table 15 is that the proportion of uncompensated care costs made up through state or local subsidies has gone from 19.6% in 1991 to 12.2% in 2001, a drop of more than one-third. Yet losses from uncompensated care have not risen proportionately; as a percent of total hospital costs, the losses were 4.8% in 1991 and 5.3% in 2000. One possible explanation is that non-Medicaid subsidies were partially replaced by DSH payments to safety net hospitals. The possible role of Medicaid in offsetting some hospitals’ losses from bad debts or charity care appears to vary by state. Table 16 is based on the 2000 annual member survey of the National Association of Public Hospitals and Health Systems (NAPH). This organization chiefly represents large state and local hospitals; a few members are operated by private, non-profit corporations but function as “safety net” providers, treating substantial numbers of Medicaid and uninsured patients. The table thus illustrates the experience of a few major safety net providers in each state listed, and may not be representative of all hospitals, or even comparable safety net hospitals, in each state.23 The table first compares estimated costs for Medicaid patients and Medicaid revenues, including DSH payments. Of the 20 states listed, 10 were paying the reporting hospitals less than their Medicaid costs. In the other 10 states, Medicaid revenues exceeded costs, sometimes substantially. The table then compares costs and revenues for patients classed as “self pay/other.” This group is made up of all patients without private insurance, Medicaid, or Medicare, including the uninsured and people with coverage through CHAMPUS, workers compensation, and other sources. Offsetting revenues for this group include various forms of non-Medicaid public funding, such as local subsidies or state indigent care pools), and other funding sources for the self-pay/other population. In nearly all the states, the reporting hospitals incurred sizeable losses for this population. (Exceptions may be artifacts of the method of estimating costs from gross charges.) 23 The survey, like the AHA survey, ascertains Medicaid and self-pay/other gross charges but not costs. As in the AHA data, the estimates in the table assume that the Medicaid and self-pay/other cost/charge ratios are the same as the overall cost/charge ratio reported by the hospital. CRS-46 Table 16. Estimated Costs and Revenues, Medicaid and Self-Pay/Other Patients, NAPH Member Hospitals, 2000 (millions of dollars) Medicaid State California Colorado Florida Georgia Hawaii Iowa Illinois Indiana Louisiana Massachusetts Minnesota Missouri New Mexico Nevada New York Ohio Tennessee Texas Virginia Washington Count of entities 15 2 9 1 3 1 1 1 9 2 1 1 1 1 12 2 3 5 1 1 Estimated cost $1,812 $112 $387 $153 $30 $13 $40 $81 $184 $185 $140 $84 $64 $65 $1,772 $136 $184 $513 $64 $116 Revenue $1,797 $165 $301 $194 $24 $6 $41 $105 $624 $120 $128 $77 $87 $66 $1,788 $154 $112 $495 $79 $98 Self-pay and other Percent gain/ loss -1% 48% -22% 27% -21% -52% 3% 29% 238% -35% -9% -9% 37% 1% 1% 13% -39% -4% 24% -16% Estimated cost $1,323 $198 $374 $214 $14 $45 $37 $100 $456 $210 $24 $65 $91 $78 $731 $102 $86 $1,022 $128 $46 Revenue $947 $45 $416 $101 $15 $38 $23 $66 $4 $208 $41 $64 $55 $67 $496 $56 $65 $ 958 $109 $33 Percent gain/ loss -28% -77% 11% -53% 10% -15% -39% -34% -99% -1% 71% -2% -39% -14% -32% -45% -25% -6% -15% -28% Combined Medicaid/ self-pay/other gain/loss -12% -32% -6% -20% -11% -23% -17% -6% -2% -17% 3% -6% -8% -7% -9% -12% -34% -5% -2% -19% Source: Author’s calculations from National Association of Public Hospitals and Health Systems, America’s Safety Net Hospitals and Health Systems, 2000. Note: Assumes Medicaid and self-pay/other cost/charge ratio equal to overall cost/charge ratio. The table omits five hospitals, one in Alabama, two in Illinois, and two in New York, that reported total costs greater