Manatt on Medicaid: CMS Introduces Time-Limited MMC Supplemental Payments

by Manatt, Phelps & Phillips, LLP
Contact

Editor's Note: This Manatt on Medicaid is the third in a series of updates focused on CMS's new Medicaid/CHIP managed care regulations. In the coming weeks, Manatt will be exploring key provisions of the regulations and highlighting their implications.

___________________________________

On April 25, 2016, the Centers for Medicare and Medicaid Services (CMS) released its highly anticipated final rule to overhaul the regulations governing Medicaid managed care (MMC) and make conforming changes to state Children's Health Insurance Program (CHIP) regulations. In one of the most significant changes between the proposed and final rule, CMS clarifies and codifies limits on "pass-through" payments—supplemental payments that states require managed care plans to distribute to specific providers—and phases out states' ability to use most pass-through payments by 2022 or 2027, depending on the type of payment. Although CMS describes these payments as inconsistent with basic concepts of managed care and value-based purchasing strategies and imposes limitations that will foreclose the ability of states to make pass-through payments in the long run, it opens the door for a new stream of supplemental payments in the short run. Many states are likely to explore using this new form of supplemental payment, relying on intergovernmental transfers and provider taxes to finance the nonfederal share; it remains to be seen how CMS will view these new payment strategies in the context of its review of states' managed care rates.

In the final rule, CMS defines a pass-through payment as "any amount required by the state to be added to the contracted payment rates, and considered in calculating the actuarially sound capitation rate, between the MCO . . . and hospitals, physicians, or nursing facilities."1 The rule permits states to provide pass-through payments after 2027 (and for some providers, after 2022), only for wrap-around payments to Federally Qualified Health Centers and Rural Health Centers, as well as graduate medical education payments. All other payments not directly linked to services delivered to enrollees under the contract (or bonuses related to outcomes of those services) will be prohibited.

In the preamble, CMS states that this rule codifies a longstanding interpretation of the current prohibition found at 42 C.F.R. § 438.60 on states making payments directly to providers for services covered through the state's contract with the managed care organizations. CMS indicates that it has interpreted this provision as also prohibiting pass-through or supplemental payments to a provider through a managed care plan. CMS also acknowledges that, despite the existing prohibition, many states do direct their plans to make supplemental payments to providers. This is in part because as states have expanded to managed care, their ability to make supplemental payments that are computed based on fee-for-service payments has been shrinking. As CMS notes: "Commonly, states that have moved from [fee-for-service] to managed care have sought to ensure a consistent payment stream for certain critical safety-net hospitals and providers and to avoid disrupting existing [intergovernmental transfer], [certified public expenditures], and provider tax mechanisms associated with the supplemental payments."

Acknowledging the potential disruption for certain providers accustomed to receiving supplemental payments paid through plans, the final rule delineates a process and timeframes for ending these types of payments. The final rule calls out three specific provider types—hospitals, physicians and nursing facilities—that are the primary provider types to which states make supplemental payments and have sought to continue to make pass-through payments through plans. Because of the much heavier reliance on these payments for hospitals, states are provided with a 10-year transition until July 1, 2027 for hospital payments, while payments to physicians and nursing facilities are afforded a 5-year transition until July 1, 2022.

CMS prescribes a phase-down approach for hospital pass-through payments. The process entails:

  • Calculating a base amount of allowable pass-through payments through a four-step process, re-basing annually. CMS likens this process to performing hospital upper payment limit (UPL) calculations under a Medicaid FFS delivery system, which identifies the "UPL gap" by comparing what Medicare would have paid to what Medicaid paid for services. The base amount is calculated annually by applying utilization data from the most recently available data two years prior to the rating period.
  • Reducing the pass-through payment limit annually. States are permitted to make pass-through payments to hospitals of up to 100 percent of the base amount through plan contracts starting on or after July 1, 2017. The limit then ratchets down by ten percentage points for each successive year, so that states are permitted to make pass-through payments to hospitals of up to 90 percent through plan contracts starting on or after July 1, 2018, and so on. States may not make pass-through payments to hospitals through plan contracts on or after July 1, 2027.

CMS does not similarly prescribe an approach for phase-down of pass-through payments to physician and nursing facilities because these are generally smaller payments and the transition period is limited to 5 years.

The clear limits on both the amount and duration of pass-through payments are described as an effort to curtail the use of supplemental payments in Medicaid managed care. CMS, as well as federal oversight bodies, have had longstanding concerns with the use of supplemental payments—particularly those directed through managed care plans. In the preamble to the final rule, CMS underscores its concerns with supplemental payments, emphasizing that pass-through payments limit plans' ability to effectively implement value-based purchasing.

Despite CMS's concerns, as noted, the final rule does not limit the phase-out period to only existing pass-through payments. In other words, CMS does not "grandfather" existing supplemental payments on which safety-net providers may have come to rely. Instead, the rule contemplates states establishing new pass-through payments during the phase-down period, clarifying in the preamble that pass-through payments established in later years of the phase-down period are capped at the same percentage of the base amount as longstanding pass-through payments made in that year.

Further, the phase-out requirements implicitly authorize a new type of supplemental payment—a UPL payment based on services delivered through managed care. Previously, states were able to make UPL payments based only on the difference between what Medicare would have paid and what the state Medicaid agency paid for services delivered through fee-for-service. As described above, under the first step of calculating the base amount for the new pass-through payments, states calculate the difference between what Medicare would have paid and what Medicaid managed care plans paid for services delivered through managed care. As a result, states can now calculate a UPL gap in Medicaid managed care in addition to a UPL gap in fee-for-service. Particularly in states with large Medicaid managed care programs, this presents an opportunity to establish a large, albeit time-limited, new stream of supplemental payments to providers. CMS intends to review new and existing pass-through payments through the managed care rate review process. Given the intent to phase out these payments, new supplemental payments may trigger additional CMS scrutiny.

The final rule allows states the ability to gradually transition existing supplemental payments to more value-based arrangements but also presents states the option of establishing new payments that could interfere with those strategies but help address low provider payment rates and assist safety net hospitals. Much will depend on how states and providers view these choices and on CMS's approach to approving new arrangements.

142 C.F.R. § 438.6(a).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Manatt, Phelps & Phillips, LLP | Attorney Advertising

Written by:

Manatt, Phelps & Phillips, LLP
Contact
more
less

Manatt, Phelps & Phillips, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.