Order Code RL31021
CRS Report for Congress
Received through the CRS Web
Medicaid Upper Payment Limits and
Intergovernmental Transfers: Current Issues
and Recent Regulatory and Legislative Action
Updated April 24, 2002
Elicia J. Herz
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress
Medicaid Upper Payment Limits and
Intergovernmental Transfers: Current Issues
and Recent Regulatory and Legislative Action
Summary
In accordance with Medicaid statute, the Secretary of Health and Human
Services (HHS) has established, through a series of regulatory actions, upper payment
limits (UPLs) for inpatient and outpatient services provided by certain types of
facilities. In late 2000, the Secretary determined that regulations in effect at that time
created a financial incentive for states to make higher than usual payments for care
provided at non-state government facilities, namely, county and city facilities,
allowing these states to claim higher federal matching dollars. States require these
facilities to transfer some or all of the excess funds back to the state. Then states use
these funds to cover part of the state share of Medicaid costs and/or for other
purposes. After HHS issued a proposed rule in October of 2000 designed to halt
these practices, Congress mandated additional changes to upper payment limits in the
Benefits Improvement and Protection Act of 2000 (BIPA; incorporated by reference
into P.L. 106-554). Final regulations that included the BIPA provisions were released
by the Clinton Administration on January 12, 2001.
Among other changes, this rule established a separate UPL for inpatient services
provided by non-state government facilities, and for the subset of non-state public
hospitals only, a separate higher payment rate was allowed. It also provided a
separate UPL for private facilities. Parallel rules were established for outpatient
hospital and clinic services. Three phase-out or transition periods for states with
enhanced payment arrangements that were noncompliant were also specified.
Application of a specific transition period to a given state was primarily dependent
on the effective date of its plan describing the enhanced payment arrangement. Phase-
out periods varied in duration, and except for the shortest period, required specific
percentage reductions in excess payments for each transition year.
The Bush Administration made two changes to the Clinton final rule: (1)
creation of a separate, minimum 1-year transition period for certain states that have
only recently received approval for enhanced payment arrangements, and (2)
elimination of the higher payment rate for non-state public hospitals.
Several estimates of cost savings for federal Medicaid spending based on these
changes to UPLs have been made. Over the next 10 years, savings associated with
the January 12, 2001 final rule and BIPA range from $55 billion (Clinton
Administration) to $77 billion (Congressional Budget Office or CBO), respectively.
The 1-year transition period rule issued by the Bush Administration is expected to
save $0.5 billion in FY2001 and FY2002. Elimination of the higher payment rate for
city and county public hospitals is expected to save $9 billion over FY2002 through
FY2006.
Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Changes to Upper Payment Limits . . . . . . . . . . . . . . . . . . . . . . . . . 4
Transition Periods for Achieving Full Compliance with New Rules . . . . . . . 7
What about Intergovernmental Transfers? . . . . . . . . . . . . . . . . . . . . . . . . . 9
Costs and Savings Associated with Changes to UPL Rules . . . . . . . . . . . . . 9
List of Tables
Table 1. Hypothetical Example of Enhanced Payment Arrangement
and Intergovernmental Transfer Under 1987 Federal Regulations –
Inpatient Hospital Services Delivered in 1 Month . . . . . . . . . . . . . . . . . . . 11
Table 2. Upper Payment Limit Rules for Inpatient or Institutional Care . . . . . . 12
Table 3. Upper Payment Limit Rules for Outpatient Hospital and Clinic
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 4. Hypothetical Example of Enhanced Payment Arrangement
and Intergovernmental Transfer Under Clinton Administration Final
Rule (1/12/01) – Inpatient Hospital Services Delivered in 1 Month . . . . . . 14
Table 5. Hypothetical Example of Enhanced Payment Arrangement
and Intergovernmental Transfer Under Bush Administration Final
Rule (1/18/02) – Inpatient Hospital Services Delivered in 1 Month . . . . . . 15
Table 6. Transition Periods For Compliance with Upper Payment Limits a . . . . 16
Medicaid Upper Payment Limits and
Intergovernmental Transfers:
Current Issues and Recent Regulatory
and Legislative Action
Background
Medicaid is a federal-state health program for low income persons. Services are
financed jointly by the federal government and the states. For each dollar of state
spending, the federal government makes a matching payment.1
In the spring of 2000, newspaper reports around the country described seemingly
questionable Medicaid accounting practices used by some states to obtain additional
federal matching dollars for purposes other than providing services to Medicaid
beneficiaries. These reports galvanized concern among some Members of Congress
and the Clinton Administration about potential state financing abuses, leading to a
series of subsequent legislative and administrative actions. At issue were two
interrelated factors – a loophole in the regulations governing upper payment limits
(UPLs) and the practice of intergovernmental transfers.
In accordance with statutory requirements that payments for services be
consistent with efficiency and economy,2 the Secretary established through regulation
upper payment limits for different types of Medicaid covered services. The
regulations in effect during 2000 had been issued in 1987.3 For the purpose of
applying the UPLs for inpatient or institutional care, providers were divided into three
primary groups – inpatient hospitals (IPH), nursing facilities (NF), and intermediate
care facilities for the mentally retarded (ICF/MR). Within these three provider
groups, a secondary distinction was made for facilities that were state-owned or
operated. For each of the three primary provider groups (IPH, NF and ICF/MR), two
separate UPLs were applied – one for overall aggregate payments to all public and
private institutions in the primary group, and the other for aggregate payments to
state government facilities in the primary group. Aggregate payments to each primary
group of providers (IPH, NF and ICF/MR) could not exceed a reasonable estimate
of what would have been paid for those services under Medicare payment principles.
