MFAR rule cuts Medicaid spending, increasing the CMS' power

As the CMS’ much anticipated Medicaid block grant guidance released in January was making headlines, hospital industry stakeholders were quietly assembling their case for why they think the Medicaid Fiscal Accountability Regulation is such a bad idea.

The industry is gearing up for a fight, saying the regulation would harm beneficiaries and overly empower the CMS.

The proposed rule aims to boost the transparency of supplemental payments, and also gives the CMS sweeping new authority to regulate how states finance their Medicaid programs.

“We are deeply concerned that, if finalized, this rule would end up denying millions of Americans access to healthcare,” said Erin O’Malley, senior director of policy for America’s Essential Hospitals.

Under Medicaid fee-for-service, states receive matching funds from the federal government to pay for their state Medicaid programs. The Trump administration says that states are taking advantage of the matching-funds system to maximize the amount of money they receive from the federal government. Increased scrutiny of supplemental payments to providers would ensure the fiscal integrity of the Medicaid program, CMS officials argue.

To that end, the Medicaid Fiscal Accountability Regulation—MFAR—would markedly increase federal oversight of how states fund their Medicaid programs.

“It’s impossible to overstate how dramatic a change it would be for state Medicaid programs to have to comply with all of these rules at the same time,” said Anil Shankar, a partner with Foley & Lardner.

MFAR would also limit how states pay providers by increasing state and provider reporting requirements and eliminating payment and financing arrangements that many state Medicaid programs rely on. States would probably have to restructure or abandon existing financing mechanisms, either of which would be extremely disruptive.

Though any of the proposed changes would significantly affect the Medicaid program, the CMS is pushing for them all at once. Stakeholders are anxious about how that could affect Medicaid programs throughout the country.

“The administration purports that these changes would strengthen the overall fiscal integrity of the Medicaid program,” O’Malley said. “It runs counter to that goal because, in large part, it would weaken state flexibility.”

The changes could cut total Medicaid funding by up to $49 billion annually or roughly 8% each year, according to an analysis conducted for the American Hospital Association by Manatt Health.

That would slash payments to hospitals by as much as $31 billion or 17% per year. Meanwhile, the Medicaid and CHIP Payment and Access Commission estimated that supplemental payments for the Medicaid program totaled $48.3 billion in fiscal 2018.

While those estimates are imprecise, they are suggestive of how the changes would impact states and providers. Payment cuts could make providers less willing or able to care for Medicaid beneficiaries, which would decrease their access to care.

But those spending cuts wouldn’t be evenly distributed because states differ in how they raise the state portion of the funds, so hospitals, physicians and beneficiaries in certain states could be hit particularly hard while others remain mostly untouched.

States spent $1.3 billion on supplemental payments to physicians and other health professionals in 2018, according to the Medicaid and CHIP Payment and Access Commission.

Supplemental payments accounted for less than 5% of fee-for-service spending in Kansas, Massachusetts, Nevada and West Virginia. But Florida, Iowa and Michigan spent more than 40% of their traditional Medicaid funds on supplemental payments that year.

It’s hard to know how things would play out for individual providers because there’s little to no information about supplemental payments to each provider. The proposed rule tries to rectify that by increasing state and provider reporting requirements. That approach is consistent with previous recommendations from the U.S. Government Accountability Office, HHS’ Office of Inspector General, MACPAC and others.

“Where CMS has the strongest case is that they don’t have enough transparency about what’s going on around (supplemental) payments,” said Edwin Park, a research professor at Georgetown University’s Center for Children and Families.

But many experts warn that the administration’s proposal goes well past transparency, giving the CMS broad new authorities and limiting the ability of states to raise funds for their Medicaid programs.

States often rely on funding mechanisms like provider donations to fund the state portion of fee-for-service Medicaid funding, but the proposed rule would make that far more difficult. “This rule is about reducing the ability to generate state funds, which can draw down the federal match,” Park said.

The additional requirements would make it tough for states to ensure that their financing arrangements comply with MFAR because they would have to redesign them and get approval from critical stakeholders, including state legislatures, which could take months or years. “It would add needless administrative burden to states and to CMS,” O’Malley said.

Many states like Indiana have part-time legislatures so they have limited time and resources to adjust to “broad and sweeping changes in federal law,” said Brian Tabor, president of the Indiana Hospital Association.

“That makes it difficult to plan at the state level,” he said. The Medicaid Fiscal Accountability Regulation “creates a lot of uncertainty for state budgetmakers and providers.”

But even if states were able to make the changes that they thought were necessary, they couldn’t be sure that the CMS would approve them. The proposed rule would give the agency broad new discretionary standards through abstract frameworks like “totality of circumstances,” “net effect” and “undue burden.” The authority is so extensive that states would have no way to know how the CMS would enforce the rule or that it would enforce it consistently.

“In a nutshell, the current clarity under the law is being replaced by a ‘just trust us’ standard,” said Debbie Johnston, senior vice president of policy development for the Arizona Hospital and Healthcare Association.

That could end existing arrangements and create a chilling effect among states that might eliminate or roll back their efforts to raise the state portion of fee-for-service Medicaid funds. If states are unable to make up the funding gap elsewhere, they would likely cut their Medicaid funding and, in turn, lower their federal match and federal Medicaid spending. But governors and state legislatures would still be on the hook for funding base payments to Medicaid providers, which means that they would be forced to make up the funds elsewhere. That could mean increasing sales or income taxes or drawing from their general funds and crowding out other priorties like education, law enforcement or transportation.

States, hospitals and patient advocates think that the CMS should slow down because it hasn’t collected enough data and carried out a complete analysis.

“The fiscal impact on the Medicaid program from the implementation of the policies in the proposed rule is unknown,” the CMS said in the proposed rule.

“CMS recognizes the critical importance of supplemental funding to the safety net, but those payments must support value and improve care and the quality of life of our Medicaid beneficiaries. Through the Medicaid Fiscal Accountability Rule, we are increasing transparency, integrity, and clarity, to ensure Medicaid resources serve the best interests of patients,” CMS Administrator Seema Verma said.

Critics argue that the agency should go through a normal policymaking process before making sweeping changes to the Medicaid program. That means collecting all the necessary information, analyzing it, working with stakeholders to develop targeted policy solutions, allowing them to comment on the proposals and permitting enough time for states and providers to implement the changes.

“That’s how a regulatory process should work,” Park said. “They’ve thrown against the wall a whole bunch of proposals with, apparently, little interest in figuring out the potential downsides of such an approach or justifying the benefits.”