ȱ
Ž’ŒŠ’ȱŽž•Š’˜—ȱ˜ȱ ˜ŸŽ›—–Ž—Š•ȱ
›˜Ÿ’Ž›œȱ
•’Œ’Šȱ ǯȱ Ž›£ȱ
™ŽŒ’Š•’œȱ’—ȱ ŽŠ•‘ȱŠ›Žȱ’—Š—Œ’—ȱ
Š—žŠ›¢ȱŘřǰȱŘŖŖşȱ
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŝȬśŝŖŖȱ
   ǯŒ›œǯ˜Ÿȱ
ŘŘŞŚŞȱ
ȱŽ™˜›ȱ˜›ȱ˜—›Žœœ
Pr
epared for Members and Committees of Congress

Ž’ŒŠ’ȱŽž•Š’˜—ȱ˜ȱ ˜ŸŽ›—–Ž—Š•ȱ›˜Ÿ’Ž›œȱ
ȱ
ž––Š›¢ȱ
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. In response, Congress placed a moratorium on the
implementation of its provisions. The moratorium was recently extended until April 1, 2009.
Further, in May of 2008, a federal judge ruled, in a lawsuit brought by a coalition of provider
groups, that the final rule should not have been issued and has returned the matter back to the
agency. Finally, the existing moratorium would be further extended to July 1, 2009, via the
American Recovery and Reinvestment Bill of 2009 that was approved by the House Energy and
Commerce Committee on January 22, 2009.


˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

Ž’ŒŠ’ȱŽž•Š’˜—ȱ˜ȱ ˜ŸŽ›—–Ž—Š•ȱ›˜Ÿ’Ž›œȱ
ȱ
˜—Ž—œȱ
Background ..................................................................................................................................... 1
The Provisions of the Rule .............................................................................................................. 2
Defining a Unit of Government ................................................................................................ 2
Sources of State Share and Documentation of Certified Public Expenditures......................... 2
Cost Limit for Providers Operated by Units of Government and Elimination of
Payment Flexibility to Pay Public Providers in Excess of Cost............................................. 3
Retention of Payments .............................................................................................................. 4
Opposition to the Rule..................................................................................................................... 4

˜—ŠŒœȱ
Author Contact Information ............................................................................................................ 6
Acknowledgments ........................................................................................................................... 6

˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

Ž’ŒŠ’ȱŽž•Š’˜—ȱ˜ȱ ˜ŸŽ›—–Ž—Š•ȱ›˜Ÿ’Ž›œȱ
ȱ
ŠŒ”›˜ž—ȱ
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 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

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)
(continued...)
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗȱ

Ž’ŒŠ’ȱŽž•Š’˜—ȱ˜ȱ ˜ŸŽ›—–Ž—Š•ȱ›˜Ÿ’Ž›œȱ
ȱ
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.
‘Žȱ›˜Ÿ’œ’˜—œȱ˜ȱ‘Žȱž•Žȱ
Ž’—’—ȱŠȱ—’ȱ˜ȱ ˜ŸŽ›—–Ž—ȱ
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, a city, a
county, a special purpose district, or other governmental units within the state. The 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
˜ž›ŒŽœȱ˜ȱŠŽȱ‘Š›ŽȱŠ—ȱ˜Œž–Ž—Š’˜—ȱ˜ȱŽ›’’Žȱȱ
ž‹•’Œȱ¡™Ž—’ž›Žœȱ
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 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 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

(...continued)
2236, January 18, 2007.
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.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Řȱ

Ž’ŒŠ’ȱŽž•Š’˜—ȱ˜ȱ ˜ŸŽ›—–Ž—Š•ȱ›˜Ÿ’Ž›œȱ
ȱ
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.
˜œȱ’–’ȱ˜›ȱ›˜Ÿ’Ž›œȱ™Ž›ŠŽȱ‹¢ȱ—’œȱ˜ȱ ˜ŸŽ›—–Ž—ȱŠ—ȱ
•’–’—Š’˜—ȱ˜ȱŠ¢–Ž—ȱ•Ž¡’‹’•’¢ȱ˜ȱŠ¢ȱž‹•’Œȱ›˜Ÿ’Ž›œȱ’—ȱ
¡ŒŽœœȱ˜ȱ˜œȱ
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 limit on payments to governmental providers that do not exceed cost.

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.
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.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
řȱ

Ž’ŒŠ’ȱŽž•Š’˜—ȱ˜ȱ ˜ŸŽ›—–Ž—Š•ȱ›˜Ÿ’Ž›œȱ
ȱ
ŽŽ—’˜—ȱ˜ȱŠ¢–Ž—œȱ
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.
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
™™˜œ’’˜—ȱ˜ȱ‘Žȱž•Žȱ
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.
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 lawsuit asks the court to reject the rule on three grounds: that CMS has
overstepped its authority in limiting intergovernmental transfers, that Congress has barred the

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.)
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Śȱ

Ž’ŒŠ’ȱŽž•Š’˜—ȱ˜ȱ ˜ŸŽ›—–Ž—Š•ȱ›˜Ÿ’Ž›œȱ
ȱ
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:
(1) The rule defines “units of government” more narrowly than 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
Indeed, a ruling in this case, filed on May 23, 2008, found the latter claim compelling. U.S.
District Court Judge James Robertson has prohibited the implementation of the final rule.14 The
rule was vacated and the matter returned to the agency. In response to the ruling, a spokesman for
CMS suggested that the judge’s finding is technical in nature only and that the substance of the
rule will ultimately be upheld.15
Congress has taken action as well. In May of 2007, Congress enacted a one-year moratorium on
the implementation of the rule.16 That moratorium was extended until April 1, 2009, as part of
H.R. 2642, The Supplemental Appropriations Act of 2008 (the War Supplemental), signed by the
President on June 30, 2008. This moratorium would be further extended to July 1, 2009, via the
American Recovery and Reinvestment Bill of 2009 that was approved by the House Energy and
Commerce Committee on January 22, 2009.


13 http://www.naph.org/naph/Communications/Litigation_backgrounder_FINAL.pdf.
14 U.S. District Court for the District of Columbia, Alameda County Medical Center,
et al. v. Michael O. Leavitt, Secretary, U.S. Department of Health and Human Services, et al., Civil Action No. 08-
0422.
15 Reichard, John, Judge Blocks Rule Cutting Payments to Hospitals for the Poor, CQ Healthbeat News, May 23, 2008.
16 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.
˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
śȱ

Ž’ŒŠ’ȱŽž•Š’˜—ȱ˜ȱ ˜ŸŽ›—–Ž—Š•ȱ›˜Ÿ’Ž›œȱ
ȱ
ž‘˜›ȱ˜—ŠŒȱ —˜›–Š’˜—ȱ

Elicia J. Herz

Specialist in Health Care Financing
eherz@crs.loc.gov, 7-1377


Œ”—˜ •Ž–Ž—œȱ
Jean Hearne wrote the original version of this report.



˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Ŝȱ