1 The federal share of a state’s payments for services is known as the federal medical
assistance percentage (FMAP). FMAPs are calculated annually based on a formula designed
to provide a higher federal matching rate to states with lower per capita incomes. No state
may have an FMAP lower than 50% or higher than 83%.
2 Section 1902(a)(30) of the Social Security Act.
3 Federal Register, v. 52, no. 144, July 28, 1987, p. 28141-28148.
CRS-2
For outpatient hospital services and clinic services, the 1987 regulations
established a single UPL that applied to aggregate payments for all providers
combined, and these could not exceed estimates based on Medicare payment
principles. Thus, with respect to applying UPLs for outpatient care, no distinctions
were made between primary groups of providers or groups of facilities based on
ownership (operation) status.
Two additional factors are important to this discussion. First, in the 1987
regulations, there were no separate inpatient or outpatient UPLs for other government
facilities, namely, county or city providers. Second, both then and now, states may
fund up to 60% of the non-federal share of Medicaid expenditures with local
government funds4 – the source of intergovernmental transfers that also plays a role
in the state accounting practices that have drawn the concern of Congress and both
the Clinton and Bush Administrations.
In part due to the newspaper reports in early 2000, the Secretary determined that
the 1987 regulations created a financial incentive for states to provide excess
payments, beyond the usual payment rate, to non-state-operated government facilities
(e.g., county or city providers), allowing these states to claim additional federal
matching dollars. Subsequently, as part of that process states required the local
government facilities to transfer all or a portion of the excess funds back to the state.
States then used these funds to cover part of the state share of Medicaid expenditures
and/or for other purposes.
Although legal at that time, the Secretary deemed this practice to be inconsistent
with the intent of the statute that Medicaid payments be economical and efficient. On
July 26, 2000, the Health Care Financing Administration (HCFA)5 released a letter to
state Medicaid directors announcing a forthcoming notice of proposed rulemaking
that would close the UPL loophole in the 1987 regulations and would outline
transition provisions. In that letter, HCFA noted that excess or enhanced payments
may be used for a variety of purposes, both health-related and non-health-related. In
addition to financing the state share of Medicaid costs, some states used or planned
to use the enhanced funds to cover uncompensated care or to provide community-
based services for seniors or the disabled. In other cases, the money was used to fill
state budget gaps, for state tax cuts, or to reduce state debt. HCFA argued that while
all these purposes may have merit, Medicaid funds are intended to pay only for
Medicaid services delivered to Medicaid beneficiaries by Medicaid participating
providers.
Recently, the Office of the Inspector General (OIG) completed 7 audits in 6
states examining the enhanced payments under Medicaid to public providers and the
use of intergovernmental transfers. In its report6 summarizing the findings from these
4 Section 1902(a)(2) of the Social Security Act.
5 Under the Bush Administration, HCFA’s name was changed to the Centers for Medicare and
Medicaid Services or CMS.
6 U.S. Department of Health and Human Services, Office of the Inspector General: Review
(continued...)
CRS-3
audits, the OIG concluded: (1) such payments were not based on the actual costs of
providing services to Medicaid beneficiaries, nor were they directly related to
improving the quality of care provided by these facilities, (2) the majority of enhanced
payments to public nursing facilities was returned to the states via intergovernmental
transfers, (3) while public hospitals kept a larger portion of the enhanced payments,
such hospitals either did not receive Medicaid disproportionate share hospital (DSH)7
payments, or returned DSH payments to the states via intergovernmental transfers,
(4) some of the funds returned to states were used to cover health services, but not
necessarily for approved Medicaid benefits, and (5) the states developed mechanisms
to attain federal Medicaid funds without contributing their full share of required
matching funds. In an earlier analysis,8 the General Accounting Office (GAO) had
drawn similar conclusions from its investigation, noting that these payment
arrangements violate the integrity of the federal/state partnership under Medicaid and
that states were guilty of replacing state dollars with federal dollars in the process.
Table 1 shows an example of hypothetical payment arrangements for inpatient
hospital services provided in private and county-operated facilities in a hypothetical
state under the 1987 rules.9 The hypothetical state uses the total number of hospital
days (county and private combined) in a given month and Medicare payment
principles ($1,000 per day) to determine an aggregate upper payment limit or total
dollar amount for inpatient hospital services. The state claims federal matching funds
based on this aggregate amount. Private hospitals are paid the usual daily Medicaid
rate ($800), while the balance of the total calculated amount is allotted to county
facilities, which yields a much higher average daily payment rate ($2,800). Thus, the
state has established two different payment rates for two different ownership
categories of hospitals, so that when all payments are combined, the upper payment
limit for inpatient hospital services is not exceeded.
The next step in the example involves the return of funds to the state through an
intergovernmental transfer from the county facilities. In this example, the county
providers return all excess dollars beyond the usual payment rate back to the state.
How do private facilities contribute to enhanced payment arrangements? States
cannot require private facilities to transfer excess payments back to the state; thus,
there is little incentive to provide enhanced payments to these providers. However,
as shown in Table 1, because private facilities add significantly to the total number
of hospital days in determining the upper payment boundary (using Medicare payment
6 (...continued)
of Medicaid Enhanced Payments to Local Public Providers and the Use of
Intergovernmental Transfers, A-03-00-00216, September, 2001.
