CMS Considers Prohibiting New Pass-Through Medicaid Reimbursements

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By Nathaniel Weixel

Aug. 8 — States, health plans and providers are being put on notice that the CMS may soon ban any new Medicaid payments made under the “pass-through” reimbursement system.

According to an agency bulletin, adding new or increased pass-through payments into Medicaid managed care contracts is “inconsistent with the goals and objectives associated with” the recently overhauled Medicaid managed care regulations. Under the final regulations published in May, the Centers for Medicare & Medicaid Services will put limits on pass-through payments and eventually phase out states' ability to use most pass-through payments by 2022 or 2027, depending on the type of payment (80 HCDR, 4/26/16). The agency wants to transition to value-based payments, which can't be done under the current pass-through system.

Pass-through payments are distributed to providers by managed care plans, and are a way for states to ensure funding to specific providers who serve a significant number of Medicaid recipients. Safety-net providers and teaching hospitals have especially been reliant on pass-through payments as a way to bolster the relatively low Medicaid reimbursements. The guidance, and subsequent rulemaking that the CMS said it has planned, will potentially end those payments earlier than stakeholders had anticipated.

In the informational bulletin published in late July, the CMS said it believes the final rule prohibits states from developing any new Medicaid pass-through reimbursements during the phase-out transition. The CMS said states also can't increase pass-through payment amounts, and said it would be addressing the issue in future rulemaking. The managed care rule didn't explicitly prohibit new pass-through payments, but the CMS has the authority to explain how it thinks regulations should be interpreted.

Change of Plans

The agency has expressed many concerns about pass-through payments, but the final rule didn't “grandfather” existing pass-through payments. In other words, states understood they could still create new pass-through payment arrangements.

The guidance serves notice that the agency intends to change those regulations, Cindy Mann, the former Medicaid chief at the CMS, told Bloomberg BNA.

“They were clear in the regulations that you could do a new payment,” Mann said in an interview Aug. 8. The guidance is “rethinking the policy.” Mann is a partner at Manatt, Phelps & Phillips LLP in Washington.

The final rule said that beginning with contracts effective on or after July 1, 2017, pass-through payments for hospitals must be phased out within 10 years—so no contracts can begin on or after July 1, 2027. The CMS in the rule said it thinks the transition for physicians and nursing homes won't be as complicated, so those payments will be phased out over five years.

The guidance document isn't binding, so states and plans can still create new pass-through payments or make changes to existing ones if they want to. The knowledge that the CMS may prohibit them sooner rather than later “will dampen enthusiasm for states and providers to create new payments,” Mann said. But until it makes a new final rule, the agency still has a legal obligation to review new pass-through payments.

Anil Shankar, an attorney with Foley & Lardner LLP in Los Angeles, credited the agency with clearly telegraphing its intentions as early as possible, but said it's still going to be difficult for stakeholders.

“They are forewarning states that this is their intent, so states don’t set up systems and then find out the CMS has put out another regulation that changes policy,” Shankar told Bloomberg BNA Aug. 8. “[The CMS is] trying to be transparent about intent and giving fair warning. It doesn’t end the opportunity for states, but lets them know the path may not be open indefinitely.”

Provider Confusion

Ever since the final managed care regulations were published, states have been meeting with managed care plans and providers to figure out which new value-based payment arrangements to use going forward. The guidance and new rulemaking won't change that, but it will create more confusion for managed care plans, states and providers as they continue to try to implement the policies from the final rule, Shankar said.

“They’ll have to change their approach, or have more discussions with CMS,” Shankar said. “It takes time to figure these things out. [The guidance] creates uncertainty about what would be allowable, and what would not.”

Even before the guidance came out, states and providers understood from the final rule that pass-through payments were ending, Mann said. Because the CMS said it will make the new prohibition official through official rulemaking, it won't happen overnight, but it could still be a significantly shorter time frame than what providers initially thought, she said.

“It was a temporary arrangement, but now the prospect is that it’s even shorter than the five-year or 10-year phaseout they had anticipated” under the regulations, Mann said.

“States should be very concerned by this new guidance,” Shankar said. “Right now, states around the country are looking to the future of Medicaid supplemental payments. This guidance is very relevant to those states: It's a new limitation that wasn’t previously there.”

To contact the reporter on this story: Nathaniel Weixel in Washington at

To contact the editor responsible for this story: Brian Broderick at

For More Information

The agency bulletin is at

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