Medicaid Managed Care Final Rule: Long-awaited pronouncement on permitted uses of state directed payments

The changes that will occur resulting from this Final Rule will ripple throughout the provider community and will define how Medicaid program funding is structured in the coming years 

On April 22, 2024, the Centers for Medicare and Medicaid Services (CMS) issued its long-awaited Medicaid Managed Care Final Rule governing Medicaid and Children’s Health Insurance Program (CHIP) managed care access, finance, and quality (Final Rule). The Final Rule is large and covers many areas, and concurrent regulations governing ensuring access to services. A CMS Informational Bulletin issued as an important codicil to the Final Rule (Informational Bulletin), provides significant enforcement discretion that would be used alongside the more controversial financing provisions in the Final Rule. In Medicaid and CHIP, delivery of services through managed care has become the predominant delivery system, with over 85 percent of beneficiaries receiving some of all of their care through a managed care organization (MCO). This Final Rule will undoubtedly impact most every participant in the Medicaid program across the US, from payor to provider to state to beneficiary.

Section 1902 of the Social Security Act requires that states share in the cost of medical assistance expenditures and permits other units of state and local government to contribute to the financing of the non-federal share of such medical assistance expenditures. Thus, states can leverage other permitted sources of funding to help draw down the federal medical assistance percentage (FMAP) in addition to or in substitution for its own budget appropriations. While there are several permissible methods to finance the non-federal share, all such methods must be structured to prohibit an indirect or direct “hold harmless” arrangement whereby any donation or payment would be positively correlated with the amount of the donation. Thus, no contributor to a tax, intergovernmental transfer (IGT) or other means to finance the non-federal share of the FMAP can be assured that they be “made whole.”

State-directed payments (SDPs) have become a prevalent means for states to implement managed care programs and contracts since CMS established exceptions in 2016 to the general prohibition in the Social Security Act (§ 1903(m)(2)(A)). This prohibition requires that contracts between the states and MCOs provide risk-based payments that are actuarially sound, and states are generally not allowed to direct payments made to providers. The regulation governing the use of SDPs, 42 CFR § 438.6(c), requires the prior written approval of CMS via a preprint, and that SDPs must be financed and documented accordingly.

Managed Care Final Rule

The Final Rule makes several revisions to this regulation to further specify and add to the existing requirements and standards for SDPs. The revisions include new documentation and substantive standards, and new contract term requirements.

While the Final Rule makes a number of changes, the preamble discussion and comment concerning the manner in which the non-federal share of the FMAP is financed, is instructive as guidance as to what CMS believes is occurring. CMS further notes that the applications for SDPs as referenced in the state preprints or other applications, is under substantial scrutiny and will be for the foreseeable future.

In December 2023, the General Accounting Office (GAO) issued a stark warning concerning rapid spending growth in Medicaid SDPs. CMS cites, in its preamble to the Final Rule that “as part of our review of SDP proposals, we are increasingly encountering issues with State financing of the non-Federal share of SDPs, including the use of health care related taxes and IGT arrangements that may not be in compliance with the underlying Medicaid requirements for the non-federal share financing,” citing the GAO report. The GAO report highlighted that CMS in 2020 had approved the use of SDPs in 37 states with spending exceeding US$25 billion. In its report, GAO recommended that CMS enhance fiscal guardrails for SDPs.

CMS specifically cites its knowledge of hold harmless arrangements that “appear to have been prearranged agreements to redistribute Medicaid payments or other provider funds that are replenished by Medicaid payments. These redistributions are not described on the state’s preprint applications.” CMS further states in the preamble, “The fact that these apparent hold harmless arrangements are not made explicit on SDP preprints should not affect our ability to disapprove SDPs when we cannot verify they do not employ redistribution arrangements.”

CMS acknowledges that it is aware of certain arrangements in which Medicaid payments are redirected away from providers that furnish the greatest volume of Medicaid-covered services to providers that deliver fewer or even no Medicaid-covered services with the effect of ensuring that taxpaying providers are held harmless for all or a portion of the cost of the healthcare-related tax. CMS recognizes that, often, this is the only manner in which local provider entities can gain the agreement of other providers to authorize local tax funding for intergovernmental transfers or other taxing mechanisms to support the non-federal share of funding.

In the preamble to the Final Rule, CMS walks the line between signaling significant additional scrutiny of private arrangements and state applications and the recognition that some states may be unaware of private transactions that occur ‘behind the scenes.’ CMS does not want to hamper legitimate funds flow to entities that provide significant services to Medicaid patients. The preamble signals to the industry arrangements that will fall under significant future scrutiny and outlines how CMS intends to manage attestations and inquiry into state programs.