7 Disproportionate share hospital (DSH) payments are supplemental payments made to
hospitals that treat a disproportionate share of uninsured and Medicaid beneficiaries. The
intent of Medicaid DSH payments is to provide financial relief to such hospitals.
8 U.S. General Accounting Office: Medicaid: State Financing Schemes Again Drive Up
Federal Payments, GAO/T-HEHS-00-193, September 6, 2000.
9 For simplicity, the example does not include state government facilities because such
facilities are few in number, are subject to a separate UPL, and are not the focus of the current
payment controversy.
CRS-4
principles), especially when the state’s recognized Medicaid payment for care is lower
than Medicare’s, they are crucial to the overall aggregation process. In this example,
the state gains $200,000 in enhanced payments through an intergovernmental transfer
from the county facilities, and in this process, has reduced its own share of total
Medicaid costs for acute inpatient care delivered in 1 month.
Recent Changes to Upper Payment Limits
Tables 2 and 3 summarize key components of the series of recent regulatory and
legislative changes made to the 1987 rules governing upper payment limits. Table 2
describes UPL modifications for inpatient or institutional care. Table 3 describes
UPL modifications for outpatient hospital and clinic services. In general, to establish
consistency, changes made over time with respect to inpatient services were replicated
for outpatient care.
The Clinton Administration issued a proposed rule on Medicaid UPLs in October
of 2000. In December of 2000, the Benefits Improvement and Protection Act of 2000
(BIPA), incorporated by reference into P.L. 106-554, required that the final rule
include separate UPLs for local government facilities. Thus, the January 12, 2001 final
rule10 established new UPLs for city and county facilities,11 and separate UPLs specific
to privately owned and operated facilities, thereby eliminating the overall aggregate
UPLs that had previously applied to all public and private facilities within each
primary group. In this final rule, HCFA clarified that these regulations apply only to
fee-for-service Medicaid payments. Managed care payments are subject to different
regulations.
In terms of allowed payment amounts to facilities, the final rule issued by the
Clinton Administration established an exception for payments covering inpatient and
outpatient services provided by non-state-owned or operated public hospitals. This
exception allowed states to pay city and county public hospitals up to 150% of the
Medicare payment rate for such services. HCFA justified this exception because these
facilities provide access to a wide range of needed care not often otherwise available
in underserved areas, deliver a significant proportion of uncompensated care, and are
critically dependent on public funding sources such as Medicaid. The January 12,
2001 final rule also required that payments to city and county public hospitals be
separately identified and reported to HCFA. Such reporting was intended to ensure
both that the higher payments were appropriate and that they were being fully retained
by these facilities.
10 Federal Register, v. 66, no. 9, January 12, 2001, p. 3148-3177. On January 20, 2001, the
Bush Administration released an agency notice delaying by 60 days implementation of final
rules issued near the end of the Clinton Administration. The purpose of the delay was to allow
for regulatory review by the Bush Administration. Because BIPA required that the final
Medicaid UPL rule be issued by the end of CY2000, this rule was allowed to go into effect
on its original effective date of March 13, 2001.
11 Technically, the rule imposed the new UPL on all other government-owned or operated
facilities; that is, all non-state government owned or operated facilities. However, Indian
Health Services facilities and tribal facilities are not subject to this new UPL. In addition,
DSH payments are not counted toward the UPLs.
CRS-5
Table 4 provides an example of how the Clinton final rule substantially alters the
methodology states may use to claim federal matching dollars and the resulting
reduction in excess payments states may obtain through intergovernmental transfers
from city and county facilities. Table 4 carries over the basic underlying assumptions
defined in Table 1. That is, the total number of hospital days, the split in hospital
days between private and county facilities, and the basic Medicare and Medicaid
payment rates are identical in the two tables.
There are two significant differences between Table 1 (1987 final rule) and
Table 4 (Clinton final rule). First, under the 1987 final rule, states could combine
hospitalizations in public and private facilities in calculating amounts to claim for
federal matching. Once private facilities were paid the usual Medicaid rate, and all
remaining funds were distributed to county facilities, an intergovernmental transfer of
the excess dollars exceeding the usual Medicaid payment rate resulted in a net gain
of $200,000 to the state. In contrast, under the Clinton final rule, states must treat
private and county facilities separately in claiming federal matching dollars, which
substantially reduces the amount of federal funds available to pay county hospitals and
to subsequently transfer back to the state.
The second significant difference between Tables 1 and 4 is the Medicare
payment rate used to set the UPL. Under the 1987 rule, states were allowed to pay
all providers, regardless of ownership, up to 100% of the Medicare payment rate.
Under the Clinton final rule, states were permitted to pay city and county public
hospitals up to 150% of the Medicare payment rate (all other providers were subject
to the 100% rule). Despite the higher payment rate for local government facilities,
considerable savings were still achieved under the Clinton final rule in this example.
Private facilities were paid the usual Medicaid rate and federal matching funds were
claimed accordingly. Among county public hospitals, a claim for federal matching
dollars was based on the higher UPL rate, and these facilities were paid based on
these calculations. An intergovernmental transfer from the county hospitals of the
excess dollars exceeding the usual Medicaid payment rate resulted in a net gain of
$70,000 to the state.
