The matching structure at the heart of the Medicaid program creates an inherent tension between federal and state financing of the program. While states have incentives to control Medicaid costs to decrease their share, they also have sought to maximize federal Medicaid funds through various financing mechanisms, including supplemental payments, disproportionate share hospital (DSH) payments, provider taxes, and intergovernmental transfers, which has resulted in consistent increases in federal Medicaid spending in recent years. With this, the Centers for Medicare & Medicaid Services (CMS) has been under pressure from federal oversight agencies to rein in rampant improper payments in an effort to control spending.

In November 2019, CMS responded with the Medicaid Fiscal Accountability Regulation (MFAR) proposed rule, which seeks to promote transparency. In a February 12 blog post, CMS Administrator Seema Verma wrote “[t]he proposed rule is not intended to reduce Medicaid funding, but is aimed at strengthening accountability and increasing transparency to ensure that every Medicaid dollar is claimed and spent in accordance with federal law while supporting the interests of Medicaid recipients.”

By way of summary, MFAR aims to achieve accountability and transparency through the following proposals:

  1. Increasing reporting and review requirements related to supplemental payments and DSH payments;
  2. Limiting supplemental payments to physicians and other practitioners;
  3. Limiting approvals of upper payment limit reimbursement to three years at a time;
  4. Clarifying various regulatory definitions and provisions to support various financing mechanisms and address “egregious funding schemes that mask non-bona fide donations”; and
  5. Revising regulatory definitions and provisions related to healthcare taxes.

The proposed rule has received negative feedback from providers, industry organizations, and states. While critics do not dispute the lack of transparency and data around Medicaid’s supplemental payments, the consensus response is that the MFAR proposal goes well beyond promoting transparency (you’ve no doubt seen a version of the “MFAR goes TOO FAR” refrain).

The primary criticism of the MFAR proposal is that it places significant constraints and limitations on how states finance Medicaid programs. The concern is that states may not be able to make up for funding displaced by MFAR and may be required to cut Medicaid spending. Less state Medicaid funding would result in fewer federal Medicaid match dollars, thus amplifying the effect. Such payment cuts could make providers less willing and able to care for Medicaid beneficiaries and ultimately inhibit access to care.

To illustrate the financial impact, the American Hospital Association’s comment to the proposed rule cited an analysis conducted by Manatt Health that estimates that the proposed changes could cut Medicaid funding by up to $49 billion annually, with hospitals and health systems alone seeing reductions of up to $31 billion annually. The MFAR proposal fails to quantify its potential fiscal impact, however, stating only that “[t]he fiscal impact on the Medicaid program from the implementation of the policies in the proposed rule is unknown.”

Critics also point out that the proposed review mechanisms with respect to supplemental payment and financing arrangements introduce broad new discretionary standards of review. Specifically, MFAR would replace the clarity afforded under the current law with significant discretion in reviewing such arrangements through indefinite concepts of “totality of the circumstances,” “net effect,” and “undue burden.”

In addition, critics point out practical concerns regarding MFAR’s proposed timetable and lack of meaningful regulatory impact. Specifically, it has been argued that the administrative burden imposed by the increased reporting and review mechanisms and the lack of a transition period to implement and comply with such substantial program changes make the proposal unrealistic. Accordingly, critics urge CMS to withdraw the proposed changes until it collects more data and completes a more comprehensive analysis.

CMS received more than 4,000 comments in response to the proposed rule, which the agency is currently reviewing as it considers final rulemaking. In that same February 12 blog post, Seema Verma addressed the comments by writing “[w]e will remain conscious of those operational concerns as we consider final rulemaking and work with states to potentially transition problematic arrangements into clearly permissible ones that support the safety net and ensure Medicaid beneficiaries have access to high quality health care.”