Amid Unwinding of Pandemic-Era Policies, Medicaid Programs Continue to Focus on Delivery Systems, Benefits, and Reimbursement Rates: Results from an Annual Medicaid Budget Survey for State Fiscal Years 2023 and 2024

Provider Rates and Taxes

Context

In general, states have broad latitude under federal laws and regulations to determine fee-for-service (FFS) provider payments so long as the payments: are consistent with efficiency, economy, and quality of care; safeguard against unnecessary utilization; and are sufficient to enlist enough providers to ensure that Medicaid enrollees have access to care that is equal to the level of access enjoyed by the general population in the same geographic area.¹ Subject to certain exceptions,² states are not permitted to set the rates that managed care entities pay to providers. However, state-determined FFS rates remain important benchmarks for MCO payments in most states, often serving as the state-mandated payment floor. Proposed rules from CMS related to ensuring access to Medicaid services would require states to publish all Medicaid FFS payment rates by January 1, 2026, as well as compare payment rates to the Medicare rate for certain services.³ Proposed rules would also set financial thresholds that states cannot fall below when reducing rates for specific services. Additionally, proposed rules related to minimum staffing standards in nursing facilities would require states to report the percent of Medicaid payments for institutional long-term services and supports spent on compensation for direct care workers and support staff.

Historically, FFS provider rate changes generally reflect broader economic conditions. During economic downturns where states may face revenue shortfalls, states have typically turned to provider rate restrictions to contain costs. Conversely, states are more likely to increase provider rates during periods of recovery and revenue growth. However, during the COVID-19 pandemic, state and federal policymakers wished to avoid the use of rate reductions to address budget challenges due to the financial strains that providers were experiencing from the increased COVID-19 testing and treatment costs and from declining utilization for non-urgent care. Federal policymakers adopted a number of policies to ease financial pressure on states, hospitals, and other health care providers, including enhanced Medicaid matching funds for states (phasing down through December 2023) and enhanced funding for home and community-based services (HCBS) (available through March 21, 2025) designed to bolster rates and the direct care workforce. The expiration of these federal funds will impact state budgets and could affect providers, as states consider whether to maintain the funding increases made possible by enhanced federal matching funds, or other one-time funding sources.

States have considerable flexibility in determining how to finance the non-federal share of state Medicaid payments, within certain limits. In addition to state general funds appropriated directly to the Medicaid program, most states also rely on funding from health care providers and local governments generated through provider taxes, user fees, intergovernmental transfers (IGTs), and certified public expenditures (CPEs). Over time, states have increased their reliance on provider taxes, with expansions often driven by economic downturns.

This section provides information about:

• FFS reimbursement rates; and
• Provider taxes

Findings

FFS Reimbursement Rates

At the time of the survey, responding states had implemented or were planning more FFS rate increases than rate restrictions in both FY 2023 and FY 2024 (Figure 7 and Tables 1 and 2). All responding states in FY 2023 (48) and all but one responding state in FY 2024 (47) reported implementing rate increases for at least one category of provider. Fewer states (21 in FY 2023 and 19 in FY 2024) implemented or were planning to implement at least one rate restriction.

States reported continued pressures to increase provider rates in response to inflationary impacts and workforce shortages. Many states employ cost-based reimbursement methodologies for some provider types, such as nursing facilities and critical access hospitals, that automatically adjust for inflation and other cost factors during the rate setting process. States also reported that rates for some provider types are benchmarked to Medicare rates and therefore increase commensurate with Medicare increases. A few states highlighted comprehensive rate review analyses underway that are expected to continue on a regular schedule in the future (e.g., every four to five years), which may inform the state budget process.

States reported rate increases for nursing facilities and HCBS providers more often than for other provider categories (Figure 8). In some cases, state officials reported that nursing facility and HCBS rate increases included, at least in part, the continuation of pandemic-related payments or represent temporary rate increases or supplemental payments to HCBS providers using American Rescue Plan Act (ARPA) funds. Some states reported enhanced rates associated with the PHE will be discontinued, while other states noted that these rate increases were made permanent. Reflecting the ongoing staffing-related challenges impacting nursing facility and HCBS services, several states reported more significant nursing facility or HCBS rate increases. Examples of HCBS rate increases include the following:

