Every Medicaid payment – whether Medicaid reimbursement for a particular health care service, a disproportionate share hospital payment or an uncompensated care payment from the Medicaid 1115 Transformation Waiver – comes in two pieces. One piece is the federal share. The other is the non-federal share.

It's Medicaid 101 that the program is a federal-state partnership; the state “draws down” matching federal dollars by first putting up its own dollars. The split for Texas is roughly 60 percent federal contribution and 40 percent state.

In general, the non-federal share of Medicaid inpatient and outpatient reimbursements comes from state funds. For a fee-for-service provider who gets $100 for an appendectomy for a Medicaid beneficiary, for example, about $60 comes from the federal government and the other $40 from state funds.

The non-federal share of hospital supplemental payments (DSH, UC and Delivery System Reform Incentive Program Payments), however, does not come from state general revenue. Instead, it traditionally has come from local hospital districts with property tax revenue

Hospital Supplemental Payments

Hospitals receive additional Medicaid payments in part to “supplement” the belowcost reimbursement amount for inpatient and outpatient services. Most general acute care hospitals are paid, on average, 70 percent of allowable costs. To supplement the Medicaid shortfall created by these low reimbursement rates, some hospitals receive additional payments for:

  • Treating a “disproportionate” number of Medicaid and low-income patients (DSH).

  • Providing high levels of uncompensated care (UC).

  • Meeting quality and outcomes metrics in DSRIP.

And this is where things get complicated…

Medicaid 1115 Transformation Waiver and Intergovernmental Transfer Payments

As part of the special terms and conditions of the original Medicaid 1115 Transformation Waiver approved in 2011, the Centers for Medicare & Medicaid Services acknowledged that the funding mechanism used to provide the nonfederal share of Waiver payments (UC and DSRIP) would be the same as that used in the previous Upper Limit Payment program (made obsolete in 2011 by statewide implementation of managed care). That funding mechanism was intergovernmental transfers —payments from public hospitals that are local taxing authorities to the Texas Health and Human Services Commission, the state’s Medicaid agency (although an intergovernmental transfer can occur between any unit of local government and a state agency).

Through a “burden alleviation” model:

  • Public hospitals with taxing authority provide the intergovernmental transfer payment to “draw down” matching federal Waiver funds.

  • Private hospitals deliver a portion of indigent care services that the public hospitals otherwise might have provided, thus freeing up the public hospitals’ tax revenue to fund Medicaid payments.

  • Both public and private hospitals receive Medicaid supplemental payments through the Waiver based upon the uncompensated care they both provide.

CMS approved this method of finance for Waiver payments in 2011. However, the agency questioned it in June 2014 and deferred payment of $74 million in federal UC payments for hospitals in several parts of the state while it investigated the source of the non-federal share of waiver payments. Under a deferral, CMS indicates that it questions the allowability of the nonfederal share of payment and needs additional information to resolve the question. Deferred federal payments eventually can be made or disallowed. CMS’ basis for the deferral was that the burden alleviation model constitutes impermissible provider donations (voluntary transfers from non-public providers to governmental entities directly or indirectly linked to Medicaid payments, rather than community activities.)

CMS released the deferral in January 2015 but gave no explicit blessing of the method of finance, although it expressed a willingness to work with the state before making a final determination on the allowability of the financing mechanism. CMS and the state Medicaid agency began discussions on the method of finance but came to no agreement, and in September 2016, CMS eventually disallowed $27 million in federal UC payments for private hospitals in the Dallas-Fort Worth area on the grounds that the method of finance constituted impermissible provider donations.

While these payments already had been made, the state appealed the decision, eventually reaching the Departmental Appeals Board at the U.S. Department of Health and Human Services. A final disallowance decision could require the state to repay the federal payments that already were made and deemed impermissible. The disallowance decision also could apply prospectively, meaning that future federal UC payments are not allowable.

With the threat of a final disallowance and the potential for a decision that could undermine the entire Medicaid 1115 Waiver, the DAB began its work on the appeal at the same time that the state and CMS were undergoing extensive and challenging negotiations over what a new Medicaid 1115 Waiver would look like once it expired at the end of December 2017.

Waiver negotiations went down to the wire, and the DAB never issued a ruling on the disallowance. A few days before Christmas, CMS and the state Medicaid agency announced an agreement for a new five-year Medicaid 1115 Waiver (see January/February Texas Hospitals). And with that new Waiver agreement came acknowledgement of the IGT/burden alleviation method of finance, although the terms and conditions explicitly state that CMS can at any time review the sources of the non-federal share of Waiver payments.

A New Method of Finance

For some Texas hospitals, however, this agreement was almost literally a day late and a dollar short. The ongoing uncertainty around the disallowance and the ever-increasing likelihood that the DAB would uphold it, particularly as the appeal dragged on, meant that some hospitals already had begun looking for alternative methods of finance for the vital UC payments.

But the billion-dollar question remained: what is an acceptable alternative method of finance for hospitals to be able to access the more than $6.2 billion a year in federal Waiver supplemental payments?

Absent state general revenue for Medicaid supplemental payments, states have had to get creative in how these payments are financed because the federal government’s requirement that states contribute to Medicaid payments is rock solid.

The vast majority of other states impose a tax on all hospitals to help fund the non-federal share of Medicaid payments. CMS rules require hospital assessments to be both broad-based (i.e., imposed on all providers within a specified class of providers) and uniform (i.e., the same tax for all providers within a specified class of providers). States also are prohibited from holding the providers harmless for the cost of the provider tax, which means that hospitals are not guaranteed to get back what they paid, although in most states an outside agreement is established between the hospitals to create a hold harmless process post-payment.

A statewide hospital tax in Texas, however, has faced uphill battles. Any kind of tax in Texas is political poison. And the hospital community itself in the past has been divided on this issue. The Texas Hospital Association has convened workgroups over the last several years to explore the issue with members but ultimately refrained from proposing a statewide hospital tax.

Local Solutions

Instead, since 2013, 19 jurisdictions in Texas – cities or counties — have created local provider participation funds to generate parts of the non-federal share of Medicaid payments. In the early years of LPPFs, jurisdictions developed them because they had no public hospital and therefore had limited IGT capacity, with the result being that federal UC dollars were left on the table because the non-federal share was short. Since then, additional jurisdictions, such as Tarrant and Dallas Counties in North Texas, whose hospitals were the subject of CMS’ disallowance decision, have pursued LPPFs as an alternative to the IGT method of finance (see sidebar).

The first jurisdictions to create LPPFs were Cameron, Hidalgo and Webb counties, which lacked a public hospital. Brazos County followed in 2015 after hospitals in that county were unable to take full advantage of available federal UC funds and could not participate in DSRIP because the county has no public hospital and therefore no IGT.

When the Medicaid 1115 Transformation Waiver first was implemented in 2011, CHI St. Joseph Health in College Station proposed 12 DSRIP projects to meet significant unmet needs in the region. However, it was unable to implement them because of the lack of available IGT. For the faith-based hospital with a strong mission to address the overall health of the community, this outcome was “particularly disturbing,” according to Tim Ottinger, director of government relations at CHI, because known community needs were being unmet.

With the approved Brazos County LPPF in 2015, according to CHI’s Ottinger, about $3 to $4 million DSRIP dollars now are flowing into the region to support its hospitals in their work to provide better care to uninsured and low-income residents.

What’s Next?

As the calendar barrels toward 2019 and the 86th Texas Legislature, hospitals across the state will be looking to identify a viable method of finance for supplemental Medicaid payments to ensure they can support essential health care services in their communities. THA will continue to work with all of its member hospitals that are interested in building LPPFs.