States Respond to COVID-19 Challenges but Also Take Advantage of New Opportunities to Address Long-Standing Issues: Results from a 50-State Medicaid Budget Survey for State Fiscal Years 2021 and 2022

Provider Rates and Taxes

Context

Fee-for-service (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. The COVID-19 pandemic, however, has changed this historic dynamic. With many providers facing financial strain from the increased costs of COVID-19 testing and treatment or from declining utilization for non-urgent care, especially in the early months of the pandemic, states facing budget challenges likely found rate reductions to be less feasible.¹ At the same time, starting early in the pandemic, Congress, states,² and the Administration adopted a number of policies to ease financial pressure on hospitals and other health care providers.³ Also, while most states increasingly rely on capitated arrangements with managed care organizations (MCOs) to deliver Medicaid services to most of their Medicaid populations, state-determined FFS rates remain important benchmarks for MCO payments in many states, often serving as the state-mandated payment floor.

In state fiscal year (FY) 2019, state payments to MCOs comprised about 46% of total Medicaid spending.⁴ State capitation payments to MCOs and limited benefit prepaid health plans (PHPs) must be actuarially sound,⁵ but within this broader constraint, states use a variety of mechanisms to adjust managed care plan risk, incentivize performance, and ensure plan payments are not too high or too low.⁶ To further state goals and priorities, including COVID-19 response, states can also implement CMS-approved “directed payments” that require MCOs and/or PHPs to apply certain methodologies (e.g., minimum fee schedules or uniform increases) when making payments to specified provider types. For example, CMS has permitted states to implement directed payments to ensure funds continue to flow to providers during the pandemic, even if utilization had decreased, but also permitted states to make pandemic-related adjustments to managed care contracts and capitation rates to provide financial protection and limits on financial risk for states and plans.

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 state Medicaid program, most states also rely on funding from health care providers and local governments generated through provider taxes, intergovernmental transfers (IGTs), and certified public expenditures (CPEs).⁷ Over time, states have increased their reliance on provider taxes, with expansions often driven by economic downturns.⁸

This section provides information about:

• FFS reimbursement rates;
• MCO capitation rate setting;
• Managed care plan (MCO & PHP) payment requirements; 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 2021 and FY 2022 (Figure 6 and Tables 3 and 4). In FY 2021, 42 states (out of 47 responding) reported implementing rate increases for at least one category of provider and 27 states reported implementing rate restrictions. In FY 2022, slightly more states reported at least one planned rate increase (45 states) and the number of states planning to restrict rates decreased slightly (26 states).

States reported rate increases for nursing facilities and home and community-based services (HCBS) providers more often than other provider categories (Figure 7). As discussed further below, approximately two-thirds of the states reporting a nursing facility or HCBS rate increase indicated that the increase was related, at least in part, to the COVID-19 pandemic. 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.) Two states (Colorado and Wyoming) reported rate reductions across most provider categories in FY 2021; three states (California, Idaho, and North Carolina) reported rate reductions across most provider categories in FY 2022; and Mississippi reported that its legislature had enacted a rate freeze for all providers for FY 2022 through FY 2024. Broader rate cuts across provider types are often linked to budget shortfalls.

More than two-thirds of responding states (33 of 47) indicated that one or more payment changes made in FY 2021 or FY 2022 are related in whole or in part to COVID-19. Across provider types, the vast majority of COVID-19-related payment changes were rate increases. COVID-19-related payment changes were most commonly associated with nursing facilities (27 states) and HCBS providers (26 states). Additionally, states reported a variety of other FFS payment changes in FY 2021 or planned for FY 2022 in response to COVID-19 including: increasing COVID-19 vaccine reimbursement rates to 100% of the Medicare rate (approximately $40 per dose) and allowing a broader range of providers to be reimbursed for vaccine administration such as pharmacists, home health agencies, ambulance providers, renal dialysis clinics, and outpatient behavioral health clinics; making retainer payments to HCBS providers and bed hold payments to institutional providers; and making supplemental or add-on payments to certain providers, especially nursing facilities, for COVID-19 patients.⁹

MCO capitation rate setting

This year’s survey asked states about remittances related to minimum medical loss ratios as well as the use of risk corridors in MCO contracts.

