Medicaid financing is extremely complex.  Federal upper payment limits on hospitals, nursing facilities, and other healthcare providers are a case in point.  Here is a quick primer.

Origins of Upper Payment Limit:

The Upper Payment Limit (UPL) is a federal limit placed on fee-for-service reimbursement of Medicaid providers.  Specifically, the Upper Payment Limit is the maximum a given State Medicaid program may pay a type of provider in the aggregate, statewide in Medicaid fee-for-service.  State Medicaid programs cannot claim federal matching dollars for provider payments in excess of the applicable UPL.

Prior to 1983, Medicaid followed Medicare cost-based payment methods for hospitals and nursing facilities.  When Medicare adopted prospective, DRG-based payment for hospitals, State Medicaid programs were given broad authority to set their own hospital and nursing facility rates.  To create an upper bound to Medicaid spending on fee-for-service hospital rates, Congress imposed an Upper Payment Limit based on what Medicare would have paid facilities for the same services.  There are different UPLs for other provider types.

Upper Payment Limits are a Statewide Spending Cap:

The Upper Payment Limit serves as a cap on a State Medicaid program’s total spending on particular providers, most notably hospitals and nursing homes.  The UPL is defined differently for different provider types (e.g., inpatient hospitals, outpatient hospitals, physicians).  Here are the basics of how hospital upper payment limits work:

  • Statewide, a State Medicaid agency may not pay hospitals in the aggregate more than they would have been paid by Medicare, plus Medicaid Disproportionate Share Hospital (DSH) payments.
  • There are separate UPLs for inpatient hospitals and outpatient hospitals.
  • Each State also has a separate federal cap on statewide Medicaid DSH spending (DSH Allotment).  The UPL and DSH allotments together serve as an overall, statewide cap on a State’s Medicaid hospital spending.

To calculate the amount that Medicare would have paid, states use a variety of calculation methodologies.  In modeling UPLs and projecting Medicaid rates compared to the limits, State and provider associations are often assisted by Medicaid financing experts, most notably Sellers Dorsey.

Once the UPL is calculated, a State Medicaid agency will calculate what was actually paid for all of those services by the Medicaid program.  This amount must not exceed the UPL.

State Calculations and Assurances:

For hospitals, State Medicaid agencies must calculate what under Medicare payment rules the federal Medicare program would have paid facilities for the services rendered to Medicaid beneficiaries.  States must arrive at an aggregate, statewide, defensible, and well documented estimate of what Medicare would spend had Medicare and not Medicaid been responsible for paying for the hospital or nursing home care for those beneficiaries.  Each State must provide written assurances of compliance with the Upper Payment Limits.  CMS routinely examines and questions State modeling, assumptions, and data to ensure compliance with the federal UPLs.

State Medicaid agencies and provider groups, such as state hospital associations, often engage consultants to help improve the strength of State assumptions and find additional “room” under the specific UPLs.  This allows the State to pay providers more and can be very useful in rate negotiations with Governors and Medicaid directors.

For any or all individual providers, Medicaid payments may exceed the actual cost of medical services provided to Medicaid beneficiaries – as long as the applicable Upper Payment Limit is met.

Separate Upper Payment Limits by Type of Ownership:

For both hospitals and nursing facilities, there are separate Upper Payment Limits based on facility ownership.  The objective is to create separate aggregate spending caps on public providers.

In general, there are separate UPLs for sub-groupings of providers by type of ownership:

  1. State owned or operated facilities (e.g., state hospitals).
  2. County or other local government owned or operated facilities (e.g., county public hospitals, county nursing homes).
  3. All other for-profit or non-profit facilities.

All UPL calculations are statewide and, again, in the aggregate for the provider type as a whole and for each ownership sub-group.

Prior to the federal requirement for separate UPL calculations by ownership class, a State Medicaid program could pay large supplemental payments to just county hospitals or county nursing homes, since public and private providers were in the same class for purposes of calculating the UPL.  Separate UPLs are now required in order to limit the ability of States to use Medicaid to pay State, county, or other government-owned facilities substantially more than their costs and more than other facilities.  States may still do so but the UPLs serve as an overall break on the practice.

Role of Intergovernmental Transfers:

Federal law requires that at least 40% of a State’s share of Medicaid benefit spending must come from the State itself.  The other 60% may come from the State or from local government, such as through a Intergovernmental Transfer (IGT).

If a given State’s federal matching rate is 50%, the State must somehow provide the other 50%.  At least 20 percentage points from the State budget (40% of the State 50% match) and no more than 30 percentage points from counties or other local governments (60% of the State’s 50% match).

Here is an example of how this can work:

  1. A county government also operates a public hospital.
  2. Therefore, the county is wearing two hats: (1) a local government that may help cover a portion of the State share of Medicaid and (2) a Medicaid provider (as owner of a facility).
  3. The county voluntarily sends the State money to help cover the State (non-federal) share of Medicaid expenditures.  This is the Intergovernmental Transfer.  (This may also be done through county certifying county spending on federally-matchable Medicaid services such as a facility operating deficit and a portion of that is then applied to Medicaid based on utilization mix.)
  4. The State runs the county dollars through Medicaid as normal, receiving the applicable federal Medicaid match.
  5. The State sends the county hospital a supplemental payment.  The supplemental payment typically exceeds the amount of the county’s IGT to the State.
  6. In most cases, this is a cooperative arrangement between the State and county.  If State stops the supplemental payment, the county merely stops sending the IGT payment.

UPL Programs:

States often develop supplemental payment programs to increase provider reimbursement up to the UPL if there is room between current reimbursement levels and the applicable UPL.  Most States now have one or more supplemental UPL payment programs.

UPL Problem for Medicaid Managed Care Expansion:

The Upper Payment Limits and the UPL calculations only apply to Medicaid fee-for-service spending.  Therefore, once a State Medicaid program creates a UPL program, both the State and providers become dependent on it as a Medicaid funding mechanism.  If a State with a UPL Program decides to use or expand the use of capitated managed care, it immediately runs into a fiscal and political problem.

Specifically, as managed care penetration grows within a State, the amount of fee-for-service spending declines and thus so does the amount of room available for supplemental fee-for-service payments under the UPLs.  Since Medicaid health plans are commonly capitated for hospital services, the shift from fee-for-service to managed care automatically reduces the ability of a State to make supplemental UPL payments to hospitals.  CMS interprets federal rules as prohibiting a State from directing that a Medicaid health plan pay particular rates or use a certain methodology.  Marketplace negotiations are expected to govern provider rates in capitated Medicaid managed care.  Therefore, there is no guarantee that county hospitals will receive the supplemental UPL-based payments upon which the county premised its Intergovernmental Transfers.