• Alaska reported that rates for HCBS providers were increased by 10% on July 1, 2022, by an average of 5% (following rebasing) on May 1, 2023, and then again on July 1, 2023 (7.9%) to implement legislatively required increases and an inflationary adjustment.
• Colorado increased base wages in the FY 2023-2024 budget for workers providing most HCBS from $15.00 to $15.75 per hour.
• The District of Columbia reported supplemental payments were approved for qualifying HCBS providers so that they will earn an average wage rate of 117.6% of the District’s minimum wage by FY 2025.
• Utah reported in 2023 almost all rates for developmental disabilities waiver services with direct service care components were increased by 19.5%.
• Indiana reported increases of 42.4% for HCBS waivers serving the aged and disabled, 23.3% for HCBS waivers serving persons with intellectual and developmental disabilities, and 32% for home health services.
  Nevada reported that HCBS rate increases were approved during the 2023 legislative session including for developmental disabilities waiver services (26.9% on average), personal care services (140% on average), and services to frail elderly in Assisted Living Facilities (98% on average).

Examples of notable nursing facility rate increases reported by states include the following:

• Nevada reported that a 24.5% increase for freestanding nursing facilities was approved during its 2023 legislative session.
• Illinois increased its average nursing facility per diem rate by 21% in FY 2023 as part of a major rate reform effort and also reported plans to increase the nursing home support rate (a component of the per diem rate) by 12% on January 1, 2024.
• Nebraska reported a 20% rate increase for nursing facilities in FY 2023 and a 3% increase in FY 2024.
• Ohio reported a 2.3% rate increase for nursing facilities in FY 2023 and a 17.1% increase in FY 2024.
• Wyoming reported a 20% nursing facility rate increase effective July 1, 2023.

Nearly half of responding states (23) reported increasing primary care physician rates in FY 2023 and nearly two-thirds (30) reported plans to do so in FY 2024. This compares with 15 states reporting increases in FY 2022, 19 in FY 2021, and 21 in FY 2020. Notable increases reported for FY 2023 or FY 2024 include a 41.8% increase in specific evaluation and management codes in Alabama and an 11.8% rate increase for primary care providers in Michigan. Other states reported benchmarking to Medicare rates, for example, 100% of the current Medicare rates in Maine, and 80% of Medicare in New York and Oregon.

Similar to the 2022 survey, the 2023 survey found an increased focus on dental rates with more than half of reporting states (29 in FY 2023 and 26 in FY 2024) reporting implementing or plans to implement a dental rate increase, in some cases benchmarked to the American Dental Association national fee survey. This compares with 14 states reporting increases each year in the 2019, 2020, and 2021 surveys.⁴ Notable dental rate increases reported for FY 2023 or FY 2024 include increasing rates 25% (Connecticut and Wyoming); raising rates to average commercial rates (or a share of commercial rates) (Michigan and Vermont), and introducing a supplemental payment based on average commercial rates (Iowa). Additionally, Illinois reported making a $10 million investment in dental rate increases effective January 2023.

While states reported imposing more restrictions on inpatient hospital and nursing facility rates than on other provider types, most of these restrictions were rate freezes rather than actual reductions. (Because inpatient hospital and nursing facility services are more likely to receive routine cost-of-living adjustments than other provider types, this report counts rate freezes for these providers as restrictions.) There is one important caveat to consider when evaluating FFS hospital rate changes: in addition to FFS reimbursement, states make supplemental payments to fund hospital care such as Upper Payment Limit payments, State Directed Payments, Graduate Medical Education, and Disproportionate Share Hospital payments. One or more of these payment types could be increasing during a fiscal year even if the base hospital payments are not. In fact, one state (Kansas) reported that it restructured a provider tax-funded payment from an add-on payment to a quarterly State Directed Payment which resulted in a reduction to inpatient and outpatient hospital FFS payments in FY 2024.

Beyond the inpatient hospital and nursing facility rate restrictions described above, only three states reported other rate restrictions: Alaska reported reductions in outpatient hospital and dental rates in both FY 2023 and FY 2024, Kansas reported a reduction for outpatient hospital rates in FY 2024, and North Carolina reported HCBS rate reductions in FY 2023 and that both HCBS and nursing facility rates decreased in FY 2024 when COVID-19 add-on payments expired. No states reported legislative action to freeze or reduce rates across all or most provider categories in either FY 2023 or FY 2024.

