For years, essential hospitals have relied on supplemental Medicaid payments to support their mission, pay for underfunded services, and, in some cases, simply to keep their doors open.

With states facing ever more challenging budget battles and the federal government seemingly unwilling to tackle the adequacy of Medicaid base rates, this reliance will continue for the foreseeable future. Yet, even when those with power acknowledge the importance of supplemental payments, there continues to be a shroud of confusion — even suspicion — around them. What are they? How are providers using them? And what is the government getting in return?

Interestingly, however, the same concerns are not raised about the most recent tool for Medicaid supplemental support: directed payments to providers through Medicaid managed care plans (authorized in the 2016 managed care rule). Perhaps these payments are still new, and it would be safer to say that these concerns have not been raised yet. Or perhaps the Centers for Medicare & Medicaid Services (CMS) is intentionally creating a framework to satisfy the desire for accountability and transparency while allowing an unexpected level of flexibility for states to continue to support essential providers.

When CMS in 2014 started revamping the managed care regulations for the first time in decades, America’s Essential Hospitals engaged with the agency on these issues. As states have increasingly relied on private health plans to serve the Medicaid population, emulating more traditional commercial coverage, what should happen to the patchwork of supplemental support keeping critical Medicaid providers afloat and spurring innovations in care? Should the Medicaid program retain its traditional role in supporting state policy goals that the commercial market might not value? What payments could continue to be justified and on what basis? And how would CMS know that they were getting something out of it?

The rules that CMS eventually finalized seemed an attempt to find a middle ground, acknowledging providers’ reliance on funding beyond base rates but seeking to phase out supplemental payments the agency perceived were unrelated to the provision of care to Medicaid patients—so-called “pass-through payments.” At first blush, the regulatory language adopted by CMS at 42 CFR 438.6(c), allowing directed payments under certain circumstances, appeared quite limiting. Yet, new possibilities emerge in working through the implementation of these rules with essential hospitals throughout the country.

The regulation requires that directed payments be based on the use and delivery of services, be directed equally to a class of providers, be linked to goals in the state’s published quality strategy, and be subject to an evaluation plan. In other words, the rules provide answers to some tough questions that historically surrounded supplemental payments:

  • What are these directed payments for? States have to explain their goals and objectives for the payments through a CMS-defined application template (a “pre-print”) and demonstrate that the payments are linked to specific services provided to particular Medicaid beneficiaries;
  • Why should the government support these payments? To further the state’s clearly articulated Medicaid quality strategy; and
  • How do we know what we’re getting? The state must assess their efficacy through a CMS-approved evaluation plan.

Perhaps this framework of accountability and transparency has led CMS to provide a level of flexibility in implementing these payments that we, frankly, did not predict. And CMS has proposed even further flexibility through a pending amendment to the rules. Through it all, CMS seems to acknowledge that states might legitimately use Medicaid funds to support particular policy goals, including goals that private health plans might not choose to support. These supplemental payments need not distort the market or undermine competition, and CMS has demonstrated its willingness to work with states to ensure that they do not. Through this particular CMS approval and ongoing evaluation process, could these directed payments be spared some of the criticism and suspicion of previous iterations of Medicaid supplemental support?

Like so much else in the health care world, federal policy on directed payments continues to evolve beneath the text of the regulations. It is unclear whether the accountability and transparency built into this payment mechanism is sufficient in the long run, or whether changes in this or a future administration will impact the flexibility we have recently seen. For now, at least, it seems CMS has built a way forward for longer-term, sustainable support.

Register today for two upcoming webinars providing more information on CMS’ directed payment rules and how essential hospitals have worked with states to bring critical support to their organizations. Join us on May 28 for a deep dive into directed payments and what they mean for essential hospitals. On July 31, hear a more detailed account of California’s experience, including an essential hospital’s perspective (registration available soon).