In a new final rule published on January 18, 2002,12 the Bush Administration
eliminated the higher payment rate for city and county public hospitals. Beginning on
May 14, 2002 (at the earliest),13 states may pay city and county public hospitals only
12 Federal Register, v. 67, no. 13, January 18, 2002, p. 2602 - 2611.
13 Originally, the effective date of this Bush Administration final rule was March 19, 2002.
On March 19, 2002, CMS announced a delay of the effective date of this final rule to April
15, 2002 (Federal Register, v. 67, no. 53, p. 12479). The text of this notice does not provide
a reason for the delay. However, CMS officials indicated that the delay was undertaken in
light of both pending litigation to halt the rule change, and concerns regarding compliance with
the Congressional Review Act (CRA). The CRA stipulates that the effective date for a major
rule, such as this Bush Administration final rule, cannot be sooner than 60 days after the rule
is published in the Federal Register, or a report is submitted to Congress, whichever is later.
On April 10, 2002, during opening arguments in this lawsuit, the federal district court in
Arkansas ruled that since the Senate did not receive the rule until March 15, 2002, the earliest
(continued...)
CRS-6
up to 100% of the Medicare payment rate. This rule also eliminated the reporting
requirement applicable to all states making enhanced payments to city and county
public hospitals. The new rule retained the requirement that states qualifying for a
transition period (see below) report annually to CMS actual facility-specific payments
made to all facilities and estimates of what Medicare payments would have been to
those facilities.
CMS’s rationale for the UPL change is based on four considerations. First,
CMS argues that the 100% UPL is more than sufficient to ensure access for Medicaid
beneficiaries to such facilities. Moreover, states retain the flexibility to pay such
hospitals enhanced payments (up to the Medicare payment rate) as long as the UPL
is maintained in the aggregate. Second, the higher payments allowed under the
January 12, 2001 rule were not necessarily benefitting these hospitals to the fullest
possible extent, as evidenced by the OIG findings summarized above. In that analysis,
public hospitals were transferring excess UPL payments back to states, or when these
hospitals were allowed to retain a portion of such payments, they either were not
receiving any DSH payments or were being required to transfer their DSH dollars
back to the states. Thus, the net gain for these hospitals was minimized. Third, many
city and county public hospitals do qualify for DSH payments, and BIPA increased
the hospital-specific DSH limits up to 175% of a hospital’s reasonable costs for two
state fiscal years beginning in federal fiscal year 2003.14 So additional funding can be
provided through this mechanism. Finally, CMS wants to restore payment equity
across all providers.
Table 5 provides an example of how the Bush final rule reduces funding
available to city and county public hospitals, and further reduces the amounts available
for intergovernmental transfers from these facilities back to states. Again, the basic
underlying assumptions are identical across all three tables in this report. With respect
to Tables 4 and 5 (illustrating the Clinton and Bush final rules, respectively),
calculations for private facilities are identical. That is, private facilities were paid the
usual Medicaid rate and federal matching funds were claimed accordingly. Because
the Bush final rule allows local government hospitals to be paid up to 100% of the
Medicare payment rate, rather than 150% under the Clinton final rule, additional
savings are achieved. An intergovernmental transfer from the county hospitals of the
excess dollars exceeding the usual Medicaid payment rate resulted in a net gain of
$20,000 to the state.
13 (...continued)
permissible effective date is May 14, 2002. CMS has indicated that it will abide by this
ruling.
14 In late December, 2001, the OIG issued an audit report recommending that the upcoming
increase in DSH reimbursements may not be warranted or should at least be studied further
before implementation. The OIG noted that DSH payments are not always retained by public
hospitals and the DSH funds received are not always calculated correctly. For more
information, see U.S. OIG, Reviews Indicate That an Increase in Medicaid Disproportionate
Share Hospital Payments to 175 Percent of Uncompensated Care Cost May Not Be
Warranted, A-06-01-00069, December 2001.
CRS-7
In late 2001, some Members of Congress expressed opposition to this new rule.
Two bills were introduced (H.R. 3360 and S. 1745) seeking to delay until at least
January 1, 2003, any changes in Medicaid regulations that would modify the rule
allowing payments of up to 150% of the Medicare payment rate to city and county
public hospitals. Both bills would also require the Secretary of HHS to submit a
report to Congress, at least 3 months prior to publication of any such rule, describing
a plan to mitigate the loss of funding to these facilities as a result of new regulations,
and also providing recommendations for legislative action as deemed appropriate.
Finally, in early 2002, a Senate amendment was added to, and later withdrawn from,
H.R. 622 (the Temporary Extended Unemployment Compensation Act of 2002) that
would have delayed until at least June 30, 2002, any regulatory changes to the UPL
rule affecting city and county public hospitals.
Transition Periods for Achieving Full Compliance
with New Rules
While the creation of new UPLs by facility type is likely to result in significant
savings in federal Medicaid spending (see discussion below), federal policymakers
have considered the impact of these regulatory changes on state budget planning.
Instead of requiring full compliance with the latest UPL rules immediately, some
states qualify for one of several transition periods that allow phase out of excess
payments over a specified length of time beyond the effective date of the applicable
rule. Table 6 summarizes the key components of these transition periods as defined
in the final rule issued by the Clinton Administration, which incorporated BIPA
requirements, and the changes subsequently made by the Bush Administration.
Most of the transition period provisions have been defined in the January 12,
2001 Clinton Administration final rule. The goal of this rule was to provide a phase-
out period commensurate with the length of time states have relied on the additional
federal funds gained through using enhanced payment arrangements that are now
being curtailed. States with short-term reliance on these arrangements must phase out
excess payments relatively quickly. States that have relied on enhanced payment
arrangements for a number of years are allowed a relatively long period of time in
which to phase out excess payments. Other states fall in the middle.
One feature is common to all transition period rules. State fiscal year (SFY)
2000 is the base period for determining the amount of excess payments (i.e., the
difference between payments made under enhanced arrangements and amounts that
would result from application of the new UPLs) that must be phased out.
