ABA Health eSource
December 2008 Volume 5 Number 4

Moratorium on Medicaid Rules
By Priscilla Keith, Health and Hospital Corporation of Marion County, Indianapolis, IN

AuthorOn June 30, 2008, the President signed into law the Supplemental Appropriations Act of 2008 (Public Law 110-252, HR 2642), which included provisions to extend the moratoria currently set on six Medicaid regulations. The effective date for the regulations is now extended until April 1, 2009. The proposed regulations were issued by the Centers for Medicare and Medicaid Services (“CMS”) in an effort to generate greater fiscal accountability and transparency in the Medicaid process. 1 The Governmental Accountability Office (“GAO”) and the Office of Inspector General (“OIG”) recently performed studies that highlighted areas where the fiscal integrity of the Medicaid system needed improvement. 2 The Congressional Budget Office (“CBO”) reports that the moratorium on the regulations would increase direct spending to $1.8 billion over the 2008-2013 period and $1.9 billion over the 2008-2013 period, as a result of the delays in implementing the regulations. The overall net impact of savings would be $3 million over both the 2008-2013 and 2008-2018 periods, respectively. 3 As such, the intent of the proposed regulations were to reduce the amount of Medicaid reimbursements in areas dealing with rehabilitative services, intergovernmental transfers, graduate medical education, case management services, school based administrative and transportation services, and provider taxes.

Moratoria on these regulations were originally requested in The Protecting the Medicaid Safety Net Act of 2008 (“Safety Net Act”), proposed by Rep. John Dingell (D-MI). The Safety Net Act sought to delay the six CMS proposed regulations included within the Supplemental Appropriations Act as well as an additional CMS regulation. The additional regulation, CMS-2213-P, 4 clarifies the definition of outpatient clinic and hospital services eligible for payment under the Medicaid program and aligns the Upper Payment Limit (“UPL”) in accordance with the current calculations used under Medicare payment principles. 5 CMS released the final outpatient services rule on November 7, 2008. The rule narrows the definition of outpatient hospital services to exclude those that could be provided and covered outside a hospital. The rule takes effect December 8, 2008. The other six CMS proposed rules are discussed below along with key portions that were included or excluded from moratorium status by the Supplemental Appropriations Act.

1. Rehabilitative Services

Under CMS’ proposed rule ( CMS 2261–P), 6 the scope of services considered “rehabilitative” is narrowed and a written rehabilitation program, that is recommended by a physician or other licensed practitioner, is required for each individual. In addition, providers must retain the case records of all individuals along with a copy of the rehabilitation plan. The definition of “rehabilitative” services does not include programs furnished through a non-medical provider, either as a benefit or administrative activity, nor does it include services that are considered “intrinsic parts” of other programs. This will have the effect of excluding the following activities from Medicaid funding: foster care, child welfare, education, child-care, vocational and prevocational training, housing, parole and probation, juvenile justice, or public guardianship. Estimated savings were $180 million in fiscal 2008 and $2.2 billion over the next five years. 7

2. Intergovernmental Transfer

The CMS proposed rule on intergovernmental transfers ( CMS–2258–FC) 8 was vacated and remanded back to CMS by the U.S. District Court for the District of Columbia for its technically improper promulgation. 9 As a result of the ruling and moratorium, CMS may not take any action to finalize or implement the regulation until after March 31, 2009. The proposed regulation (1) defines a “governmental unit” in accord with its definition under the Social Security Act; (2) clarifies that only governmental units are able to finance the non-federal share of Medicaid expenditures –federal statutes exempt governmental units from tax and donation scrutiny on non-federal intergovernmental transfers (IGT) 1O ; (3) requires retention of all Medicaid payments received ; and (4) limits governmental unit healthcare providers’ reimbursement rates to the costs of providing the covered services – no longer following the UPL system based upon aggregate cost data. However, Disproportionate Share Hospital (DSH) payments and payments authorized under Section 701(d) and Section 705 of the Benefits Improvement Protection Act of 2000 are not subject to the cost-limit requirement. Also excluded are: Managed care organizations, Prepaid Inpatient Health plans and Prepaid Ambulatory Health plans, Federally Qualified Health Centers and Rural Health Clinics, and Indian Health Service facilities. Estimated savings to the federal government because of the moratorium were $120 million in fiscal 2008 and $3.87 billion over the next five years. 11

