November 9, 2000
The Honorable Michael Hash Dear Administrator Hash: This letter sets forth my comments on the proposed rule relating to the Medicaid Upper Payment Limit (UPL) requirements, 65 Fed. Reg. 60151 (October 10, 2000). I am pleased that HCFA is moving forward to close this loophole which threatens the integrity and viability of the Medicaid program. As Ranking Member of the Commerce Committee with sole jurisdiction over Medicaid, I have a longstanding interest in ensuring the Medicaid program remains a viable health insurance program for the millions of Americans who depend on it for their care. The program will maintain public support only if it maintains public trust. I appreciate your commitment to ensuring this is the case. The proposed rule addresses a major threat to the integrity of the Medicaid program. The clearest example of the problem we are facing was outlined in work done in the State of Pennsylvania by the Office of the Inspector General (OIG) earlier this year. In Pennsylvania, 20 counties borrowed $695.6 million from a bank and transferred this money to a transaction account maintained by the state Medicaid agency. The state agency added a $1.5 million "transaction implementation fee" to the account, then transferred $697.1 million to the counties’ bank accounts and claimed $393.3 million in federal Medicaid matching funds. The counties used these payments to satisfy the bank loans and transferred the transaction implementation fee to a county commissioners’ association account. According to the OIG, "[n]one of the supplementation payments reached the participating nursing facilities, and the Medicaid residents received no additional services. Pennsylvania retained the entire $393,342,145 in federal financial participation to use as it pleased." This had the effect of raising the state’s federal matching rate from the statutory rate of 54 percent to 65 percent. The proposed rule would impose a new aggregate upper payment limit on hospitals, nursing facilities, and ICFs/MR owned or operated by local governments, including county nursing facilities. It would eventually limit aggregate payments to all county nursing facilities in a state to a reasonable estimate of what would have been paid for those services under Medicare payment principles. For states with non-compliant approved state plan amendments that were in effect before October 1, 1999, there is a three-year phase-down of federal matching payments in excess of the new UPL or, if lower, the base state FY 2000 payments. During state FY 2001 and 2002, such states could continue their current practices. In Pennsylvania’s case, this would allow the state to continue its one-day transfers of $393 million until 2002. Thereafter, it would have an additional three-year phase-down of excess federal matching payments. In other words, it will not be until many years out that Pennsylvania will actually be subject to the full proposed UPL limit with respect to payments to county nursing facilities. While I am pleased that the proposed rule seeks to address the problem posed by the Pennsylvania scheme and others like it, I believe that the rule has three main shortcomings which I hope to see addressed in the final version to be published shortly. 1. The proposed transition period appears overly long, particularly with respect to states that have been using the scam to generate federal dollars that are not applied to either Medicaid or other health care programs. I have concerns with the transition period proposed in the rule because, for example, it legitimizes the Pennsylvania scheme in its entirety for two additional years and allows additional excess federal payments for an additional three years without any requirement that the hundreds of millions of excess federal funds generated by the scheme actually be applied to the cost of care of the county nursing home residents eligible for Medicaid or to the care of other Medicaid beneficiaries. The proposed transition policy does not require that the excess federal matching payments be "consistent with efficiency, economy, and quality of care" as required under 1902(a)(30)(A) of the Social Security Act or even, on a more basic level, that the money be spent on any health care purpose related the low-income or uninsured. Moreover, the proposed rule does not require that the state report its disposition of these excess federal payments. I understand the desire to minimize disruption, and thus understand the need for some type of transition period. However, I am particularly offended by scams that generate additional money for state coffers and have no link to the provision of health care at all. I do not believe these bad actors should be rewarded with a lengthy period during which they can perpetuate their improper actions. I do recognize that some states may be channeling this additional money to fund care under Medicaid or other state health care programs for the low-income or uninsured and hope that the final rule will make some accommodations to minimize disruption in such instances. Therefore, I encourage you to ensure that the final rule is more stringent in dealing with programs where excess funds are not linked directly to the provision of services in either Medicaid or another health care programs. Additionally, I believe that all states should be required to account for the expenditure of these excess funds. 