The January 12, 2001 final rule created three transition groups with short,
medium, and long phase-out periods (see Table 6 for these details). The shortest
transition group consists of states with approved plans effective on or after October
1, 1999. For such payment plans, the phase-out period formally began on March 13,
2001 (the effective date of the rule) and will end on September 30, 2002.
The second transition group consists of those states with approved plans
effective after October 1, 1992 and before October 1, 1999. For this group, the
phase-out period formally begins in SFY2003. Aggregate payments for the specified
CRS-8
provider groups must be reduced to the applicable UPL in increments over 3 years
(i.e., 25% reduction in the first year, 50% in the second year, and 75% in the third
year) leading to full compliance with the UPL by the end of the fourth year, SFY2006.
Finally, the third transition group, defined in BIPA and incorporated into the
January 12, 2001 final rule, includes states with approved plans effective on or before
October 1, 1992. For these states with the longest reliance on the additional federal
dollars associated with such payment arrangements, the phase-out period begins with
the first state fiscal year that starts after September 30, 2002 (either SFY2003 or
SFY2004)15 and ends on September 30, 2008. Regardless of the starting point, all
such states must be in compliance with the applicable UPL by October 1, 2008 – the
beginning of federal fiscal year (FFY) 2009. BIPA also specified the schedule of
percentage reductions in excess payments incorporated into the January 12, 2001 final
rule. Such excess payments must be reduced by 15% increments over each of six
consecutive periods (full SFYs for the first five periods and a partial SFY for the sixth
period). The final 10% reduction occurs at the end of the transition period such that
full compliance with the final UPL is achieved by October 1, 2008.
On September 5, 2001, the Bush Administration issued a final rule16 that amends
the transition period provisions in the January 12, 2001 final rule. The main purpose
of the September 5, 2001 rule is to specify a new phase-out period for certain states
that had enhanced payment plans that were pending HCFA approval as of the
effective date of the prior final rule (i.e., March 13, 2001).17 Specifically, this rule
divides states previously subject to the shortest transition period (those with plans
effective on or after October 1, 1999) into two subgroups. The subgroup of states
that received plan approval before January 22, 2001 (the first business day of the new
Bush Administration) still qualify for the original transition period ending on
September 30, 2002. The remaining states that had submitted payment plans before
March 13, 2001 but received plan approval on or after January 22, 2001 must
eliminate excess payments above the UPL by November 5, 2001 (the effective date
of this rule), or by one year from the effective date of the plan, whichever is later.
Four states fall into this latter group – Florida, Michigan, Wisconsin, and Virginia.
CMS has indicated that this rule ensures that these 4 states will have had at least one
full year to implement their enhanced payment plans.18
15 In 46 states, the state fiscal year runs from July to June. In New York, the state fiscal year
begins in April and ends in March. In Texas, the state fiscal year is September to August.
Among these 48 states, the first state fiscal year that begins after September 30, 2002 is
SFY2004. Finally, in Alabama and Michigan, the state fiscal year is the same as the federal
fiscal year (October to September). For these two states, the first state fiscal year that begins
after September 30, 2002 is SFY2003.
16 Federal Register, v. 66, no. 172, September 5, 2001, p. 46397 - 46399.
17 HCFA also determined that such plans should be reviewed under the UPL rules in place
prior to March 13, 2001 and not under the provisions of the January 12, 2001 final rule.
18 Shortly after the September 5, 2001, final rule was published, the GAO issued a report
criticizing the approval of UPL plans in these four states. In that report, GAO claimed that
the Bush Administration had reversed an earlier decision to deny approval of pending
(continued...)
CRS-9
While the January 18, 2002 rule issued by the Bush Administration did not alter
transition period provisions of the two prior final rules, this rule clarified that some
states with enhanced payment arrangements for city and county public hospitals that
exceed the newest UPL will not qualify for a transition period. Under the January 12,
2001 final rule, states would qualify for a transition period if they met two criteria:
(1) payments to city and county public hospitals exceeded 150% of the Medicare
payment rate (or for all other providers within a primary group, payments exceeded
100% of the Medicare payment rate), and (2) the date of approval/effectiveness for
such a payment plan fell within the parameters specified in the rule (see Table 6 for
details). In the case of city and county public hospitals, such states had until the end
of the applicable transition period to reduce payments to 150% of the UPL. Plans
that allowed payments up to 150% of the UPL were in compliance with the January
12, 2001 rule, and so no payment reductions were required and no transition period
applied. However, the new January 18, 2002 final rule lowered the UPL for city and
county public hospitals from 150% to 100% of Medicare payment rates. Thus, state
plans approved under the prior January 12, 2001 rule that pay such hospitals greater
than 100% and up to 150% of the UPL must now reduce such payments to 100% of
Medicare payment rates by May 14, 2002 (at the earliest; see footnote #13). Such
state plans (if any) do not qualify for any of the previously defined transition periods,
because they do not meet both criteria outlined above.
What about Intergovernmental Transfers?
In its October 10, 2000 proposed rule, HCFA gave two reasons for not making
a policy change to intergovernmental transfers that can be used to finance up to 60%
of the non-federal portion of Medicaid expenditures. First, HCFA acknowledged that
states and local governments have developed unique arrangements for sharing
Medicaid costs. Second, there are statutory restrictions on the Secretary’s authority
to limit intergovernmental transfers.19 Thus, no such changes are included in any of
the final UPL rules issued to date.
