Jackson Hammond is a Senior Policy Analyst at Paragon Health Institute. He has been active in the federal and state health policy space since 2017.
Prior to joining Paragon, Jackson was a health care policy analyst for American Action Forum (AAF). While at AAF, his work focused on payer issues including private insurance, Medicare, and Medicare Advantage. Furthermore, Jackson wrote extensively about the 340B Program and contributed to AAF’s research on a variety of drug pricing issues.
The Biden administration has enacted several major regulations pertaining to Medicaid in the past year. This brief discusses the four most significant rules and their likely impact on the health sector and federal and state spending. In total, the Biden administration has undertaken several Medicaid regulatory actions that have significant fiscal cost, policymaking that is generally reserved for Congress. The Centers for Medicare and Medicaid Services (CMS) estimates the federal cost of these rules at between $68.5 billion and $134.8 billion over five years and a state cost at between $46.3 billion and $82.6 billion. Congress or the next administration should consider rescinding all these regulations.
This rule expands a Medicaid payment mechanism known as state-directed payments (SDPs; see the appendix for a discussion of them), which are a subset of Medicaid supplemental payments. In essence, these are lump sum payments to health care providers in addition to Medicaid payments for specific health care services that have been rendered.
Specifically, the rule sets a ceiling on SDPs in managed care organizations (MCOs) in Medicaid, preventing them from paying more than average commercial rates (ACRs) when SDPs are combined with the other Medicaid payments received by providers.
The Centers for Medicare and Medicaid Services (CMS) formalized existing policy in this rule. Prior to this action, there was no payment rate ceiling in managed care, and CMS had not “knowingly approved an SDP that includes payment rates that are projected to exceed the ACR.”2 Under the rule, total payment rates (the average base rate paid by the MCO, the SDP, and any other approved SDPs or supplemental payments) must not exceed the ACR for the given service and provider class. (Provider classes are defined by individual states.)
Even though this rule just puts existing policy into regulation, CMS and the Congressional Budget Office (CBO) expect it to significantly raise federal spending.3 CMS expects that the rule will incentivize states to raise payment rates—and the higher the total payment rate, the more a state spends and thus the more federal dollars the state receives. CMS believes that once a ceiling is set, states will aim to increase rates to near or at ACR to increase their receipt of federal funds.4 In essence, CMS believes that before this rule, states were uncertain whether CMS would approve SDPs that functionally push payment rates as high as ACR but now, after this rule, states have clarity that CMS will approve such rates.
CMS estimated the impact in three different scenarios for 2024-2028 based on the extent to which their clarification would open the door to higher SDPs. Their low-spending scenario estimated $27.0 billion in spending ($17.6 billion federal, $9.4 billion state), the middle scenario estimated $78.3 billion in spending ($50.7 billion federal, $27.6 billion state), and the high scenario estimated $129.6 billion in spending ($83.9 billion federal, $45.7 billion state).5 The Committee for a Responsible Federal Budget calculated that, over 10 years, the low, middle, and high scenarios would be $50 billion, $135 billion, and $220 billion, respectively.6 These huge increases are due to ACRs being significantly higher than typical Medicare or Medicaid rates. CBO has found that commercial rates for hospitals are twice Medicare fee-for-service rates, and a 2024 RAND study estimates commercial prices at 2.5 times Medicare rates for hospitals.78
By allowing states to direct higher payments to specific providers (mostly hospitals), this rule advantages politically-connected providers with increases in payments that will be mostly, if not entirely, covered by the federal government.
Another problem with this rule is that it incentivizes providers to increase their commercial rates. Because this rule enables states to pay providers up to the ACR courtesy of the federal reimbursement, providers will want to increase the rates they charge commercial payers in order to raise the ACR and thus what they receive through Medicaid. In essence, under this rule, the federal government rewards providers for charging higher commercial rates.
This rule aims to keep people on Medicaid, the Children’s Health Insurance Program (CHIP), and the Basic Health Program longer, including when they are no longer eligible, through several provisions. First, this rule eliminates waiting periods for CHIP (states were previously allowed to require up to a 90-day waiting period to join CHIP after leaving group coverage), eliminates annual and lifetime coverage limits in CHIP, and prohibits states from instituting lock-out periods for non-payment of premiums (under lockout periods, the child cannot be re-enrolled for a certain period of time).
For Medicaid, the rule restricts when states may verify changes in eligibility, prevents states from terminating coverage if enrollees fail to verify changes in eligibility, and extends the time for enrollees to verify changes in eligibility before redeterminations and removals. The rule also requires that state Medicaid programs be proactive in obtaining updated addresses and accept multiple types of verification of addresses, and it prevents states from immediately terminating coverage for enrollees with out-of-state addresses. Additionally, the rule requires that state Medicaid programs discount pensions, annuities, retirement funds, and other specified sources of income from available benefits when determining eligibility. Finally, the rule prohibits states from conducting eligibility reviews more frequently than every 12 months, requiring in-person interviews with disabled or elderly individuals, and from using processing delays as a reason to terminate coverage.
CMS expects this rule to cost $45.2 billion over five years. That $45.2 billion includes $22.0 billion paid by the federal government and $23.2 billion by states.10 This rule will make it more difficult for states to discover if an individual is ineligible for government-financed coverage, thus resulting in more ineligible people on both Medicaid and CHIP enrolled for longer periods. This rule comes at a time when CBO projects that 21 million individuals have multiple sources of coverage in 2024, an indication that government is making excessive payments to provide coverage.11
This rule expands enrollment in Medicare Savings Programs (MSPs). In MSPs, Medicaid helps to cover Medicare Part A and Part B premiums and some cost sharing for about 10 million low-income individuals in Medicare who would not otherwise qualify for full Medicaid benefits.13 The new rule requires states to automatically enroll individuals receiving Supplemental Security Income in the MSP that pays for Part A premiums; use data from the Part D low-income subsidy (LIS) program in applications for MSPs and request only missing data from eligible enrollees (currently, eligible enrollees have to fill out all information normally contained in the LIS data that is shared with states); align the “family size” definitions of MSPs and the LIS program (which help determine household-based income limits); and accept enrollee self-attestation of the value of certain types of income and resources, including income from interest and dividends, burial funds, non-liquid resources, and the face value of life insurance.
