Order Code RL34764
Medicaid Regulatory Issues
November 26, 2008
Elicia J. Herz
Specialist in Health Care Financing
Domestic Social Policy Division
Vanessa K. Burrows
Legislative Attorney
American Law Division

---

Medicaid Regulatory Issues
Summary
This report provides a summary of seven proposed and final rules affecting the
Medicaid program that were issued by the Bush Administration during 2007 and
2008. Six of the seven rules are currently under a congressional moratorium on
further administrative action until April 1, 2009. A description of possible
administrative and legislative actions to modify these rules, which could be taken by
the next administration or the 111th Congress, is also provided.

---

Contents
Graduate Medical Education (GME) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Cost Limit for Public Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Provider Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Rehabilitative Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Case Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
School-Based Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Outpatient Hospital Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Options for Administrative and Legislative Actions . . . . . . . . . . . . . . . . . . . 5
List of Tables
Table 1. Status of Medicaid Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

---

Medicaid Regulatory Issues
Medicaid finances the delivery of primary and acute care medical services, and
long-term care, for certain low-income populations, including nearly 63 million
individuals in FY2008. Combined federal and state spending currently exceeds $300
billion each year. It is the largest or second-largest item in state budgets, and is
second only to Medicare in terms of federal spending on health care.
During 2007 and 2008, the Centers for Medicare and Medicaid Services (CMS),
the federal agency that administers Medicaid, issued a number of regulations for this
program. Seven regulations were the subject of considerable controversy in the 110th
Congress. Each of these regulations, to differing degrees, would limit payments for
certain services and/or affect payments to providers. As per the Supplemental
Appropriations Act, 2008 (P.L. 110-252, Section 7001), six of these seven rules are
currently under a congressional moratorium preventing further administrative action
until April 1, 2009 (see Table 1). The seventh rule affecting outpatient hospital
services was published as a final rule in the Federal Register on November 7, 2008,
and will become effective, absent any congressional action, on December 8, 2008.
Graduate Medical Education (GME)
Most states make Medicaid payments to help cover the costs of training new
doctors in teaching hospitals and other teaching programs. Historically, Medicare
and most Medicaid programs have recognized two components of GME costs: (1)
direct graduate medical education, or DGME (e.g., resident salaries, teaching
supervision), and (2) indirect graduate medical education, or IME (e.g., higher patient
care costs because of additional tests ordered by residents). CMS argued that GME
payments are not authorized in Medicaid statute, are not included in the list of
services considered to be “medical assistance,” and are not recognized in the
Medicaid statute as a component of the costs of hospital care. The proposed rule
would eliminate federal reimbursement for both DGME and IME under Medicaid.
The rule would also change the way in which the Medicaid upper payment limit for
hospital services is calculated, which would further reduce the federal share of
Medicaid costs for hospitals. Opponents argued that the rule represents a reversal of
long-standing Medicaid policy, that there are references to GME payments in both
Medicaid statute and regulations, that GME payments have previously been explicitly
recognized by CMS, and that the statute is broadly drafted, and even accompanying
regulations do not itemize every element of reimbursable costs. (For more details,
see CRS Report RS22842, Medicaid and Graduate Medical Education.)
Cost Limit for Public Providers
Intergovernmental transfers (IGTs) are one method used by some states to
finance the non-federal share of Medicaid costs. Certain IGTs are specifically

