HHS Unveils New Rules to Restrict Use of Medicaid Loophole

HHS Secretary Tommy Thompson yesterday announced new regulations to revise Medicaid's "upper payment limit" rules, "further restrict[ing]" use of the Medicaid loophole. The rules will "build on reforms" to upper payment limit regulations issued in January 2001 and will prevent states from "inappropriately increasing the federal share of Medicaid costs." Under the loophole, states pay city- or county-owned health care facilities more than the actual cost of health services, receive additional federal matching funds from CMS and then require the facilities to return the additional state funds. States may pay the facilities a small fee for their participation and use the funds to cover health- or non-health-related costs. The new rules, part of proposed reforms announced in November, will reduce the upper payment limit -- the highest amount states can pay facilities -- from 150% of the Medicare rate for health services, a figure established in rules issued last January, to 100% of the Medicare rate. However, the new rules will allow states to "gradually reduce payments" to 100% over five to eight years for six states with "long-established programs" and one to two years for states with "newer programs." In November, when HHS proposed the upper payment limit reductions, officials said 14 states would have to phase out their loophole use more quickly: Colorado, Florida, Georgia, Idaho, Indiana, Kentucky, Michigan, Minnesota, Montana, Nebraska, New York, South Carolina, Texas and Washington. California and Illinois are among the six states that will have three years to end their loophole use. HHS said it expects to phase out the technique completely by 2010. Thompson said, "These changes strike the right balance by ensuring Medicaid beneficiaries continue to get the services they need while assuring federal taxpayers that their Medicaid dollars are being used for Medicaid services." The changes will be published in today's Federal Register and become effective March 19 (HHS release, 1/17).