CMS Should End Medicaid Payment Loopholes, Not Grandfather Them

The Trump administration continues implementing the Medicaid provisions of H.R. 1, the "Working Families Tax Cuts," through a proposed rule that would place new limits on state directed payments (SDPs). The proposal addresses financing arrangements that have allowed some states to draw significantly more federal Medicaid funding through payment mechanisms rather than direct improvements in patient care. Public comments submitted by the Paragon Health Institute support the rule while recommending changes to ensure it is implemented as Congress intended.

Implementing the New SDP Standards

State directed payments allow states to establish payment methodologies for providers participating in Medicaid managed care. In recent years, some states have used these arrangements alongside provider taxes and intergovernmental transfers to increase federal Medicaid matching funds.

The Working Families Tax Cuts established new statutory limits on these payment arrangements. CMS's proposed rule would implement those provisions by capping many state directed payments at the Medicare payment rate rather than allowing them to reflect higher commercial insurance reimbursement levels.

The proposal is an important step toward carrying out the law, but the details of implementation will determine how effective the reforms ultimately become.

Grandfathering Would Weaken the Reform

In comments submitted to CMS, the Paragon Health Institute supports the proposed rule but recommends strengthening it by limiting the grandfathering of existing state directed payment arrangements.

That recommendation goes to the heart of the proposal. New standards should apply consistently across the program rather than allowing older payment arrangements that conflict with the rule to remain in place for years. Broad grandfathering would preserve many of the financing practices the new statutory framework is intended to address while delaying the benefits of reform.

The purpose of implementation is to carry out the law as enacted, not to create exceptions that allow outdated payment structures to continue indefinitely.

A Principle CFE Has Long Supported

The recommendation also reflects concerns CFE has previously raised regarding Medicaid financing arrangements. Earlier this year, CFE urged CMS to reject California's proposed supplemental payment program because it relied on financing mechanisms that shifted additional costs to federal taxpayers while favoring government-owned providers over private competitors.

The same principle applies here. If existing state directed payment arrangements conflict with the new rule, they should be brought into compliance instead of being preserved through grandfathering. Otherwise, states could continue operating payment structures that are inconsistent with both the regulation and the reforms Congress enacted.

CFE Takeaway

CMS's proposed rule represents meaningful progress toward implementing the Medicaid provisions of the Working Families Tax Cuts. Finalizing strong standards is only part of the process. Those standards should apply equally to existing and future state directed payment arrangements so that outdated financing schemes are phased out rather than protected through broad grandfathering. Doing so would better fulfill Congress's intent and strengthen the integrity of the Medicaid program.