than total charges. CRS-47 In some states it appears clear that Medicaid reimbursement is reducing the burden of uncompensated care. Louisiana is paying the responding hospitals, all operated by Louisiana State University, more than twice their Medicaid costs. (The nine hospitals received about one-third of Louisiana’s DSH funding in 1998.) The excess nearly exactly offsets the hospitals’ bad debt and charity care costs. Hospitals in several other states, such as Colorado, Indiana, and New Mexico, received considerably more in Medicaid payments than their Medicaid costs. In these states, however, the Medicaid payments and other public subsidies were insufficient to offset costs for uncompensated care. The two states with the most responding hospitals, California and New York, paid these hospitals amounts roughly equal to their estimated Medicaid costs. The 15 California hospitals received $1.2 billion in DSH funds in 2000, or 64% of the state’s total DSH spending of $1.9 billion. In New York, the 12 hospitals received $407 million in 2001, or 34% of the state’s $1.2 billion in DSH spending. But these payments were just sufficient to bring Medicaid payments close to Medicaid costs, with no excess available to subsidize other patients. Physician and Dental Care Medicaid payment levels for physician and dental care, and their effects on provider participation and beneficiary access, have been issues since the earliest years of the program. States have commonly paid independent practitioners using fixed fee schedules, often at rates well below those paid by Medicare or private insurers. Many physicians refused to accept Medicaid patients or limited their Medicaid caseloads, leaving beneficiaries to rely on more costly hospital outpatient departments and emergency rooms as a primary source of care. Medicaid payments to physicians and other providers are subject to the general requirement that payments be sufficient to attract enough providers to ensure that covered services will be as available to Medicaid beneficiaries as they are to the general population. OBRA 89 codified this requirement (previously established only by regulation) and established specific reporting requirements with respect to payment rates for obstetric and pediatric services, to allow the Secretary to determine the adequacy of state payments for these services. These special reporting requirements were repealed by the BBA, but the requirement that payments be sufficient to assure access remains in the statute. It has been the basis for numerous lawsuits by groups of physicians, dentists and other providers.24 This section provides data on payment levels for physician and dental services and summarizes some recent literature on how these payment levels affect access to care. 24 For reviews of recent litigation, see National Health Law Program, Docket of Medicaid Cases to Improve Provider Participation, Feb. 23, 2003, at [http://www.nls.org/ conf2003/provider-docket.htm] and summaries by the American Dental Association, at [http://www.ada.org/prof/govt/dentistryworks/med-litigate.html], as of Sept. 2003. CRS-48 Physician Payment. Every state except Hawaii now pays physicians the lesser of actual charges or a fixed fee schedule amount for each visit or procedure, whether performed in offices, hospitals, or other settings.25 States set these fee schedules in various ways. Some were originally based on physicians’ actual charges for services, while others are set arbitrarily by the state or negotiated with provider groups. Others use systems comparable to Medicare’s, under which each procedure is assigned a weight on a resource-based relative value scale (RBRVS); the weightings reflect relative physician work, practice expenses, and malpractice costs associated with different procedures. A brief physician office visit might have a value of three, an appendectomy a value of 150. The state