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Building on changes implemented by both the Clinton and Bush administrations earlier this year, the proposed rule would revise Medicaid's "upper payment limit" rules to prevent states from increasing the federal share of Medicaid costs. The new rule would limit state Medicaid program payments for services provided at certain hospitals to the estimated amount that the Medicare program would pay for the same services.

The proposed rule would limit a provision of an earlier regulation published Jan. 12, 2001, that allowed states to make overall payments to non-state government owned or operated hospitals of up to 150 percent of the estimated amount that would be paid under Medicare for the same services. Instead, the proposed rule would limit these payments to 100 percent of estimated Medicare payments, which is the limit for all other hospitals.

To help states adjust to the change, the proposed rule continues the transition provisions included in the January rule. These transition periods would:

• gradually reduce payments to 100 percent during the 5- or 8-year transitions for six states with long-established
• programs, and
• continue the 1- and 2- year transitions in other states with newer programs.

"We know that some states have come to rely on these funds over a period of years," Secretary Thompson said. "Other states have recently discovered this mechanism and want to use it to refinance their state budgets. We believe this regulation strikes the right balance by phasing out these excessive payments so Medicaid beneficiaries continue to get the services they need, while assuring that federal Medicaid money is used for Medicaid services."

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.

In recent years, Medicaid's "upper payment limit" regulations have allowed a number of states to make Medicaid payments to non-state government-owned or -operated facilities that far exceed actual reimbursed expenses. Many of those states then required those facilities to return some or all of the excessive payment to the state through intergovernmental transfers. This practice effectively resulted in states obtaining excessive federal Medicaid payments without putting up the state share required by law or assuring that the additional money was being used for Medicaid-related expenses.

"To ease the potential effect of this proposal on states that have used this funding mechanism for a long time, we continue to allow states to phase out the practices slowly during the substantial transition periods included in the January rule," Centers for Medicare & Medicaid Services Administrator Tom Scully said. "Our goal is to protect the integrity of the Medicaid program while ensuring that Medicaid beneficiaries continue to receive quality care and services."

The proposed rule will be published in the Federal Register on Nov. 23, with a 30-day public comment period. CMS will review all comments received and, if appropriate, make changes before issuing a final rule.

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