---

CRS-2
allowed for funding the state share of program costs (e.g., local units of governments
such as counties may contribute to the state share of Medicaid costs). Current federal
law 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. Some states have
instituted programs where all or portions of the Medicaid state share is paid by
hospitals or nursing homes that (1) are public providers, but not units of government;
or (2) are units of government, but the state share is returned to the provider
sometimes through inflated Medicaid payments. The purpose of such financing
arrangements is generally to draw down additional federal matching funds for which
a state share may not otherwise be available.
A final rule issued by CMS clarifies the types of IGTs 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. The rule also establishes
documentation requirements to substantiate that a governmental entity is making a
certified public expenditure (CPE) when contributing to the state share of Medicaid
costs. Opponents of the rule argued that CMS overstepped its authority to limit IGTs,
when Congress explicitly allows such transfers. Governors expressed fear that the
rule would inappropriately shift costs to states at a time when some states were facing
difficult fiscal situations. In addition to the moratorium on further administrative
action on this rule, a federal court held, in May, 2008, that the rule had been
“improperly promulgated” and remanded the rule back to CMS for further action.
Alameda County Medicaid Center v. Leavitt, 559 F.3d 1 (D.D.C. 2008). However,
the moratorium prohibits CMS from “tak[ing] any action (through the promulgation
of regulation, issuance of regulatory guidance, or other administrative action)” with
regard to the proposed and final rules prior to April 1, 2009. (For more details, see
CRS Report RS22848, Medicaid Regulation of Governmental Providers.)
Provider Taxes
Provider-specific taxes have been used by many states over the last two decades
to help pay for the costs of the Medicaid program. Under these funding methods,
states collect funds (through taxes or other means) from providers and pay the money
back to those providers as Medicaid payments, and claim the federal matching share
of those payments. States are essentially “borrowing” their required state matching
amounts from the providers. Once the state share has been netted out, the federal
matching funds claimed may be used to raise provider payment rates, to fund other
portions of the Medicaid program, or for other non-Medicaid purposes. Such taxes
are required to meet a number of federal laws and regulations, some of which have
been in flux recently. CMS issued a final rule that would (1) revise the threshold for
determining if a tax program is required to undergo a test to determine whether a
provider is being “held harmless” for the tax payment and clarify use of the term
“revenues,” (2) clarify standards for determining the existence of a hold harmless
arrangement, (3) codify one class of health care services permissible for establishing
health care provider taxes, and (4) remove obsolete language. Opponents of this rule
expressed concern that it reduces consistency and clarity, that its changes exceed the
Secretary’s authority, and that it would impede a state’s ability to condition Medicaid
reimbursements on payment of required taxes. (For more details, see CRS Report
RS22843, Medicaid Provider Taxes.)

---

CRS-3
Rehabilitative Services
Medicaid rehabilitation services include a full range of treatments designed to
reduce physical or mental disability or restore eligible beneficiaries to their best
possible functional levels. Both the executive and legislative branches have
addressed this benefit. For example, in recent annual budget submissions, the Bush
Administration proposed administrative changes to reduce Medicaid rehabilitation
expenditures. Congressional and executive branch oversight organizations have
documented inconsistent policy guidance and states’ practices for claiming federal
matching funds that failed to comply with Medicaid rules. The current proposed rule
was intended to more clearly define the scope of the rehabilitation benefit and
identify services that could be claimed as rehabilitation under Medicaid. Opponents
of this rule are concerned that it creates new administrative barriers and restricts
access by tightening the definition of rehabilitation. Others argue this rule could
reduce a key funding stream for community-based mental health services, resulting
in reduced access to such services and increased reliance on institutional care for
individuals with mental retardation and developmental disabilities. (For more
details, see CRS Report RL34432, Medicaid Rehabilitative Services.)
Case Management
Case management services assist Medicaid beneficiaries in obtaining needed
medical and related services. Targeted case management (TCM) refers to case
management for specific beneficiary groups or for individuals who reside in state-
designated geographic areas. The Bush Administration proposed legislative changes
to reduce Medicaid TCM expenditures in recent annual budget submissions. In the
Deficit Reduction Act of 2005 (DRA; P.L. 109-171), Congress added new statutory
language to both clarify and narrow the definition of case management and directed
the Secretary of HHS to issue regulations to guide states’ claims for federal matching
dollars for TCM. A proposed rule was issued which became final in March, 2008.
All Medicaid authorities, related to all case management services, including TCM
and services delivered through waivers, are subject to this rule. It also directly
addresses case management issues that previously might have been considered open
to interpretation. Opponents of this rule argue that it is more restrictive than
Congress intended in DRA, and would result in cuts to TCM services since
alternatives to Medicaid funding are scare. In addition, the new administrative
requirements and complexities of the rule may increase state costs while decreasing
provider participation and beneficiaries’ access to quality medical care. (For more
details, see CRS Report RL34426, Medicaid Targeted Care Management (TCM)
Benefits.)
School-Based Services
As a condition of accepting funds under the Individuals with Disabilities
Education Act (IDEA), public schools must provide special education and related
services necessary for children with disabilities to benefit from a public education.
Generally, states can finance only a portion of these costs with federal IDEA funds.
Medicaid can cover IDEA required health-related services for enrolled children as
well as related administrative activities. According to federal investigations and

