Order Code RS22848
March 25, 2008
Medicaid Regulation of
Governmental Providers
Jean Hearne
Specialist in Health Care Financing
Domestic Social Policy Division
Summary
On May 29, 2007, the Centers for Medicare and Medicaid Services (CMS) issued
a rule intended to establish control over the use and misuse of intergovernmental
transfers in financing the states’ shares of Medicaid costs. The rule clarifies the types of
intergovernmental transfers of funds allowable for financing a portion of Medicaid costs,
imposes a limit on Medicaid reimbursements for government-owned hospitals and other
institutional providers, and requires certain providers to retain all of their Medicaid
reimbursements. In addition, the rule would establish documentation requirements to
substantiate that a governmental entity is making a certified public expenditure (CPE)
when contributing to the state share of Medicaid. The rule has raised considerable
concern among states and health care providers that its impact on Medicaid services,
providers, and beneficiaries could be severe, and Congress has acted to place a
moratorium on the implementation of its provisions until May of 2008. Other legislation
addressing the regulation is currently under consideration.
Background
Medicaid is a state-administered program that is jointly financed by states and the
federal government. The federal and state shares of program costs vary for each state
based on a formula that takes into consideration each state’s per capita income compared
with the national per capita income. The formula is designed so that states with per capita
income that is relatively lower than other states will pay a lower state share of Medicaid
program costs. Nonetheless, many states have found raising their state share of Medicaid
program costs to be challenging, particularly during economic downturns.
Intergovernmental transfers (IGTs) are one of the methods used by some states to
finance the non-federal share of Medicaid costs. Certain IGTs are specifically allowed for
funding the state share of program costs. For example, units of government, such as
counties, are able to contribute to the state’s share of Medicaid. At least three states
currently require counties to fund some part of the state share. Congress specifically

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protects the ability of states to use funds derived from state or local taxes and transferred
or certified by units of government within a state.1
Some states have instituted programs where all or portions of the Medicaid state
share is paid by hospitals or nursing homes that
! are public providers, however, not units of government; or
! are units of government, but the state share is returned to the provider
sometimes through inflated Medicaid payment rates.2
The purpose of such financing arrangements is generally to draw additional federal
funds for which a state share may not otherwise be available. While the funds often help
to pay for Medicaid or other health care services, those arrangements effectively raise the
federal share of Medicaid program spending. These “intergovernmental transfers” are
often repaid through Medicaid disproportionate share hospital payments or through
inflated Medicaid payment rates3 for which federal matching amounts are claimed.
Alternately, states can make Medicaid payments to the providers, and the providers
transfer a portion or all of those payments back to the state through what is claimed as an
IGT. Either way, the net impact is to effectively raise the federal matching rate in the state
to levels beyond those specified in law.
In May of 2007, the Department of Health and Human Services issued a regulation
tightening the administrative procedures and clarifying the vague definitions that allow
these types of financing mechanisms to operate.4 The regulation tightens the definitions
of governmental entities and CPEs for the purpose of Medicaid financing, and establishes
a ceiling on payment rates for governmental providers equal to the cost of providing
Medicaid services. Existing rules that establish ceilings on Medicaid payments to
privately owned and operated facilities would not be affected by this rule.
The Provisions of the Rule
Defining a Unit of Government
Section 1903(w)(7)(G) of the Social Security Act (SSA) identifies five types of units
of government that may participate in the non-federal share of Medicaid payments: a state,
1 42 USC 1396b (w)(6)(A).
2 U.S. Government Accountability Office, Medicaid: States’ Efforts to Maximize Federal
Reimbursements Highlight Need for Improved Federal Oversight, GAO-05-836T; U.S.
Department of Health and Human Services, Office of the Inspector General, Review of Medicaid
Enhanced Payments to Local Public Providers and the Use of Intergovernmental Transfers,
A-03-00-00216.
3 For a more detailed description of how states are able to utilize inflated payment rates, see CRS
Report RL31021, Medicaid Upper Payment Limits and Intergovernmental Transfers: Current
Issues and Recent Regulatory and Legislative Action, by Elicia J. Herz.
4 Department of Health and Human Services, “Medicaid Program; Cost Limit for Providers
Operated by Units of Government and Provisions to Ensure the Integrity of Federal-State
Financial Partnership,” 72 Federal Register (FR) 2236, January 18, 2007.

