Medicaid Upper Payment Limits and Intergovernmental Transfers: Current Issues and Recent Regulatory and Legislative Action

Publication Date: April 2002

Publisher: Library of Congress. Congressional Research Service

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Research Area: Health

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Abstract:

In accordance with Medicaid statute, the Secretary of Health and Human Services (HHS) has established, through a series of regulatory actions, upper payment limits (UPLs) for inpatient and outpatient services provided by certain types of facilities. In late 2000, the Secretary determined that regulations in effect at that time created a financial incentive for states to make higher than usual payments for care provided at non-state government facilities, namely, county and city facilities, allowing these states to claim higher federal matching dollars. States require these facilities to transfer some or all of the excess funds back to the state. Then states use these funds to cover part of the state share of Medicaid costs and/or for other purposes. After HHS issued a proposed rule in October of 2000 designed to halt these practices, Congress mandated additional changes to upper payment limits in the Benefits Improvement and Protection Act of 2000 (BIPA; incorporated by reference into P.L. 106-554). Final regulations that included the BIPA provisions were released by the Clinton Administration on January 12, 2001.

Among other changes, this rule established a separate UPL for inpatient services provided by non-state government facilities, and for the subset of non-state public hospitals only, a separate higher payment rate was allowed. It also provided a separate UPL for private facilities. Parallel rules were established for outpatient hospital and clinic services. Three phase-out or transition periods for states with enhanced payment arrangements that were noncompliant were also specified. Application of a specific transition period to a given state was primarily dependent on the effective date of its plan describing the enhanced payment arrangement. Phaseout periods varied in duration, and except for the shortest period, required specific percentage reductions in excess payments for each transition year.

The Bush Administration made two changes to the Clinton final rule: (1) creation of a separate, minimum 1-year transition period for certain states that have only recently received approval for enhanced payment arrangements, and (2) elimination of the higher payment rate for non-state public hospitals.

Several estimates of cost savings for federal Medicaid spending based on these changes to UPLs have been made. Over the next 10 years, savings associated with the January 12, 2001 final rule and BIPA range from $55 billion (Clinton Administration) to $77 billion (Congressional Budget Office or CBO), respectively. The 1-year transition period rule issued by the Bush Administration is expected to save $0.5 billion in FY2001 and FY2002. Elimination of the higher payment rate for city and county public hospitals is expected to save $9 billion over FY2002 through FY2006.