Minimum Medical Loss Ratios

The Medical Loss Ratio (MLR) reflects the proportion of total capitation payments received by an MCO spent on clinical services and quality improvement (where the remainder goes to administrative costs and profits). CMS published a final rule in 2016 that requires states to develop capitation rates for Medicaid managed care plans to achieve an MLR of at least 85% in the rate year, for rating periods and contracts starting on or after July 1, 2019.¹⁰ Analysis of National Association of Insurance Commissioners (NAIC) data for the Medicaid managed care market show that annual loss ratios in 2020 (in aggregate across plans) decreased by four percentage points from 2019 (and three percentage points from 2018), but still met the 85% minimum even without accounting for potential adjustments.¹¹

Contracts taking effect on or after July 1, 2017 must include a requirement for plans to calculate and report an MLR.¹² The 85% minimum MLR is the same standard that applies to Medicare Advantage and private large group plans. There is no federal requirement for Medicaid plans to pay remittances to the state if they fail to meet the MLR standard, but states have discretion to require remittances. (A state and the federal government share in any remittances in proportion to the state’s federal matching rate—if the state requires remittances). For a limited time (from federal fiscal years 2021 through 2023), The Substance Use Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities (SUPPORT) Act permits states to keep their regular state share of any remittances paid by Medicaid plans for expansion adults rather than only 10%.¹³

More than half of states that contract with MCOs always require MCOs to pay remittances when minimum MLR requirements are not met. States were asked whether they require MCOs that do not meet minimum MLR requirements to pay remittances. Of the 37 MCO states that responded to this year’s survey, 21 reported that they always require MCOs to pay remittances, while nine indicated they sometimes require MCOs to pay remittances (Exhibit 4). States reporting that they sometimes require remittances often limit this requirement to certain MCO contracts. For example, in Pennsylvania, physical health MCOs not meeting minimum MLR requirements are always required to pay remittances, while remittances for managed long-term services and supports (MLTSS) MCOs are at the Medicaid agency’s discretion. Likewise, Utah’s remittance requirements are limited to MCO contracts for the adult expansion population. In the District of Columbia, an MCO with an MLR less than 85% may be required to remit payments or be subject to other corrective actions. One state (South Carolina) reported allowing an exception to the remittance requirement if an MCO achieved a high National Committee for Quality Assurance (NCQA) health insurance plan rating. Seven states reported that they do not require remittances when their plans do not meet the minimum MLR requirement.

COVID-19 Risk Corridors

The COVID-19 pandemic caused major shifts in utilization across the healthcare industry that could not have been anticipated and incorporated into MCO capitation rate development for 2020 and 2021. CMS therefore allowed states to modify managed care contracts and rates in response to the pandemic, including through the imposition of risk corridor arrangements, where states and health plans agree to share profit or losses (at percentages specified in plan contracts) if aggregate spending falls above or below specified thresholds (two-sided risk corridor).¹⁴

More than half of MCO states implemented COVID-19-related risk corridors in their 2020 or 2021 contracts; about half of these states reported that they have or will recoup funds, while recoupment in the remaining states remains undetermined (i.e., yet to be reconciled) (Exhibit 5). Twenty-one of 37 responding MCO states reported imposing risk corridors in their MCO contracts for all or part of FY 2020 or FY 2021 in response to the COVID-19 pandemic. State MCO contract periods may be on a calendar year, fiscal year, or another period.¹⁵ One state (Hawaii) had risk corridors already in place but narrowed them in response to the pandemic. Of these 21 states, nine reported that recoupments had already occurred or were expected while 12 reported that potential recoupments remained undetermined. Tennessee noted that potential recoupments were undetermined but that any potential recoupments would be mitigated by utilization-based capitation rate reductions imposed in 2020. A number of states noted having risk corridors in place for at least one MCO program unrelated to the pandemic.¹⁶

Managed care PLAN (mco & php) payment requirements

States are generally prohibited from contractually directing how a managed care plan (MCO or PHP) pays its providers.¹⁷ Subject to CMS review and approval, however, states may implement certain “state directed payments” (permissible under 42 CFR Section 438(c))¹⁸ that require MCOs and/or PHPs to adopt minimum or maximum provider payment fee schedules or provide uniform dollar or percentage increases to network providers that provide a particular service under the contract.¹⁹ State directed payments must be: based on utilization and delivery of services covered under the managed care plan contract; reflected in capitation rate development and certification; and expected to advance at least one of the goals and objectives in the state’s managed care quality strategy.²⁰ In May 2020, CMS also announced temporary flexibilities to address the COVID-19 public health emergency (PHE), including the use of state directed payments to require managed care plans to temporarily enhance provider payments and to make retainer payments to HCBS providers covered under the managed care contract.²¹