CMS estimates that the cost over five years will be $26.2 billion.14 That cost is split between the federal and state governments, with the federal government paying $18.3 billion between Medicare and Medicaid and the states covering $7.9 billion in Medicaid. The Medicaid and CHIP Payment and Access Commission estimates that roughly half of eligible Medicare beneficiaries are enrolled in MSPs.15
The part of this rule with perhaps the most potential for abuse is the accepting of self-attestation of income from interest, dividends, and non-liquid sources. These self-attestation exceptions favor wealthier individuals—those more likely to have non-liquid assets and investment income—similar to how Medicaid long-term care (LTC) rules encourage the wealthy to purchase exempt assets and arrange finances in order to qualify for a program meant for the poor.16 This CMS rule could further discourage individuals with the means to plan and save for late-in-life health expenses, leading them to rely on public safety-net programs instead.
This rule requires that, starting in 2026, LTC facilities maintain a minimum ratio of nurse staffing hours per resident day (HPRD), with the intent of ensuring adequate patient care and safety.18 HPRD is the total number of hours worked by relevant staff divided by the number of facility residents. Specifically, registered nurses must be onsite 24 hours a day, seven days a week, and facilities must provide a minimum of 0.55 registered nurse HPRD. Nurse aide coverage must be at least 2.45 HPRD, and total nurse staff coverage must exceed 3.48 HPRD. Importantly, these ratios do not differ based on the general health of a facility’s residents. The rule notes that facility assessments may require more staff beyond the minimum depending on the needs of the facility.
This rule will raise facility costs through requiring more hiring and the subsequent higher salaries needed to fill new positions. CMS projects the rule will increase spending for Medicaid by $28.2 billion, Medicare by $4.7 billion, and other payers (private insurance, cash payers, etc.) by $9.2 billion over 10 years if facilities pass on 100 percent of costs to payers. CMS estimates total federal spending over 10 years to be $21.2 billion (or $10.6 billion on average over five years) and total state spending over 10 years to be $11.7 billion (or $5.8 billion on average over five years). However, it is unlikely that the government rates will be increased enough to fully compensate for the added expense. LTC facilities may respond by raising private payer rates, which over time would likely push even more people to turn to Medicaid for assistance. LTC facilities already face large staffing shortages and difficulties in recruiting.19 Increased salaries would help, but that requires increased revenues from higher payment rates, which could fall on non-governmental payers. The artificially-induced increase in demand for LTC nurses will naturally push up wages and cost pressures, which would need to be offset in other ways. Thus, LTC facilities will likely cut back on quality-of-life services (exercise classes, social activities, food quality, etc.) in order to pay for the rule, and some facilities may decide to close given low profit margins.20 This rule has led 20 states to sue the Biden administration in an attempt to vacate the rule.21
A Medicaid supplemental payment is a lump sum payment paid by the Medicaid program to a health care provider in addition to Medicaid payments for specific health care services that have been rendered. These payments are largely received by hospitals and include disproportionate share (DSH) hospital payments, upper payment limit payments, uncompensated care pool payments, and delivery system reform incentive payments. By 2019, these payments grew to 17.5 percent of total Medicaid spending and, in 2022, 33 percent of Medicaid spending on hospitals.22
The growth in supplemental payments increases lobbying, as it gives government officials discretion to award large Medicaid payments consisting mostly or entirely of federal funds. The Government Accountability Office has conducted numerous studies on the problems with supplemental payments, which include a lack of data transparency and inappropriate funding for providers.23 There are several concerns with supplemental payments: (1) They can be directed to providers based on the political influence of those providers; (2) they are often not distributed in an equitable manner; and (3) they can inappropriately inflate federal spending.
Until recently, federal regulations prohibited states from making supplemental payments for services delivered through managed care. However, states can still make DSH and graduate medical education payments for managed care services. This restriction historically created challenges for states expanding managed care, as providers that relied heavily on fee-for-service supplemental payments faced significant revenue losses when transitioning to managed care. As a result, some states excluded certain services or populations from managed care or sought approval under Section 1115 of the Social Security Act to continue making supplemental payments in managed care.
Other states found a way to increase provider pay by increasing capitation payments to MCOs and requiring them to direct these extra funds to specific providers. These payments, known as pass-through payments, were not typically linked to Medicaid services or provider performance.
In 2016, the CMS introduced a comprehensive update to Medicaid managed care regulations, which required states to gradually phase out pass-through payments due to concerns that they resembled supplemental payments and did not comply with the requirement for actuarially sound managed care rates.24 CMS allowed for a gradual phase-out, with hospitals given 10 years and physicians and nursing facilities five years to adjust.25
To replace pass-through payments, the 2016 rule introduced a new option for states to make directed payments under specific conditions. A directed payment must be linked to the delivery and utilization of services under managed care contracts—distributed equally among designated providers in a given state-defined provider class—support at least one goal in the state’s managed care quality strategy, and not be dependent on provider participation in intergovernmental transfer agreements.26 To ensure compliance, CMS requires states to obtain annual approval for these directed payment arrangements. In 2020, revisions to the rule eliminated the need for prior approval for minimum fee schedules.
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