Costs and Savings Associated with Changes to UPL Rules
At the time that the Clinton final rule was issued in January 2001, HCFA had
identified 29 states with approved or pending enhanced payment plans that would
involve city and county facilities. Going beyond the FY2001 budget baseline, HCFA
projected that the federal share of enhanced payments to city and county facilities may
reach $10 billion per year by FY2006, and over the next 10 years, cumulative
spending for such payments could total more than $90 billion. In developing these
projections, HCFA assumed that in the absence of the final rule, about one-half of the
18 (...continued)
amendments that did not comply with the Clinton final rule. Both CMS and the states
involved defended these approvals, arguing that GAO was improperly singling out certain
states and officials for criticism. CMS further noted that key Administration officials with
prior ties to Virginia and Wisconsin had recused themselves from the approval process. For
further details, see U.S. GAO, Medicaid: HCFA Reversed Its Position and Approved
Additional State Financing Schemes, GAO-02-147, October 2001.
19 Section 1903(w)(6) of the Social Security Act.
CRS-10
remaining 21 states would eventually submit plans to institute similar enhanced
payment arrangements. HCFA estimated that about two-thirds of the enhanced
payments would exceed the UPLs established in the final rule, yielding a potential
savings of nearly $55 billion over the next 10 years.
In a preliminary estimate of an earlier version of BIPA,20 CBO indicated that the
UPL provisions will result in considerably greater savings of $76.7 billion over the 10-
year period ending with FY2010 ($21.5 billion for FY2001 through FY2005).
Savings are accelerated in the second half of the 10-year period as the phase-out or
transition periods expire.
Finally, the Bush Administration has projected further savings associated with
its two final rules that amend Medicaid upper payment limits. First, a savings of $0.5
billion for FY2001 and FY2002 is estimated for the September 5, 2001 final rule that
creates a separate, minimum 1-year transition period for four states that have only
recently received approval for enhanced payment arrangements. Second, elimination
of the higher payment rate for city and county public hospitals is expected to save $9
billion over FY2002 through FY2006.
20 The UPL provisions in H.R. 5661, for which CBO provided its preliminary budget estimate,
were substantively identical to those contained in the conference agreement that eventually
became incorporated by reference into P.L. 106-554.
CRS-11
Table 1. Hypothetical Example of Enhanced Payment Arrangement and Intergovernmental
Transfer Under 1987 Federal Regulations – Inpatient Hospital Services Delivered in 1 Month
Assumptions in hypothetical state:
! 1,000 total days of general acute inpatient care in a given month;
! 900 of these days in private hospitals and 100 in county public hospitals;
! Medicaid pays $800 per day;
! Medicare pays $1,000 per day;
! Medicaid federal matching rate is 50%.
Calculations:
! State has an approved plan to use 100% of the Medicare payment rate in calculating the UPL for inpatient hospital services.
Theoretically, Medicare would pay $1,000,000 (1,000 hospital days x $1,000/day = $1,000,000) for inpatient care provided in all
hospitals during the month. This becomes the upper payment limit for Medicaid payments for hospitals, and is the basis for claiming
federal matching dollars.
! State share of Medicaid payments is $500,000 (50% of $1,000,000 = $500,000).
! Federal share of Medicaid payments is $500,000 (50% of $1,000,000 = $500,000).
! State pays the usual rate to private hospitals @ $720,000 since it cannot require such facilities to make an intergovernmental transfer
of excess payments above the usual rate back to the state.
($800/day x 900 private hospital days = $720,000)
! State pays the remaining $280,000 to county public hospitals (yielding an average daily rate of $2,800).
($1,000,000 - $720,000 = $280,000 or $2,800/day for 100 county public hospital days).
! Through an intergovernmental transfer, the state requires the county public hospitals to return $200,000 in excess payments above the
amount that would have been paid at the usual rate.
(100 county public hospital days x $800/day = $80,000 based on the usual rate)
($280,000 - $80,000 = $200,000 returned to state)
! Thus, state gains $200,000; options for using these funds include:
! no further action – state draws down $500,000 in federal funds with only $300,000 in state dollars (original state share of
$500,000 is reduced by $200,000 gain) for general acute inpatient care delivered in 1 month;
! use funds for purposes other than covering Medicaid costs;
! use funds to restart process of drawing down additional federal dollars with no additional state contribution.
Source: Adapted from an unpublished example developed by HCFA (now CMS).
Note: Tables 1, 4, and 5 are for illustrative purposes only, using a simplified example. Under Medicare, hospitals are not paid on a per
diem basis, and are instead paid based on a formula that takes into account diagnosis and use of resources during a given inpatient stay.
Under Medicaid, states rarely pay for inpatient services on a per diem basis, instead using a wide variety of other methods.
CRS-12
Table 2. Upper Payment Limit Rules for Inpatient or Institutional Care
Bush Administration final rule
Clinton Administration final rule
(1/18/02) – effective on (or
Key components
1987 regulation
(1/12/01) – effective on 3/13/01
after) 5/14/02
Facility groups to which
Two separate UPLs applied
Retains separate UPL for state facilities in
Same as 1/12/01 final rule.
separate upper payment
to: (1) all public and private
1987 regulation.
limits are applied.a
facilities combined, (2) state
facilities only.
Adds a separate UPL for city and county
facilitiesb (with exception described below).
Adds separate UPL for private facilities.
Drops UPL for all facilities combined in
1987 regulation.
