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Medicaid agency cuts supplemental funding as state proposals soar

The Centers for Medicare & Medicaid Services on Jan. 18 issued a final rule further limiting pass-through payments for Medicaid providers, claiming that it became necessary as state proposals for the payments boomed.

The latest rule is another step in the process of ending the use of pass-through payments in managed-care contracts entirely over the next decade, a strategy laid out by CMS in a May 6, 2016, rule.

Pass-through payments, or additional funds allotted to states to pass on to hospitals, doctors and facilities, have traditionally been used to encourage providers to treat Medicaid beneficiaries and cover costs of managed care. The new limitations have drawn criticism from providers that felt it would limit state flexibility and put more pressure on safety net hospitals and clinics.

Last year's rule gave states until July 1, 2017, to begin phasing out contracts with pass-through payments, while the new rule brings that deadline back to July 5, 2016, and puts new limits on the amount of permitted payments. Hospitals already using pass-through payments will still have 10 years to transition from existing contracts to new payment systems, while physicians and nursing facilities will have five.

CMS said state proposals for pass-through payments have increased significantly since the May 6 rule put a lifespan on their use. It noted one unidentified state that requested up to $275 million in pass-through payments last year and said that two other states were rumored to be working on pass-through payment proposals that would cumulatively cost up to $10 billion. Yet another state informally looked into $200 million towards physician support. None of these proposals have been approved to date, CMS said.

Though it acknowledged that the overall shift away from pass-through payments could lead to reduced state and federal government transfers to hospitals and other facilities, CMS said it could not provide numbers on the scale of that impact.

"While it is difficult for us to conduct a detailed quantitative analysis given this considerable uncertainty and lack of data, we believe that without this final rulemaking, states will continue to ramp-up pass-through payments in ways that are not consistent with [the May 6 rule]," CMS said.

Last year, CMS estimated that 16 states had implemented $3.3 billion in annual pass-through payments for hospitals. Payments for physicians and nursing facilities were much smaller but not insignificant — on average at least eight states allotted $105 million to physicians annually and at least three allotted $50 million to nursing facilities.

CMS said it received 46 comments from hospitals, Medicaid agencies and organizations since it first proposed the newest rule last November. In response to several suggesting that it should wait for the incoming U.S. administration to take office, CMS said that a delay would be contrary to its goals and policies and would make the transition more difficult.

"Pass-through payments are not consistent with our regulatory standards for actuarially sound rates; specifically, because they do not tie provider payments with the provision of services," it said.

Other providers are concerned that adding more requirements now could slow down contract approvals and put unnecessary roadblocks in the transition period. CMS responded that any additional burden to state or federal governments should be minimal.

In a statement, AHA executive vice president Tom Nickels said the rule could hurt both providers and patients.