---

CRS-4
congressional hearings, Medicaid payments to schools have sometimes been
improper. To address these problems, CMS issued a final rule that restricts federal
Medicaid payments for school-based administrative activities (e.g., outreach, service
coordination, referrals performed by school employees or contractors), and for certain
transportation services (e.g., from home to school and back for certain school-age
children). Opponents of this rule argue that it will reduce the availability of, and
access to, needed health care for children, is inconsistent with decades of approved
state plan amendments allowing federal funding of these administrative and
transportation services, and falsely assumes that health care administrative activities
performed by school personnel are inconsistent with the proper and efficient
administration of the state Medicaid plan because such activities improve children’s
health, reduce inappropriate medical care utilization, and thus ultimately save money.
(For more details, see CRS Report RS22397, Medicaid and Schools.)
Outpatient Hospital Services
Under Medicaid, outpatient hospital (OPH) services are a mandatory benefit for
most beneficiaries. OPH services include preventive, diagnostic, therapeutic,
rehabilitative, or palliative services provided under the direction of a physician or a
dentist in the hospital. These outpatient facilities may be located on or off the
hospital campus or in satellite facilities. States use a number of different
reimbursement methods for different types of services provided in OPH departments
and clinics. The proposed and final rules issued by the Bush Administration would
limit the definition and scope of Medicaid outpatient services in a hospital facility,
hospital clinic, or rural health clinic to include only those facility services (1) that
Medicare pays for under its outpatient prospective payment system (OPPS) or is
recognized by Medicare as an OPH service under an alternate payment methodology,
(2) provided by an outpatient hospital facility, including only those entities that meet
standards for provider-based status as a department of an outpatient hospital as
defined in Medicare rules, and (3) not covered under the scope of any other Medicaid
benefit category.
Opponents of this provision of the rule argue that it would exclude many of the
costs that states now consider in calculating certain supplemental payments to
qualifying hospitals (called disproportionate share or DSH payments), which would
in turn limit such DSH payments to these hospitals. In addition, this provision
would exclude federal matching funds for OPH programs that provide required
diagnostic and treatment services for persons under age 21 that may not be covered
under Medicare. Others argued that, because the OPH rule incorporates the new
definition of hospital categories adopted in the final rule regarding cost limits on
government providers (described above), this rule violated the moratorium on
implementing any provision of the rule on cost limits for government providers. On
the other hand, given this moratorium, CMS elected to exclude from its final OPH
services rule the proposed regulatory language delineating methods for demonstrating
compliance with the upper payment limit for Medicaid OPH and clinic services
provided in privately operated facilities. Currently, there is no congressional
moratorium on this final rule. Without other legislative action, this rule will become
effective on December 8, 2008. (For more details, see CRS Report RS22852,
Medicaid and Outpatient Hospital Services.)

