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The final regulation revises Medicaid's "upper payment limit" rules, ending certain accounting techniques to inappropriately obtain extra federal Medicaid matching funds that are not necessarily spent on health-care services for Medicaid beneficiaries. The changes announced today will be phased in to allow states time to adjust their Medicaid programs to meet the new requirements. The final rule also allows a higher limit on payments for public hospitals in recognition of the higher costs that these facilities incur. The final rule is projected to save an estimated $55 billion over the next 10 years.

On Dec. 21, 2000, the President signed the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000, which directed the Secretary of Health and Human Services to publish this final rule. The law further stipulated that the final rule include a longer transition period for certain states. The final rule, which incorporates that change, will be published next week in the Federal Register and will take effect in 60 days.

Medicaid is a state and federal partnership that pays for health-care services to certain low-income families and individuals, including children and elderly nursing-home residents. Each state administers its Medicaid program within the general requirements of federal law and regulations, and the state and federal governments share the cost of the program.

States have broad flexibility in setting the Medicaid rates that they pay to nursing homes, hospitals and other providers. Under previous Medicaid regulations, some states have used this flexibility to pay excessive rates to a few county or municipal facilities. After a state claimed federal matching funds based on those payments, it could require those facilities to return some or all of the extra money to the state's general fund for other uses in the state, often unrelated to Medicaid and in some cases unrelated to health care at all.

The use of this loophole had grown rapidly in the past year. Currently, 25 states have approved plans that implement programs supporting the loophole, accounting for nearly $2 billion in increased Medicaid costs in fiscal year 2000 alone.

The new final rule makes clear that it is simply closing a loophole that has allowed some states to draw down extra federal matching Medicaid funds inappropriately.

The final rule sets out three timeframes to allow adequate time for states that have come to rely on the practice to phase out their use of the loophole. States that used the practice before
Oct. 1, 1992, will have eight years to come into compliance with the new upper payment limits, as stipulated in the Benefits Improvement and Protection Act. States that started using the practice after Oct. 1, 1992, but before Oct. 1, 1999, have five years to come into compliance. Other states with plans that have lapsed into approval would have a shorter two-year transition period. The final rule will not reduce federal Medicaid funding for any state during its 2001 budget year.

In addition, recognizing the financing challenges facing hospitals that serve large numbers of low-income and uninsured patients, the administration supported the increase in Medicaid disproportionate share hospital payments recently passed by Congress. The administration also supported the increase in the hospital-specific limits on DSH payments to 175 percent of net uncompensated care costs beginning in 2002. Under current law, Medicaid disproportionate share payments to these hospitals are capped at 100 percent of their costs for treating uninsured patients plus any costs for treating Medicaid patients that are not covered by the Medicaid reimbursements that they receive. These increases will help ensure the viability of large urban safety-net hospitals.

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