then multiplies the different values by a single standard dollar amount. If a unit is valued at $5, the state will pay $15 for the brief office visit and $450 for the appendectomy. Some states have adopted Medicare’s scales, while others use different weighting systems. The effect is the same as under a fee schedule, except that the Medicaid agency has an external reference for its pricing decisions. However the schedule is established, basic rates and/or inflation increases are fixed by the state and may bear no relation to what physicians ordinarily charge or what they are paid by Medicare or private insurers. Table 17 compares each state’s Medicaid rates in 2001 for selected procedures. The rates are those reported by state Medicaid directors in an annual survey conducted by the American Academy of Pediatrics (AAP). The AAP collects data on a large number of different procedures; the five shown here were selected arbitrarily as representative of broad classes of services: primary care, mental health, and so on. (Unfortunately, because AAP focuses on pediatric care, its procedure list does not include obstetric services, payment for which has been a long-standing issue in Medicaid programs.) As the table shows, states’ payment rates vary enormously. Leaving aside Alaska, an outlier because of its high cost of living, rates for an initial pediatric preventive office visit range from $20 in Pennsylvania to $114.87 in New Mexico, almost six times as much. Payment for a complex procedure like a cardiac catheterization ranges from $80 in New York to $1,688 in Arizona, a twenty-fold difference.26 25 Hawaii continues to use the “reasonable charge” method used by Medicare before Medicare adopted its own fee schedule: the reasonable charge for a specific service is the lowest of (a) the provider’s actual charge for that service; (b) the provider’s customary charge for comparable services; or (c) the “prevailing” charge in the area, fixed at the 75th percentile of charges for comparable services. 26 This rate applies to individuals not enrolled in the Arizona Health Care Cost Containment System (AHCCCS), the managed care program that serves most Medicaid beneficiaries in Arizona. CRS-49 Table 17. Medicaid Payment Rates for Selected Physician Procedures, 2001 Preventive visit, new patient, age 1-4 (99382)a Psychotherapy, office, 45-50 minutes (90806, nonfacility)a Initial hospital care, moderate complexity (99222)a Upper GI endoscopy, biopsy (43239, nonfacility)a Appendectomy (44950)a Left heart catheterization (93510)a Alabama $70.00 $63.00 $76.00 $169.00 $405.00 $894.00 Alaska $160.07 $142.29 $174.65 $378.70 $823.44 $2,761.37 Arizona $101.18 $94.11 $114.86 $240.85 $534.28 $1,687.99 Arkansas $51.28 $88.13 $84.00 $373.00 $488.00 $356.00 California $47.13 $46.44 $73.20 $234.18 $400.59 $1,038.99 Colorado $55.05 NA $88.37 $20.06 $334.30 $441.55 Connecticut $50.00 $50.00 $51.40 $161.36 $374.70 $172.11 Delaware $97.52 NA $107.73 $227.94 $496.04 $1,596.11 District of Columbia* $45.00* NP $36.00* $123.00* $267.00* $108.00* Florida NA $50.34 $61.42 $129.63 $527.99 $145.57 Georgia $55.38* NP $104.28 $219.02 $463.03 $1,526.14 Hawaii $31.50 $84.71 $73.90 $233.73 $429.07 $267.77 Idaho $59.20 $57.54 $117.35 $327.29 $557.96 $1,644.41 Illinois $44.30 $50.25 $54.43 $264.35 $396.45 $770.05 Indiana $34.52 $63.67 $80.67 $181.60 $314.84 $1,167.49 Iowa $44.36 $60.28 $60.31 $394.19 $688.77 $526.22 Kansas $35.00 $60.00 $69.54 $220.00 $268.00 $1,431.45 Kentucky $79.91 $65.73 $84.07 $179.22 $333.52 $1,223.29 Louisiana $36.90 $76.70 $41.40 $177.66 $343.81 $232.65 Maine $50.20* $73.60 $63.05 $166.95 $297.19 $423.91 CRS-50 Preventive visit, new patient, age 1-4 (99382)a Psychotherapy, office, 45-50 minutes (90806, nonfacility)a Initial hospital care, moderate complexity (99222)a Upper GI endoscopy, biopsy (43239, nonfacility)a Appendectomy (44950)a Left heart catheterization (93510)a Maryland $37.00 $40.50 $24.50 $234.00 $206.00 $80.00 Massachusetts $90.86 $66.22 $81.05 $192.99 $397.28 $220.84 Michigan $62.13 $59.89 $66.39 $85.01 $322.09 $1,013.16 Minnesota $34.82 $67.77 $100.42 $325.99 $610.27 $463.50 Mississippi $37.63 $78.80 $60.59* $175.64* $304.20* $1,310.01 Missouri $23.00 NC $25.00 $110.00 $251.00 $165.00 Montana $58.47 $82.03 $99.65 $205.69 $455.63 $923.99 Nebraska $72.80 $79.49 $71.28 $201.20 $467.90 $194.40 Nevada $59.07 $81.62 $99.66 $17.72 $799.87 $1,541.19 New Hampshire $40.00 $65.00 $86.00 $126.00 $284.00 $900.00 New Jersey $22.00 $37.00 $22.00 $163.00 $211.00 $1,045.00 New Mexico $114.87 $85.72 $104.17 $228.71 $476.03 $1,473.62 New York $30.00 NP $10.00 $100.00 $160.00 $80.00 North Carolina $77.75 $89.97 $109.26 OM $495.82 $1,550.72 North Dakota $84.59 $78.38 $95.04 $196.29 $433.40 $1,332.53 Ohio $57.61 $57.10 $55.71 $172.53 $353.21 $1,175.83 Oklahoma $67.97 $63.03 $76.40 $157.11 $345.25 $1,054.26 Oregon $71.88 NC $76.81 $118.59 $372.64 $1,172.16 Pennsylvania $20.00 NA $29.50 $211.50 $301.50 $187.50 Rhode Island $37.00* NP $44.00 $184.80 $248.30* $235.20 South Carolina $38.00 $55.94 $38.00 $152.44 $321.72 $1,027.53 CRS-51 Preventive visit, new patient, age 1-4 (99382)a South Dakota $28.30 Psychotherapy, office, 45-50 minutes (90806, nonfacility)a Initial hospital care, moderate complexity (99222)a Upper GI endoscopy, biopsy (43239, nonfacility)a $86.30 $317.50 $529.20 $1,293.81* NP Tennessee Appendectomy (44950)a Left heart catheterization (93510)a No fee-for-service program Texas $49.01 $64.10 $82.65 $207.84 $343.68 $1,307.07 Utah $61.94 $55.23 $71.26 $148.80 $316.88 $867.91 Vermont $62.46 NP $77.05 $116.10* $270.60* $147.60* Virginia $74.21 $67.44 $82.29 $173.68 $380.70 $1,218.66 Washington $67.58 $57.27 $70.02 $156.14 $321.01 $1,040.21 West Virginia $76.64 $74.01 $81.91 $186.75 $398.26 $1,252.20 Wisconsin $31.39 NA $64.72 $471.66 $522.39 $402.25 Wyoming $45.00 $60.00 $92.34 $270.90 $630.00 $260.00 Source: American Academy of Pediatrics, Medicaid Reimbursement Survey, 2001. Note: NA=Not applicable. NC=Not covered. OM=Other method. NP=Information not provided by state. *Data provided by state in 1998/1999 survey. a. The codes are from Current Procedural Terminology (CPT), Fourth Edition, developed by the American Medical Association and used by CMS in determining physician payment amounts. CRS-52 Table 18 shows the reported Medicaid rates as a percentage of the 2001 Medicare rate for the same state. Rates under the Medicare fee schedule are partially adjusted using Geographic Practice Cost Indices (GPCIs), which reflect differences in the costs of practicing medicine in different areas. Sometimes there is one GPCI for a whole state, in which case the Medicare rate used for comparison is the statewide rate. Sometimes there are different GPCIs for different parts of a state, in which case the Medicare comparator is for the specific area noted in the table.27 27 AAP’s own published comparison uses the national rate before application of the GPCIs. As local Medicare rates for the five listed procedures varied by as much as 44% in 2001, use of local rates seemed preferable. CRS-53 Table 18. Medicaid Payment Rate as a Percentage of Medicare Physician Fee Schedule, 2001 Preventive visit, new patient, age 1-4 (99382)a Psychotherapy, office, 45-50 minutes (90806, nonfacility)a Initial hospital care, moderate complexity (99222)a Upper GI endoscopy, biopsy (43239, nonfacility)a Appendectomy (44950)a Left heart catheterization (93510)a Alabama 56% 57% 59% 52% 65% 44% Alaska 156% 149% 157% 146% 158% 182% Arizona 102% 102% 108% 96% 108% 117% Arkansas 47% 88% 72% 132% 88% 21% California (Los Angeles) 38% 43% 58% 73% 66% 53% Colorado 50% NA 77% 7% 61% 26% Connecticut 41% 46% 41% 50% 62% 9% Delaware 79% NA 85% 71% 82% 81% District of Columbia 40%* [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3ARL32644. Public record. Not legal advice.