---

CRS-5
Options for Administrative and Legislative Actions
The next administration may wish to change some or all of these Medicaid
regulations. For final rules that have already been published in the Federal Register,
the only avenue for changing or rescinding such rules is through the rulemaking
process. The Administrative Procedure Act (APA) defines “rulemaking” to include
the process for “amending or repealing a rule.”1 Section 553 of the APA establishes
the general procedures that an agency must follow when promulgating, and thus
when amending or repealing, a rule.2 Agencies must publish a notice of proposed
rulemaking, provide an opportunity for the public to submit comments, and publish
a final rule and a general statement of basis and purpose in the Federal Register “not
less than 30 days before its effective date.”3 The APA permits agencies to forego
notice and comment and to make a rule effective immediately under the “good cause”
exception in 5 U.S.C. § 553. However, an agency’s use of the good cause exception
is subject to judicial review.
For the six regulations currently under the congressional moratorium, either
before or after April 1, 2009 (when the existing moratorium ends and both the final
rules and the interim final rule would become effective), the agency could decide to
use the notice-and-comment rulemaking process to repeal the six final rules.
Additionally, the agency may use the notice-and-comment process to amend or repeal
the outpatient hospital services rule not subject to this moratorium that will become
effective on December 8, 2008. Agencies possess inherent authority to amend or
repeal their rules.4 An interested party may also petition for the amendment or repeal
of a rule pursuant to 5 U.S.C. § 553(e).5
An agency may decide to amend or repeal an existing regulation for a wide
variety of reasons, ranging from a change in Administration, to a change in the
statutory or regulatory environment, to a determination on the part of the agency that
a different standard is preferable.6 Rule modifications are subject to substantive
review by the courts. In Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Ins. Co.,
which addressed the rescission of a rule put in place by the Carter Administration, the
Supreme Court established that heightened scrutiny is required in instances where an
agency has abruptly changed a settled course of agency action, depending on the
scope and impact of the modification of the rule: “an agency changing its course by
1 5 U.S.C. § 551(5).
2 Homemakers North Shore, Inc. v. Bowen, 832 F.2d 408, 413 (7th Cir. 1987).
3 5 U.S.C. § 553.
4 See Committee for Effective Cellular Rules v. FCC, 53 F.3d 1309, 1317 (D.C.Cir. 1995).
5 “Each agency shall give an interested person the right to petition for the issuance,
amendment, or repeal of a rule.” 5 U.S.C. § 553(e).
6 See, for example, Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc., 467
U.S. 837 (1984) (stating “[a]n agency interpretation is not instantly carved in stone,” id. at
863, and explaining that an agency is under a continuing obligation to ensure that a
regulation is reasonable by evaluating “varying interpretations and the wisdom of its policy
on a continuing basis.” Id. at 863-64).

---

CRS-6
rescinding a rule is obligated to supply a reasoned analysis for the change.”7
However, a change in an agency’s settled course of action is not fatal to the rule if a
reasoned analysis is provided. As the Supreme Court said in Nat’l Cable &
Telecomms. Ass’n v. Brand X Internet Servs., “[u]nexplained inconsistency is, at
most, a reason for holding an interpretation to be an arbitrary and capricious change
from agency practice under the [APA].”8 The Court went on to cite both “changed
factual circumstances [and] a change in administrations” as events that could lead an
agency to reverse its previous policy, where the agency’s policy change may still
receive deference from a reviewing court.9
Additionally, the next administration could issue a memorandum or other
document directing the agency to not enforce the rules or to temporarily suspend the
rules, as incoming presidential administrations have done soon after they assumed
office. However, a rule’s suspension itself constitutes a rulemaking under the APA,
therefore it is axiomatic that a suspending agency is required to comply with the
APA’s notice and comment procedures in implementing a stay.10 Alternately,
Congress could pass legislation to reinstate or extend the prior moratorium, to direct
the agency not to enforce the rules, to direct the agency to repeal the rules, or directly
override the rules. Congress could also withhold funding from the agency for the
enforcement of the rules or take other measures through the appropriations process.11
If the next administration were to change a final or interim final rule through
administrative action (e.g., issue a new modified rule), it would not be legally
required to come up with an offset in the FY2010 budget. However, the recent
historical practice is that both the Clinton and Bush Administrations required
agencies to propose administrative actions and pay for such actions in their HHS
budget proposals (e.g., a corresponding savings appeared elsewhere in the budget).
This was also required outside the process of developing a budget.
7 463 U.S. 29, 41-42 (1983). This heightened scrutiny is known as the “hard look” doctrine.
However, some courts have rejected the idea of applying heightened scrutiny to changes in
settled agency policy. See Center for Auto Safety v. Peck, 751 F.2d 1336 (D.C. Cir. 1985)
(“The Supreme Court has made clear that ‘the same test’ applies to the rescission or
modification of a rule as to its initial promulgation — the ‘arbitrary or capricious’ standard
of 5 U.S.C. § 706(2)(A) (1982) — and that there is ‘no difference in the scope of judicial
review depending upon the nature of the agency’s action.’ State Farm, 103 S. Ct. at 2866.
The same ‘presumption ... against changes in current policy that are not justified by the
rulemaking record,’ id., exists whether those changes consist of enacting a new rule or of
revoking or modifying an old one. To overcome the presumption the agency ‘must examine
the relevant data and articulate a satisfactory explanation for its action.’ Id.”).
8 545 U.S. 967, 981 (2005).
9 Id.
10 See Council of the Southern Mountains v. Donovan, 653 F.2d 573 (D.C. Cir. 1981);
National Federation of Federal Employees v. Devine, 671 F.2d 607 (D.C. Cir. 1982);
National Resources Defense Council v. EPA, 683 F.2d 752 (3d Cir. 1982); Environmental
Defense Fund v. Gorsuch, 713 F.2d 802 (D.C. Cir. 1983); Environmental Defense Fund v.
EPA, 716 F.2d 915 (D.C. Cir. 1983).
11 See CRS Report RL34354, Congressional Influence on Rulemaking and Regulation
Through Appropriations Restrictions, by Curtis W. Copeland.

