Medicaid Reimbursement Policy

Publication Date: November 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

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Abstract:

Under Medicaid law, states have considerable freedom to develop their own methods and standards for reimbursement of Medicaid services. Congress has periodically intervened to modify the broad guidelines within which states operate, and the Centers for Medicare and Medicaid Services (CMS) has used its regulatory authority to restrict certain state practices. Actual payment methodologies, however, are still left largely to the discretion of the states.

Medicaid reimbursement policies play a central role in determining whether beneficiaries have access to services of adequate quality, as well as the nature of the services they receive. Because some providers, such as "safety-net" hospitals and clinics and nursing facilities are heavily dependent on Medicaid funding, payment levels can have broad effects on the delivery system and community access to care. In addition, because Medicaid is a major component of state and federal spending, decisions about reimbursement policies can have significant budgetary effects.

For both hospitals and nursing homes, Medicaid payment rates in many states are below the actual costs facilities incur in providing care to Medicaid patients. Payment rates for other kinds of providers, such as physicians or dentists, cannot be directly compared to costs; however, Medicaid is often paying less for comparable services than Medicare or private insurers. Medicaid payment shortfalls have a variety of possible consequences. Providers may engage in "cost-shifting," raising charges to private payers to make up their losses. In addition, the need to subsidize Medicaid patients may reduce their ability to fund care for people with no coverage at all. Some providers may adopt cost-cutting measures that potentially affect quality. Others may refuse to accept Medicaid patients or limit the number they will treat, since Medicaid law has no requirement prohibiting providers from doing so.

This report provides a snapshot captured primarily through state plan amendments approved through November 2002, of the methods states use to establish payment rates for most major types of providers serving Medicaid clients. It also explores some of the critical issues affecting Medicaid payments rate setting. Where available, Medicaid rates are compared to other payers such as Medicare and private insurance. This report will not be updated.

To assist Congress to review policy alternatives and understand the current status of Medicaid programs, the Congressional Research Service (CRS) is producing a series of reports on various aspects of Medicaid. This report is one in that series. This series will address Medicaid programs and policies comprehensively by covering background subjects including eligibility policy, benefits, and delivery systems and demonstration projects as well as analytic reports such as Medicaid's role for low-income individuals, long-term care, and dual eligibles. Each of the reports includes a discussion of current issues, background information, data and analysis.