The Final Rule explicitly conditions written prior approval of an SDP on the state demonstrating compliance with federal requirements for the source of the non-federal share. Further, CMS says it will scrutinize the source of the non-federal share of SDPs during the review process. This will be done in accordance with a new amendment to 42 CFR 438.6(c)(2)(ii) that adds a new (c)(2)(ii)(G) requiring SDPs to comply with all federal legal requirements for financing the non-federal share, including but not limited to, Subpart B of part 433, as part of the CMS review process. CMS believes this reference will allow the agency to use its authority to investigate explicit and implicit hold harmless arrangements if it has reason to believe that the parties have a “reasonable expectation” that they will be made whole in exchange for their contribution to the overall non-federal share.

In addition, CMS will require that states ensure participating providers attest to the fact that they do not participate in any hold harmless scheme, specified in 42 CFR 438.69(f)(3). CMS is finalizing 42 CFR 438.6(c)(2)(ii)(H) to require that “providers receiving payment under a state directed payment attest that they do not participate in any hold harmless arrangement for any healthcare related tax.” In the preamble to the Final Rule, CMS highlights that such hold harmless concepts also include attesting that the arrangement does not lead to a “reasonable expectation” that taxpaying providers will eventually be made whole for “all or a portion of a healthcare-related tax.” Importantly, this provision is not applicable until the first rating period for contracts with MCOs beginning on or after January 1, 2028.

Lawsuit and enforcement discretion

CMS has received significant pushback from states that heavily rely on SDPs and local taxing mechanisms to fund their Medicaid programs.

Texas and Florida have challenged CMS’s interpretation of a permissible hold harmless arrangement and its authority to enforce SDP programs that CMS believes are in violation of the statutory hold harmless provision. Texas filed a lawsuit in response to a previous CMS Informational Bulletin issued February 17, 2023. This Informational Bulletin and the preambles in the proposed rule and this Final Rule, challenge private arrangements that may exist to mitigate the impact of a provider tax. Texas successfully obtained a preliminary injunction prohibiting CMS from disapproving or taking any actions against certain financing arrangements within Texas, as we discussed in a previous client alert. Alternatively, a similar lawsuit by the State of Florida was dismissed after the District Court held that the bulletin didn’t constitute final agency action. Florida has appealed this ruling to the 11th Circuit Court of Appeals.

CMS acknowledges the lawsuit and the controversy in the preamble to the Final Rule. While CMS does not agree with the interpretation by Texas or the other commenters to the Final Rule, the agency indicates that it will abide by the current injunction. CMS reasserts that any private arrangement that offsets the amount paid by a taxpayer is considered an indirect hold harmless arrangement that violates the statute. CMS further indicates that it plans to implement the attestation requirement, as set forth in the Final Rule, which will not be applicable until 2028.

However, at the same time as CMS reinforces its position in the Final Rule, it simultaneously issued the Informational Bulletin, indicating that it will engage in enforcement discretion through calendar year 2028 for existing healthcare related tax programs and hold harmless arrangements involving the redistribution of Medicaid payments. The Informational Bulletin clearly provides that while CMS understands that states may need time to evaluate and work with their provider communities and legislatures to modify existing non-federal share financing arrangements, it intends to use the period prior to January 1, 2028, to “assist” states in identifying and transitioning to allowable sources of non-federal share while seeking to mitigate disruption in financing at the state level.

CMS indicates in the Informational Bulletin that it will “begin routinely asking questions about possible hold harmless arrangements in conjunction with reviews of health care-related tax waiver request and state payment proposals funded at least in part by health care-related taxes.”

Outfall

Since funding of the non-federal share is an integral component of a large number of state Medicaid financing methods, the lead up to the publication of the Final Rule was punctuated by a letter transmitted by the governors of a number of states, including Texas, that have come to rely on their financing methods to fund a significant portion of the Medicaid program. Providers in these states rely on this method of funding to help address both the state’s inability or lack of enthusiasm for funding growing Medicaid rolls through its appropriations process.

Regardless of which state a provider resides, these funding mechanisms have become essential to helping to ensure that those providers who furnish significant services to Medicaid program patients are properly reimbursed for the medical services provided, often at significant revenue losses.

The changes that will occur resulting from this Final Rule will ripple throughout the provider community and will define how Medicaid program funding is structured in the coming years.

Our team of experienced lawyers and professionals at Norton Rose Fulbright will continue to review and assess this massive rule and publish additional updates. If you have any questions about the Final Rule or the Medicaid program, please do not hesitate to contact us.