2. The proposed UPL rule would allow payment to certain facilities well in excess of costs incurred with little rationale for such a policy. The proposed rule would set the UPL for payment to non-state-owned or operated public hospitals and outpatient hospital and clinic services at 150 percent of a reasonable estimate of what would have been paid or those services under Medicare payment principles (after the end of a transition period). The rationale for this 150 percent threshold is that the higher Medicaid payments will more fully reflect the value of public hospitals’ services to Medicaid and the population it serves and are needed to ensure that these hospitals remain available to fulfill their mission and fully serve the Medicaid population. There is no question about the value of public hospitals. They are a critical component of the nation’s safety net and we all have a strong interest in preserving the health of these institutions. However, this same rationale could just as easily be applied to state-owned public hospitals or public nursing homes. And, there is no explanation of why the threshold should be the same for every public hospital or why it is set at 150 percent as opposed to 133 percent or 200 percent. In short, this limit appears to be arbitrary and only invites extension to other categories as well. Moreover, there is already an existing approach to assisting public hospitals that is far more consistent with the efficiency, economy, and quality of care and that is more likely to result in funds actually going to these safety net providers: the disproportionate share hospital (DSH) program. While Medicaid DSH payments are expressly exempt by the current and proposed UPLs, the preamble of the proposed rule does not explain why this established mechanism for delivering additional Medicaid revenues to public hospitals for the care of Medicaid and uninsured patients is inadequate, perhaps justifying the 150 percent limit. I recognize that the reductions in Medicaid DSH funding in the 1997 Balanced Budget Act are ill-advised and should be corrected. Congress is currently taking steps to do so. HCFA’s responsibility is to ensure that available DSH funds are targeted effectively to public hospitals and to address the threat posed to the Medicaid program by schemes such as Pennsylvania’s. The proposed rule does not adequately carry out this responsibility because it does not coordinate the two payment streams and does not ensure that public hospitals and the patients they serve actually benefit from the additional federal payments allowed under the 150 percent limit. I encourage you to revisit this section of the proposed rule to address these concerns. 3. The proposed rule would not ensure that local public hospitals or nursing facilities retain any portion of the Medicaid payments. The preamble indicates that the final rule will require payments made to public hospitals under the 150 percent limit be separately identified and reported to HCFA. This requirement is far different, however, than requiring that payments actually be retained by public hospitals, rather than transferred back to the state for its general treasury (or for drawing down additional federal Medicaid matching funds). I also note that this problem would be present for public hospitals even under a 100 percent limit, as well as for county nursing facilities (or non-state-owned ICF/MRs) made under the 100 percent limit applicable to those classes of facilities. In short, the proposed rule does not address the basic violation inherent in schemes like those in Pennsylvania: the state is not making a real "expenditure" for a covered nursing home services for an eligible Medicaid resident. Instead the money does not leave the bank except when the state transfers the $393 million in federal matching funds from its account to the state general treasury. By imposing an aggregate UPL limit, the proposed rule would limit the total amount of aggregate funds that Pennsylvania or other states like it could claim in connection with such transactions. But, it would not limit the amount of these funds that could continue to be diverted to non-Medicaid purposes by paying some or all of the public hospitals or nursing homes less than their costs of caring for Medicaid beneficiaries. To remedy this, the final rule should stipulate that payments are not consistent with the UPL requirements unless they are retained by the public hospitals or nursing homes to which they apply and which are used by those facilities to meet the costs of delivering care to Medicaid and uninsured patients. Consistent with state flexibility, this would not require a state Medicaid program to pay a public hospital or public nursing home at a rate that covers its reasonable cost of treating a Medicaid patient. However, it would prevent a state that pays these facilities less than their costs from claiming that it had in the aggregate paid their cost and drawing down federal Medicaid matching funds based on this illusory expenditure. Such a requirement would improve the targeting of federal Medicaid funds to public hospitals and nursing homes facing fiscal stress as well as advance the fundamental purpose of the Medicaid program of assisting states in paying the cost of basic health and long-term care services for eligible Medicaid beneficiaries. I appreciate the efforts you are undertaking to swiftly close a regulatory loophole which if left unchecked, could seriously undermine the long-term viability of the Medicaid program. I hope that you will consider seriously incorporating my comments which I believe further strengthen the proposed rule. With every good wish. Sincerely,
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