Currently, state Medicaid programs have flexibility in developing payment policies, including utilizing supplemental payments and non-federal supplemental payment mechanisms. Supplemental payments pay providers above what they receive for an individual service through Medicaid provider rates. Supplemental payments include disproportionate share hospital (DSH) and upper payment limit (UPL) payments and are a critical funding source for many safety net providers. States can fund the non-federal share of these payments through intergovernmental transfers, provider taxes, and certified public expenditures.
However, there is limited transparency and data available on supplemental payments. As a result, states can use these funding structures to increase their total federal Medicaid match. The total percentage of federal funding for each state’s Medicaid program is often referred to as the effective Federal Medical Assistance Percentage (FMAP). However, due to data limitations on supplemental payments, we do not know what any state's effective FMAP actually is.
The American Health Care Act is the House Republican bill to repeal and replace the Affordable Care Act. Its details became available March 6th. This bill changes the structure of Medicaid supplemental payments, with the exception of DSH payments. States’ reaction to the bill will tell us more about Medicaid supplemental payments than we've ever known, and whether the financing system in the proposed bill will provide equivalent federal funding.
Medicaid supplemental payments and non-federal supplemental payments allow states to develop further financing mechanisms to claim federal match funds. Although some state specific studies have shown that supplemental payments account for more than half of payments to providers, there is limited transparency and incomplete data available on these payments. This therefore limits our general understanding of spending in the Medicaid program.
With this much money at stake, states’ reaction to the bill will be most telling if they think the per capita cap financing will decrease their overall federal Medicaid funding. Under the per capital cap system created in the American Health Care Act, each enrollee category is adjusted for non-DSH supplemental payments. This ratio is excluded when calculating the per capita cap for each enrollment category. However, the non-DSH supplemental payment ratio is applied on top of the baseline calculated for each enrollee categories’ per capita cap. As a result, states can continue to make non-DSH supplemental payments. However, they will be limited in the amount of funding available because the amount is derived based on FY 2016 non-DSH supplemental spending and there is a penalty for exceeding the cap. Additionally, they would need to identify their FY 2016 total non-DSH spending. The process of identifying and verifying those non-DSH supplemental payments is far from clear.
In the bill, year-to-year increases in per capita caps will be derived from the medical care component of the consumer price index for urban consumers (MCPI-U). It is likely that, with a fixed pot of money, supplemental payments will be crowded out quickly if states start to feel budgetary pinch from the caps. We do not yet know if the MCPI-U is enough for states to move forward and embrace the per capita cap with these changes to supplemental payments. Is a baseline in payments tied to MCPI-U enough to make states happy? Not if they were doing far better through a system that allows supplemental payment streams. We will soon learn the answer.
*This post was originally published on March 8, 2017 and was updated on March 22, 2017.