---

CRS-7
The Congressional Review Act (CRA) permits the use of expedited procedures
in the Senate to disapprove agencies’ final rules. The CRA requires that agencies
submit all final rules to Congress before they take effect. If Congress adjourns its
annual session sine die less than 60 “legislative days” in the House of
Representatives or 60 “session days” in the Senate after a rule is submitted to it, then
the rule is carried over to the next session of Congress and is subject to possible
disapproval during that session.
Final rules published after May 2008 may be able to be addressed by the 111th
Congress via the CRA. Among the seven Medicaid rules described in this report, the
CRA would apply only to the final rule on outpatient hospital services. Congress
could also enact legislation that would repeal the other six Medicaid rules. If there
was a legislative change to modify or negate such a final rule, PAYGO would apply
for the Congressional Budget Office’s scoring purposes, if budget enforcement rules
are in effect.
For more information on administrative and legislative actions to change
existing rules, see CRS Report RL34747, Midnight Rulemaking: Considerations for
Congress and A New Administration.

---

CRS-8
Table 1. Status of Medicaid Regulations
Estimated Net
Status and
Effective Date Reduction in Outlays
Rule
Publication Date
for Final Rules
over 5 Years
Medicaid Program; Graduate Proposed rule — 72
Not applicable
$0.8 billion
Medical Education
Federal Register
28930, May 23, 2007
Medicaid Program; Cost
Proposed rule — 72
July 30, 2007
$9.0 billion for final
Limit for Providers Operated Federal Register 2236,
rule
by Units of Government and January 18, 2007; and
Provisions to Ensure the
Final rule — 72
Integrity of Federal-State
Federal Register
Financial Partnership
29748, May 29, 2007
Medicaid Program; Coverage Proposed rule — 72
Not applicable
$1.4 billion
for Rehabilitative Services
Federal Register
45201, August 13,
2007
Medicaid Program; Optional Interim final rule — 72 March 3, 2008
$1.5 billion
State Plan Case Management Federal Register
Services
68077, December 4,
2007.
Medicaid Program;
Proposed rule — 72
February 26,
$4.2 billion for final
Elimination of
Federal Register
2008
rule
Reimbursement under
51397, September 7,
Medicaid for School
2007; and Final rule —
Administration Expenditures 72 Federal Register
and Costs Related to
73635, December 28,
Tranportation of School-Age 2007
Children Between Home and
School
Medicaid Program; Health
Proposed rule — 72
April 22, 2008
$0.6 billion for final
Care-Related Taxes
Federal Register
rule
13726, March 23,
2007; and Final rule —
73 Federal Register
9685, February 22,
2008.
Medicaid Program;
Proposed rule — 72
December 8,
$0.3 billion for
Clarification of Outpatient
Federal Register
2008
proposed rule
Hospital Facility (Including
55158, September 28,
Outpatient Hospital Clinic)
2007; and Final rule —
Services Definition
73 Federal Register
66187, November 7,
2008.
Notes: See Congressional Budget Office, Medicare, Medicaid and SCHIP Administrative Actions
Reflected in CBO’s Baseline, February 29, 2008. For proposed rules, CBO generally assigns a weight
of 50% in its baseline to reflect the uncertainties of the administrative process. After a regulation
becomes final, CBO fully incorporates the projected effects into the baseline (after any applicable
moratorium ends). All rules listed in this table, except the rule on outpatient hospital services, are
subject to a congressional moratorium on further action until April 1, 2009. The reduction in outlays
reported in this table may be lower, given the subsequent extension of the moratoria assumed in CBO’s
analysis.

---