Exceptions to rulec that
None
City and county public hospitals may be paid
Eliminates exception made for city
payments cannot exceed
up to 150% of the Medicare payment rate.
and county public hospitals in
100% of the Medicare
1/12/01 final rule.
payment rate.
a Providers are divided into three primary groups for the purposes of applying UPLs: (1) inpatient hospitals (IPH), (2) nursing facilities (NF), and (3)
intermediate care facilities for the mentally retarded (ICF/MR). Within each primary group, further distinctions are made based on facility ownership or
operation: (1) state government, (2) other government, namely city and county, and (3) private. The UPLs are applied at the facility-type level within each
primary group.
b BIPA required that the final rule include a separate UPL for government facilities that are not state owned or operated.
c Originally specified in a final rule issued on December 19, 1983 (48 FR 56046).
CRS-13
Table 3. Upper Payment Limit Rules for Outpatient Hospital and Clinic Services
Bush Administration final rule
Clinton Administration final rule
(1/18/02) – effective on (or after)
Key components
1987 regulation
(1/12/01) – effective on 3/13/01
5/14/02
Facility groups to which
Single UPL applied to all
Adds two separate UPLs for (1) state
Same as 1/12/01 final rule.
separate upper payment
facilities across all primary
facilities, and (2) city and county
limits are applied.a
groups combined.
facilities.b
Adds separate UPL for private facilities.
Drops UPL for all facilities combined in
1987 rule.
Exceptions to rulec that
None
City and county public hospitals may be
Eliminates exception made for city
payments cannot exceed
paid up to 150% of the Medicare payment
and county public hospitals in
100% of the Medicare
rate.
1/12/01 final rule.
payment rate.
a Providers are divided into three primary groups for the purposes of applying UPLs: (1) inpatient hospitals (IPH), (2) nursing facilities (NF), and (3)
intermediate care facilities for the mentally retarded (ICF/MR). Within each primary group, further distinctions are made based on facility ownership or
operation: (1) state government, (2) other government, namely city and county, and (3) private. With the exception of the 1987 regulation, the UPLs are applied
at the facility-type level within each primary group.
b BIPA required that the final rule include a separate UPL for government facilities that are not state owned or operated.
c Originally specified in a final rule issued on December 19, 1983 (48 FR 56046).
CRS-14
Table 4. Hypothetical Example of Enhanced Payment Arrangement and Intergovernmental Transfer
Under Clinton Administration Final Rule (1/12/01) – Inpatient Hospital Services Delivered in 1 Month
Assumptions in hypothetical state (same as Table 1):
! 1,000 total days of general acute inpatient care in a given month;
! 900 of these days in private hospitals and 100 in county public hospitals;
! Medicaid pays $800 per day;
! Medicare pays $1,000 per day;
! Medicaid federal matching rate is 50%.
Clinton Final Rule requires states to treat private and county hospitals separately in calculating a UPL for each group. This rule also allows states to pay
county public hospitals up to 150% of the Medicare payment rate ($1,500 per day).
Calculations for Private Hospitals under Clinton Rule:
! State has an approved plan to pay private hospitals up to 100% of the Medicare payment rate. Theoretically, Medicare would pay $900,000 (900
private hospital days x $1,000/day = $900,000) for inpatient care provided in private hospitals during the month. This becomes the upper payment
limit for Medicaid payments for this group. But there is little incentive to pay these facilities the Medicare rate, since the state cannot require an
intergovernmental transfer back to the state of any payments above the usual Medicaid rate.
! State pays the usual Medicaid rate for private hospital days, yielding a total cost of $720,000.(900 private hospital days x $800/day = $720,000)
! State share of Medicaid payments is $360,000 (50% of $720,000 = $360,000).
! State claims federal match of $360,000 (50% of $720,000 = $360,000).
Calculations for County Public Hospitals under Clinton Rule:
! State has an approved plan to use 150% of the Medicare payment rate in calculating the UPL for county public hospitals. Thus, theoretically,
Medicare would pay $150,000 (100 county hospital days x $1,500/day = $150,000) for inpatient care provided in county public hospitals during
the month. This becomes the upper payment limit for Medicaid payments for this group. State pays entire amount to county public hospitals
anticipating an intergovernmental transfer later on.
! State share of Medicaid payments is $75,000 (50% of $150,000 = $75,000).
! State claims federal match of $75,000 (50% of $150,000 = $75,000).
! Through an intergovernmental transfer, the state requires the county public hospitals to return $70,000 in excess payments above the amount that
would have been paid at the usual Medicaid rate.
(100 county hospital days x $800/day = $80,000 based on the usual rate)
($150,000 - $80,000 = $70,000 returned to state)
! Thus, state gains $70,000; options for using these funds include:
! no further action – state draws down $75,000 in federal funds with only $5,000 in state dollars (original state share of $75,000 is reduced by
$70,000 gain) for general acute inpatient care delivered in 1 month;
! use funds for purposes other than covering Medicaid costs;
! use funds to restart process of drawing down additional federal dollars with no additional state contribution.
Note: See note on Table 1.
CRS-15
Table 5. Hypothetical Example of Enhanced Payment Arrangement and Intergovernmental Transfer
Under Bush Administration Final Rule (1/18/02) – Inpatient Hospital Services Delivered in 1 Month
Assumptions in hypothetical state (same as Table 1):
! 1,000 total days of general acute inpatient care in a given month;
! 900 of these days in private hospitals and 100 in county public hospitals;
! Medicaid pays $800 per day;
! Medicare pays $1,000 per day;
! Medicaid federal matching rate is 50%.