3. Graduate Medical Education

CMS previously allowed States to include Graduate Medical Education (“GME”) activities as a component of the cost of Medicaid inpatient and outpatient services. However, a recently proposed CMS rule ( CMS–2279–P) 12 would prohibit reimbursement for GME activities. The decision was made on the grounds that reimbursements for medical training are outside the statutory scope of the Medicaid program. However, the proposed rule distinguishes between direct and indirect GME (IME) costs. Specifically, direct GME cannot be included in the hospital’s UPL, but IME may be incorporated because it is aimed to address the higher patient care costs incurred by teaching hospitals with medical education programs. Direct costs include salaries and fringe benefits for residents and interns. Indirect costs are derived from the Medicare payment formula found in 42 CFR § 412.105 , which adjusts a hospital’s base reimbursement rate according to the hospital's ratio of residents to its available beds. Estimated savings were $140 million in fiscal 2008 and $460 million over the next five years. 13

4. Targeted Case Management

The Supplemental Appropriations Act only places moratoria on some of the case management and targeted case management services restricted under CMS’ proposed interim rule, CMS–2237–IFC. 14 The Appropriations Act sets the moratoria on the definitions of case management and targeted case management services under 42 CFR § 440.169 to the extent that they are more restrictive than the State Medicaid Director Letters dated July 25, 2000 15 and January 19, 2001. 16 This leaves in placethe provisions of the rule that comply with § 6052 of the Deficit Reduction Act of 2005 (“DRA”). The effect of the moratorium will stop many provisions under 42 CFR 440.169 from taking effect, including: (1) restricting Medicaid reimbursement to no more than one case manager per individual, (2) reducing the number of days that transitional assistance services may be provided to institutionalized patients – the last 60 days of a long-term stay (defined as a stay of 180 days or more) or the last 14 days of a short-term stay, and (3) limiting case management service units to 15 minute increments.

Under the definitions given in the DRA, Medicaid reimbursement would not available when the case management activities are: (1) an integral component of another covered Medicaid service; (2) a direct delivery of underlying medical, educational, social, or other services to which the individual has been referred; (3) are integral to the administration of a foster care program; or (4) are integral to the administration of another non-medical program, such as a guardianship, child welfare/child protective services, parole, probation, or a special education program. Estimated savings were $1.3 billion over the next five years. 17

5. School Based Administrative Claiming

CMS’ proposed rule CMS–2287–F 18 prohibits reimbursement for administrative and transportation costs provided by local schools to Medicaid recipients. Transportation from home to school and back for school-aged children with an Individualized Education Program (IEP) or and Individualized Services Plan (ISP) established under the Individuals with Disabilities Education Act would not receive federal Medicaid payments. Administrative services will not encompass medical services. Schools will continue to receive reimbursement for medical services provided to Medicaid-eligible students as long as it is approved under their current State plan. The rule was enacted to eliminate the excessive fund-seeking behavior of a few states, which had ill effects on the distribution of federal assistance. A report issued by the GAO indicated that 80 percent of the claims submitted for administrative reimbursement were from eight states. Estimated savings were $635 million in fiscal 2008 and $3.6 billion over the next five years. 19

6. Provider Taxes

Only portions of CMS’ provider-tax rule (CMS 2275–F) 20 were delayed under the Supplemental Appropriations Act. Exempt from the Act was a provision that revised the maximum threshold under the indirect “hold harmless” guarantee test from 6 percent of net patient revenue to 5.5 percent. ( Tax Relief and Health Care Act of 2006, P.L. 109-432).Also excluded was a method that would clarify the existence of a hold harmless arrangement as well as a provision that expands the definition of Managed Care Organizations (“MCO”)to ensure that provider tax requirements of MCOs are the same as other health care providers . Estimated savings were $85 million in fiscal 2008 and $115 million annually through fiscal year 2011. 21