More than three-quarters of responding states (39 of 48) implemented FFS rate increases for one or more behavioral health providers in FY 2023 or plans to do so in FY 2024 (Figure 9). States may increase reimbursement rates for behavioral health (mental health and Substance Use Disorder) providers as one strategy to address workforce shortages. On this year’s survey, states were asked whether they have or plan to increase reimbursement rates for one or more behavioral health providers (in FY 2023 and/or FY 2024). Thirty-two states reported rate increases in FY 2023 and 33 states reported plans to increase rates in FY 2024. Sixteen states reported no rate increases for FY 2023 and 11 states reported no rate increases for FY 2024.

Some states noted rate increases were targeted to specific provider types, such as increases for Substance Use Disorder (SUD) service providers (including outpatient and institutional providers), psychotherapy/counseling providers, or for applied behavioral analysis (ABA) providers. Other states implemented increases that were more widespread. Rate increase examples include:

• Iowa reported that behavioral health intervention providers received a 20.6% increase in FY 2023, ABA providers received an 8.9% increase in FY 2023, individual mental health practitioners will receive a 56.6% increase in FY 2024, SUD providers will receive a 96.5% increase in FY 2024, and Psychiatric Medicaid Institutions for Children will receive a 27.6% increase in FY 2024.
• Nebraska reported across the board behavioral health rate increases of 17% in FY 2023 and 3% in FY 2024.
• New Mexico reported increasing FY 2024 behavioral health rates to 120% of Medicare and plans to review rates annually in the future.
• Oregon reported an aggregate increase of 30% for behavioral health services by procedure code in FY 2023. The state focused on SUD, behavioral health outpatient, ABA, peer support, and residential services.
• South Dakota reported 16% increases for SUD and Community Mental Health Center (CMHC) providers and a 5% inflationary increase for other behavioral health services in FY 2023.
• Vermont reported mental health providers received an 8% rate increase in FY 2023 and a 5% rate increase in FY 2024, while SUD providers received a 5% rate increase in FY 2023 and a 5% rate increase in FY 2024.

A few states mentioned behavioral health rate studies underway or recently completed and/or the implementation of new rate methodologies for certain behavioral health services. Although states were not asked if they require MCOs to implement the FFS rate increases (for example, through a state-directed payment), previous KFF research suggests that many states that contract with MCOs may require MCOs to implement behavioral health provider rate increases. For example, Tennessee reported that through managed care directed payments, provider rates were increased for crisis services in 2023.

Provider Taxes

States continue to rely on provider taxes and fees to fund a portion of the non-federal share of Medicaid costs (Figure 10). Provider taxes are an integral source of Medicaid financing, comprising approximately 17% of the nonfederal share of total Medicaid payments in FY 2018 according to the Government Accountability Office (GAO).⁵ At the beginning of FY 2003, 21 states had at least one provider tax in place. Over the next decade, most states imposed new taxes or fees and increased existing tax rates and fees to raise revenue to support Medicaid. By FY 2013, all but one state (Alaska) had at least one provider tax or fee in place. In this year’s survey, states reported a continued reliance on provider taxes and fees to fund a portion of the non-federal share of Medicaid costs. Thirty-nine states had three or more provider taxes in place in FY 2023 and seven other states had two provider taxes in place (Figure 10).⁶  As of July 1, 2023, 34 states reported at least one provider tax that is above 5.5% of net patient revenues, which is close to the maximum federal safe harbor or allowable threshold of 6%. Federal action to lower that threshold or eliminate provider taxes, as has been proposed in the past, would therefore have financial implications for many states.

Few states made or are making significant changes to their provider tax structure in FY 2023 or FY 2024 (Table 3). The most common Medicaid provider taxes in place in FY 2023 were taxes on nursing facilities (45 states), followed by taxes on hospitals (44 states), intermediate care facilities for individuals with intellectual disabilities (32 states), MCOs⁷ (19 states), and ambulance providers (15 states). Only three states reported plans to add new taxes in FY 2024 (Iowa (MCO), Wisconsin (ambulance), and Wyoming (ambulance and Psychiatric Residential Treatment Facilities)). Vermont plans to eliminate a home health tax in FY 2024. Twenty-one states reported planned increases to one or more provider taxes in FY 2024, while three states reported planned decreases (Missouri, Vermont, and Maryland).⁸