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a city, a county, a special purpose district, or other governmental units within the state.
The proposed rule would elaborate on those units of government in the following ways.
It would include as a state or local governmental entity (including Indian tribes), a unit
of government that can demonstrate having generally applicable taxing authority or is a
state-operated, city-operated, county-operated, or tribally operated health care provider.
Health care providers that assert to be a “special purpose district” or “other” local
governmental entity must demonstrate that they are operated by a unit of government by
showing that they have generally applicable taxing authority or that the health care
provider is able to access funding as a integral part of a governmental unit with taxing
authority, and that a contractual relationship with the state or local government is not the
primary or sole basis for the health care provider to receive tax revenues. The explanation
of the regulation goes on to state, “If the unit of government merely uses its funds to
reimburse the health care provider for the provision of Medicaid or other services, that
alone is not sufficient to demonstrate that the entity is a unit of government.”5
Sources of State Share and Documentation of Certified
Public Expenditures
Prior regulations, in defining the types of public funds that may be available to fund
the state share of Medicaid costs, establish that funds “transferred from other public
agencies”6 to the state or local agency and under the state’s administrative control can be
used to fund the state share of Medicaid. The term “public agency” has been interpreted
by some states to include health care providers that are not governmental in nature, but
have a public-oriented mission, such as not-for-profit hospitals. The proposed rule would
remove the term “public agency” from prior regulations and replace it with the phrase
“other units of government (including Indian tribes)” reflecting the statutory language of
Section 1903(w)(7)(G) of the SSA.
The proposed rule also would require a governmental entity using a CPE to submit
a certification statement to the state Medicaid agency and have additional documentation
available. It would require that a CPE used to fund Medicaid be supported by auditable
documentation in a form approved by the Secretary of Health and Human Services (HHS)
and subject to periodic state audit and review. The documentation must at least identify
the category of spending under the state Medicaid plan, explain whether the contributing
unit of government is exempted from the current law limits on the use of provider taxes
or donations,7 identify actual costs incurred by the unit of government in providing
Medicaid services, and demonstrate that the funds are not from federal funds nor are
authorized by federal law to be used to match other federal funds.
5 Quotations from preamble of the proposed rule that predated the May final rule, 72 Federal
Register 2240.
6 See Title 42 of the Code of Federal Regulations (CFR), Sec. 433.51.
7 Provider taxes and donations, like IGTs, are two other approaches that states have used to raise
the non-federal share of Medicaid in the past. Congress acted in 1991 to limit those financing
mechanisms, which had been used for similar purposes as IGTs are used today. The 1991
legislation, however, did not address IGTs as one of the three questionable financing approaches.

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Cost Limit for Providers Operated by Units of Government and
Elimination of Payment Flexibility to Pay Public Providers in
Excess of Cost
A number of reports issued by the HHS Office of the Inspector General (OIG) and
Government Accountability Office (GAO) have identified questionable Medicaid
financing practices in states in which supplemental payments to providers in excess of
Medicaid costs have been made.8 Prior regulations have placed limits on such practices,
which are referred to as upper payment limit (UPL) financing arrangements. Under such
UPL arrangements, states make Medicaid payments to public hospitals and other public
long-term care institutional providers at inflated payment rates set at the statutory ceiling
known as the Medicare upper payment limit. The payments generate federal matching.
The hospitals or other providers return some or all of the amounts in excess of the usual
Medicaid rate to the state through intergovernmental transfers.
The preamble to the proposed rule explains that the excess payments violate another
statutory rule requiring Medicaid payments to be consistent with economy and efficiency
(42 U.S.C. 1396a(a)(30)(A)). Consequently, the rule would limit reimbursements to
governmentally operated providers to amounts that do not exceed cost. This limit would
not apply to Indian Health Service facilities and tribal facilities, nor to disproportionate
share hospital payments. The Secretary would be required to determine a reasonable
method for identifying allowable Medicaid costs. It would also require that Medicaid
costs be supported by auditable documentation in a form approved by the Secretary that
meets the same standards as for the CPE documentation (see above). If it is found that a
governmentally operated provider received an overpayment, those amounts would be
credited to the federal government under normal procedures.9
The regulation would also require governmental providers to submit an annual cost
report to the Medicaid agency that reflects their cost of services to Medicaid recipients
during the year. Finally, the rule would make conforming changes, including eliminating
42 CFR 447.271(b) to conform with the proposed limit on payments to governmental
providers that do not exceed cost.
Retention of Payments
A provision intended to prevent public providers from receiving Medicaid payments
and then transferring, through an IGT or other mechanism, some or all of those payments
back to state Medicaid agencies is included as well. The rule would require that providers
receive and retain the full amount of the Medicaid payments provided to them for
Medicaid services. The rule states that the Secretary will determine compliance with this
provision by examining any related transactions.
8 HHS Office of the Inspector General, Review of Medicaid Enhanced Payments to Local Public
Providers and the Use of Intergovernmental Transfers; U.S. General Accounting Office,
Medicaid: State Financing Schemes Again Drive Up Federal Payments, GAO/T-HEHS-00-193,
September 6, 2000; and, for background information, CRS Report RL31021 (cited above).
9 Regulations defining those procedures are at 42 CFR Part 433, Subpart F.

