Adequate payment versus fiscal control: an elusive balance

Healthcare Financial Management, June, 2004

Since Medicaid was created as Title XIX of the Social Security Act of 1965, policymakers have debated the adequacy of Medicaid provider payment rates.

State legislatures, program administrators, and providers have sought to find the proper balance between ad equate levels of payment and cost-control measures. To control costs, many states have reduced provider payment. However, dissatisfaction with low payment levels has caused some providers to cease their participation in the Medicaid program, which has had a detrimental effect on Medicaid recipients' access to healthcare services. As states become aware of this problem, they have tried to revise their rates to find the elusive balance between adequate payment and fiscal control.

Earlier this year, the National Conference of State Legislatures' Health Policy Tracking Service published its 2004 State Health Care Priorities Survey, which indicated that 27 states would consider reducing or freezing provider payment rates this year as a way to control program costs.

Of those 27 states:

* 20 would review hospital rates

* 20 would review nursing facilities rates

* 18 would review physician rates

* 22 would review other healthcare provider rates

State Legislative Action

Thus far in the 2004 legislative session, 30 states have passed legislation out of one branch of the legislature that deals with payment, and 11 states have enacted legislation. Of the legislation enacted, only three states have reduced provider rates; the other eight increased or "clarified" existing rates.

Reduced payment rates. Florida lawmakers cut $67 million from the payment rates to nursing homes for the daily care of Medicaid patients--about a 5 percent cut. Hospitals saw their Medicaid payment rates cut by $82 million, or 4-5 percent.

Illinois reduced provider rates for skilled nursing and intermediate care facilities by 3 percent. However, the state also increased rates by 4, percent for intermediate care and long-term care facilities for developmentally disabled residents younger than age 22--another example of a state trying to balance provider payment levels.

Washington, on the other hand, decreased payments for nursing facilities in FY04, but increased them for FY05. The state used a supplemental appropriations act to clarify that the weighted average nursing facility payment rate will be no more than $142.04 (instead of $144.54) for FY04, and no more than $148.11 (instead of $147.43) for FY05.

Increased payment rates. Kentucky imposed provider taxes on nursing facility services and intermediate care facility services for the mentally retarded in order to use part of the new "taxes" to help increase payment rates for both types of providers.

Utah increased payment rates for dentists and imposed a new assessment on nursing facilities to improve the Medicaid rate for care of the elderly and physically disabled in the facilities. Washington used a supplemental appropriations act to increase payments in the inpatient upper payment limit program for the state's teaching hospitals and to increase payments to agency home care providers.

Wyoming increased rates for direct care personnel in adult developmental disability community-based programs. Also, to ensure it has sufficient obstetric services, Wyoming plans to offer a real practice compensation payment of $2,500 per delivery for the first 10 deliveries performed by each physician who averaged fewer than 50 deliveries per year for calendar years 2001-03.

A Less Dire Year Ahead?

Although 28 states were still in session at press time, the trend seems to indicate that states are not reducing payment rates this year as much as they anticipated they would. For one thing, the states were busy the past two years enacting legislation dealing with provider payment, with 41 states reducing or freezing rates and 34 states increasing rates. Of those states, 29 actually did both--they reduced or froze rates for some providers while increasing them for others.

Also, the state fiscal situation is not as dire as it has been the past two years. Although many states still have large deficits in their Medicaid programs, the number of states with large deficits is smaller than in previous years. Finally, the continuing tension between low payment rates and efforts to ensure that there is an adequate number of providers for Medicaid enrollees may be reining in measures to reduce payment rates.