COVID-19-Related State Directed MCO Payments

In FY 2021, more than one-third of responding MCO states (13 of 37) implemented new provider payment and/or pass-through requirements on MCOs in response to the COVID-19 emergency. In addition to these 13 states,²² two states (Florida and North Carolina) reported plans to add a new provider payment and/or pass-through requirement in FY 2022. New COVID-19-related provider payment requirements reported in FY 2021 and/or FY 2022 included COVID-19 testing and vaccine reimbursement requirements, rate increases or add-on payments for selected providers, HCBS retainer payments, and telehealth reimbursement rate requirements.

MCO and PHP Directed Fee Schedules

About two-thirds of responding states with MCO and/or PHP contracts (26 of 40) reported a minimum fee schedule that sets a reimbursement floor for one or more specified provider types (Exhibit 6). States with managed care plans (MCOs and/or PHPs) were asked to indicate, by provider type, the state directed minimum fee schedules in place for at least some managed care contracts as of July 1, 2021. The most frequently cited provider type was physicians or other professional services (16 states), followed by hospitals (14 states) and nursing facilities (14 states). Although most states reported that minimum fee schedules were tied to Medicaid FFS rates, a few states mentioned developing alternative fee schedules or using Medicare rates. For example, Indiana reported requiring MCOs to pay no less than Medicare rates across provider types in the Healthy Indiana Plan program for expansion adults; Maryland reported requiring MCOs to pay hospital rates set by the state’s Health Services Cost Review Commission; and Michigan reported using average commercial rates for a physician directed payment requirement. Fifteen states reported a minimum fee schedule for a provider type not specified in Exhibit 6 (including 12 states that also reported at least one other minimum fee schedule for a provider type noted in Exhibit 6).²³

Additionally, six states reported setting a maximum fee schedule for certain provider types under at least some managed care contracts.²⁴ For example, Wisconsin imposes a maximum fee schedule under certain long-term care managed care contracts for multiple provider types (including hospitals, physicians/other professional services, nursing facilities, dental, and transportation providers) and four other states set a maximum fee schedule for hospitals.

Over half of states with managed care contracts reported a uniform dollar or percentage increase payment requirement in place as of July 1, 2021, most commonly for hospitals.²⁵ Distinct from the minimum/maximum state directed fee schedules described above, a total of 24 states reported requiring MCOs or PHPs (of 40 responding) to provide a uniform dollar or percentage increase for network providers that provide a particular service as of July 1, 2021. By far, the most frequently cited provider type was hospitals, sometimes specific to inpatient or outpatient services, public or private hospitals, or teaching hospitals. Similar numbers of states reported using intergovernmental transfers (IGTs) and health care-related taxes to provide the non-federal share of these provider payments, with somewhat fewer states using State General Funds. A small number of states reported that the non-federal share for a single state directed payment was funded through multiple sources.

Provider Taxes

States continue to rely on provider taxes and fees to fund a portion of the non-federal share of Medicaid costs (Figure 8). 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).²⁶ 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-four states reported having three or more provider taxes in place in FY 2021 (Figure 8).²⁷

Very few states made or are making any changes to their provider tax structure in FY 2021 or FY 2022 (Table 5). The most common Medicaid provider taxes in place in FY 2021 were taxes on nursing facilities (45 states), followed by taxes on hospitals (44 states), intermediate care facilities for individuals with intellectual disabilities (33 states) and MCOs²⁸ (17 states). Only four states reported plans to add new taxes in FY 2022: Kentucky, Massachusetts, Oklahoma, and Wyoming reported new ambulance taxes (which will increase the number of states with ambulance taxes in FY 2022 to 11),²⁹ and Wyoming also reported a new physician tax. Only one state (Maryland) reported plans to eliminate a tax in FY 2022 (an MCO tax that previously was dedicated to funding Medicaid but beginning in FY 2022 will contribute to the State General Fund instead). Eleven states reported planned increases to one or more provider taxes in FY 2022, while two states reported planned decreases.³⁰