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HHS estimated that the imposition of the rule would reduce federal Medicaid outlays
by $3.87 billion over a five-year period starting in (and assuming the rule went into effect)
2007. The Congressional Budget Office estimates the impact to be a reduction in federal
outlays of $9 billion over a five-year period starting with FY2008. States, however, in
responding to a survey conducted by the staff of the House Committee on Oversight and
Government Reform, estimate their loss of federal Medicaid funds to be over $21 billion
for same five-year period beginning in 2008, an amount that is more than five times the
HHS estimates.10
Opposition to the Rule
States, public and governmental providers, and advocacy organizations have
expressed opposition to the rule. All agree that the rule would significantly reduce
Medicaid payments in certain states, and concerns are raised about whether those states
would be able to fill the funding gap and, if not, what the implications would be for
Medicaid beneficiaries and providers. Aside from the concerns about the impact of the
considerable loss of federal funds on Medicaid providers and beneficiaries, the rule has
been viewed by some as CMS overstepping its authority to limit intergovernmental
transfers, when Congress explicitly allows such transfers.
Governors’ concerns were expressed in a letter from the National Governor’s
Association to House and Senate leadership dated February 25, 2008.11 The letter calls on
Congress to take immediate action to delay implementation of the rules, fearing that their
implementation would inappropriately shift costs to states at a time when some states are
facing particularly difficult fiscal situations. The governors point out that the new rules
reflect a departure from past practices and are based on new and unsupported
interpretations of Medicaid law. Finally, the letter reminds members of the Congress that
some of the rule changes were considered and rejected when the Deficit Reduction Act
of 2005 (DRA) was deliberated.
As part of the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq
Accountability Appropriations Act of 2007 (Iraq War supplemental, P.L. 110-28), signed
into law on May 25, 2007, Congress enacted a one-year moratorium on the
implementation of the rule. Without further action, the rule could go into effect after May
25, 2008, when the one-year moratorium expires.
On March 11, 2008, a lawsuit was filed in the United States District Court for the
District of Columbia by a coalition of provider groups led by the National Association of
Public Hospitals and Health Systems, the American Hospital Association, and the
Association of American Medical Colleges.12 The litigants are requesting a preliminary
injunction prohibiting CMS from implementing the rule. The lawsuit asks the court to
10 The Administration’s Medicaid Regulations: State-by-State Impacts, Prepared for Chairman
Henry Waxman by the Majority Staff, U.S. House of Representatives, Committee on Oversight
and Government Reform, March 2008.
11 [http://www.nga.org/portal/site/nga/menuitem.cb6e7818b34088d18a278110501010a0/?
vgnextoid=fda42e9a3f158110VgnVCM1000001a01010aRCRD].
12 Alameda County Medical Center v. Leavitt, No. 1:08-cv-00422 (D.C. filed March 11, 2008.)

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reject it on three grounds: that CMS has overstepped its authority in limiting
intergovernmental transfers, that Congress has barred the agency from imposing a cost
limit on Medicaid payments to governmental providers, and that CMS improperly issued
the rule.
From NAHP’s website:
The litigants make three major claims in the lawsuit:
(1) The rule defines “units of government” far more narrowly than is permitted under
law and severely restricts options for states to finance the non-federal share of their
Medicaid program expenditures. The CMS definition usurps states’ ability to
determine the governmental status of entities within states, severely limiting the type
of governmental entities that can make intergovernmental transfers to fund the
non-federal share of the program;
(2) CMS does not have the authority to limit Medicaid payments to public providers
to cost while continuing to allow private providers to be paid under a different
methodology. Congress rejected cost-based reimbursement and payment limits in the
early 1980s in favor of granting states flexibility to tailor Medicaid reimbursement to
their unique needs. A cost limit imposed solely on governmental hospitals is counter
to clear Congressional intent and is arbitrary and capricious in violation of the
Administrative Procedure Act. It also upends decades of Medicaid payment policies
established by CMS and relied on by states.
(3) The moratorium signed by the President on May 25, 2007 effectively prevented
CMS from issuing a final rule the same day.13
Finally, Congress is considering taking further action as well. A number of proposals
and at least two bills would extend the current moratorium on implementing the
governmental providers rule. H.R. 5613, Protecting the Medicaid Safety Net Act of 2008,
would extend the current law moratorium until April 2, 2009. H.R. 4355, a Bill to Impose
a Moratorium on Certain Medicaid Payment Restrictions, would extend the moratorium
for a full year that would begin on the date of enactment of the bill.
13 [http://www.naph.org/naph/Communications/Litigation_backgrounder_FINAL.pdf].

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