Clinton Final Rule requires states to treat private and county hospitals separately in calculating a UPL for each group – No change under Bush Final Rule.
Bush Final Rule allows states to pay county public hospitals up to 100% (not 150%) of the Medicare rate.
Calculations for Private Hospitals under Bush Rule – No change from Table 4:
! State has approved plan to pay private facilities up to 100% of the Medicare payment rate. Theoretically, Medicare would pay $900,000 (900 private
hospital days x $1,000/day = $900,000) for inpatient care provided in private hospitals during the month. This becomes the upper payment limit
for Medicaid payments for this group. But there is little incentive to pay these facilities the Medicare rate, since the state cannot require an
intergovernmental transfer back to the state of any payments above the usual Medicaid rate.
! State pays the usual Medicaid rate for private hospital days, yielding a total cost of $720,000.
(900 private hospital days x $800/day = $720,000)
! State share of Medicaid payments is $360,000 (50% of $720,000 = $360,000).
! State claims federal match of $360,000 (50% of $720,000 = $360,000).
Calculations for County Public Hospitals under Bush Rule:
! State has an approved plan to use 100% of the Medicare payment rate in calculating the UPL for county public hospitals. Thus, theoretically,
Medicare would pay $100,000 (100 county hospital days x $1,000/day = $100,000) for inpatient care provided in county public hospitals during
the month. This becomes the upper payment limit for Medicaid payments for this group. State pays entire amount to county public hospitals
anticipating an intergovernmental transfer later on.
! State share of Medicaid payments is $50,000 (50% of $100,000 = $50,000).
! State claims federal match of $50,000 (50% of $100,000 = $50,000).
! Through an intergovernmental transfer, the state requires the county public hospitals to return $20,000 in excess payments above the amount that
would have been paid at the usual Medicaid rate.
(100 county hospital days x $800/day = $80,000 based on the usual rate)
($100,000 - $80,000 = $20,000 returned to state)
! Thus, state gains $20,000; options for using these funds include:
! no further action – state draws down $50,000 in federal funds with only $30,000 in state dollars (original state share of $50,000 is reduced by
$20,000 gain) for general acute inpatient care delivered in 1 month;
! use funds for purposes other than covering Medicaid costs;
! use funds to restart process of drawing down additional federal dollars with no additional state contribution.
Note: See note on Table 1.
CRS-16
Table 6. Transition Periods For Compliance with Upper Payment Limits a
Clinton Administration final rule (1/12/01) –
Bush Administration final rule (9/5/01) –
Key components
effective on 3/13/01
effective on 11/5/01
How state plans are grouped for applying
Creates three mutually exclusive groups:
Divides Group 1 as defined in 1/12/01 final
transition period rules.
rule into two separate groups:
Group 1 – approved plans effective on/after
10/1/99.
Group 1A – plans effective on/after 10/1/99
and approved before 1/22/01.
Group 2 – approved plans effective after 10/1/92
and before 10/1/99.
Group 1B – plans effective on/after 10/1/99
that were submitted before 3/13/01 and
Group 3 – approved plans effective on/before
approved on/after 1/22/01.
10/1/92.b
Retains Groups 2 and 3 as identified in
1/12/01 final rule.
Base period for determining amount of
State fiscal year 2000.c
Same as 1/12/01 final rule.
excess payments that must be phased out.
When phase-out begins.d
Group 1 – with effective date of final rule, i.e.,
Groups 1A and 1B – 3/13/01.
3/13/01.
Groups 2 and 3 – same as 1/12/01 final rule.
Group 2 – SFY2003.
Group 3 – first state fiscal year that begins after
9/30/02, i.e., SFY2003 or SFY2004.
Percentage reduction in excess payments
Group 1 – not specified; states must be in
Groups 1A and 1B – not specified; states must
each year of phase-out.
compliance by end of phase-out period.
be in compliance by end of phase-out period.
Group 2 – excess payments must be reduced in 25%
Group 2 – same as 1/12/01 final rule.
increments over each of 4 consecutive years
(SFY2003-SFY2006).
Group 3 – same as 1/12/01 final rule.
Group 3 – excess payments must be reduced in 15%
increments over each of 5 consecutive years
(SFY2004-SFY2008),e plus 15% reduction for the
portion of SFY2009 occurring before 10/1/08, with
the final 10% reduction achieved as of 10/1/08.
CRS-17
Clinton Administration final rule (1/12/01) –
Bush Administration final rule (9/5/01) –
Key components
effective on 3/13/01
effective on 11/5/01
When phase-out ends – date by which full
Group 1 – phase-out ends on 9/30/02.
Group 1A – phase-out ends on 9/30/02.
compliance with UPLs is required.
Group 2 – by end of SFY2006.
Group 1B – phase-out ends on 11/5/01 or 1
year from effective date of plan, whichever is
Group 3 – phase-out ends on 9/30/08.
later.
Groups 2 and 3 – same as 1/12/01 final rule.
a Not applicable to the 1987 UPL regulation.
b BIPA created this third group and outlined the associated transition period requirements that were incorporated into the 1/12/01 final rule.
c Represents the last complete SFY prior to this rule change.
d For all plans that qualify for a transition period, that period begins on March 13, 2001 and ends with the date associated with the phase-out schedule for that
transition group. The rules governing the phase-out schedules for reducing payments that exceed the UPL have different beginning and ending dates, depending
on the transition group. The beginning dates for the phase-out schedule are shown in this row. The ending dates for the phase-out schedule are shown in the
last row of this table.
e This schedule applies to states that begin the phase-out in SFY2004. For those 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.”