The moratoria allow for piecemeal acceptance of Medicaid funding cuts. They prevent hospitals that either are overly-dependant or must resuscitate themselves with Medicaid reimbursements from experiencing a financial crisis by having to confront the regulations all at once. They also, however, extend a broad, undefined system that allow States to set their own agenda on the amount of federal financial assistance to claim on non-Medicaid oriented programs. Futile, though, is the request to change to the cost-limit reimbursement rate until its actual effects are fully understood by the public health industry. While the proposed rule estimates federal savings of $3.9 billion over five years, many hospital associations’ estimates are much higher. 22 Until CMS can justify its numbers and propose a thorough transition program to ensure against a financial crisis, more moratoria, or at least piecemeal acceptance of CMS’ proposed rules should be expected.

1 CMS Medicaid Rules Update, National Conference of State Legislatures, Updated May 27, 2008. School Based Administrative Proposed Rule issued September 7, 2007, Final Rule issued December 28, 2007 with effective date of February 26, 2008, 72 Fed. Reg. 73635-73651; Targeted Case Management Interim Final Rule issued December 4, 2007 with effective date of March 3, 2008, 72 Fed. Reg. 68077-68093; Proposed rule for Rehabilitation Services issued August 13, 2007, with effective date of October 12, 200772 Fed. Reg. 45201; Graduate Medical Education, The U.S. Troop Readiness, Veteran’s Care, Katrina Recovery and Iraq Accountability Appropriations Act imposed a one-year moratorium on the implementation of this rule that will expire May 25, 2008; Provider Tax rule proposed March 23, 2007 with Final Rule issued on February 22, 2008, 72 Fed. Reg. 13726-13734.

2 Report of CBO Cost Estimate can be found at: http://www.cbo.gov/ftpdocs/91xx/doc9157/hr5613.pdf

3 Congressional Budget Office Cost Estimate on H.R. 5613, Protecting the Medicaid Safety Net Act of 2008, April 22, 2008.

4 CMS-2213-P can be accessed at: http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-19154.pdf

5 Upper Payment Limit (“UPL”) is defined as the maximum rates that can be paid to Medicaid providers, Testimony on Medicaid Upper Payment Limits by Timothy Westmoreland, Director, Center for Medicaid and state Operations, Health Care Financing Administration, U.S. Department of Health and Human Services, Senate Finance Committee, September 6, 2000.

6 CMS 2261–P can be accessed at: http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/07-3925.pdf

7 See supra, note 1.

8 CMS–2258–FC can be accessed at: http://a257.g.akamaitech.net/7/257/242201jan20071800/edocket.access.gpo.gov/2007/pdf/07-2657.pdf

9 See decision at: http://www.naph.org/naph/advocacy/OrderAndMemorandum.pdf

10 See supra, note 5.

11 See supra, note 1.

12 CMS–2279–P can be accessed at: http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/07-2576.pdf

13 See supra, note 1.

14 CMS–2237–IFC can be accessed at: http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/07-5903.pdf

15 Attachment 3-b of DHHS Working Group for ADA/Olmstead letter to State Medicaid Director can be accessed at page 13: http://www.cms.hhs.gov/smdl/downloads/smd072500b.pdf.

16 SMDL #01-014 can be accessed at: http://www.cms.hhs.gov/smdl/downloads/smd011901d.pdf

17 See supra, note 1.

18 CMS–2287–F can be accessed at: http://edocket.access.gpo.gov/2007/pdf/07-6220.pdf

19 See supra, note 1.

20 CMS 2275–F can be accessed at: http://edocket.access.gpo.gov/2008/pdf/E8-3207.pdf

21 See supra, note 1.

22 See Association of American Medical Colleges’ letter to CMS at: h ttp://www.aamc.org/advocacy/library/teachhosp/corres/2007/031907.pdf; see also California Association of Public Hospitals and Health Systems, which predicts an annual $500 loss in Medicaid funding to California’s public hospitals, at: http://www.caph.org/LegislativeIssues/MedicaidExtension2_08.pdf

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