May 29, 2020 | Policy Cheat Sheet


By Lauren Moran

The economic effects of COVID-19 on state budgets will likely persist over the next fiscal year and potentially much further. In addition to calling for federal action to financially bolster state Medicaid programs, such as temporarily increasing the federal medical assistance percentage (FMAP) again, Medicaid stakeholders are requesting that the Centers for Medicare & Medicaid Services (CMS) postpone the implementation of the Medicaid Fiscal Accountability Regulation (MFAR). Organizations like the National Governors Association (NGA), the National Association of Medicaid Directors (NAMD), and other health policy stakeholders contend that MFAR could increase the financial strain on state budgets that are already stretched thin by the pandemic. To that end, recently proposed legislation includes language about delaying MFAR.

  • A quick primer on state-federal Medicaid financing: There are three key elements of Medicaid financing that are relevant to MFAR. First, the federal government and states share the cost of Medicaid programs. While states have flexibility in financing their share of Medicaid costs, a certain percentage must come from states’ general fund and the remainder of the state’s share can be raised through mechanisms like provider taxes, certified public expenditures, and intergovernmental transfers. Second, there are several financing vehicles that cover certain provider types that go beyond payment for direct patient services — such as supplemental payments, upper payment limits, and disproportionate share hospital payments. Every state uses at least one of these financing practices and these payments represent a significant portion of Medicaid spending. Third, the shared Medicaid financing relationship between states and the federal government creates an incentive for states to maximize federal dollars, sometimes creating a tension between states and the federal government.
  • So what’s MFAR anyway?The complexity of Medicaid financing has increased over the years as states have maximized flexibilities around supplemental payments and other Medicaid financing options. In November 2019, CMS proposed MFAR under its program integrity strategy as a way to control rising Medicaid spending through increased fiscal oversight. CMS suggests that the current web of financing mechanisms allows states to take advantage of regulatory loopholes, which increases federal spending on Medicaid. The proposed rule was open for public comment through February 1, 2020 and is now under review at CMS.
  • Beyond general funds, how do states fund Medicaid? As noted earlier, states can use a variety of mechanisms to fund Medicaid outside of general state funds. A basic example is provider taxes, which nearly all Medicaid programs use to support a portion of Medicaid costs. These funds are matched through the federal medical assistance percentage (FMAP), which means more federal Medicaid funds in the state budget and less competition for other state revenue sources. In many instances, the taxed providers in turn receive higher rates for services provided to Medicaid beneficiaries. A recent analysis found that states’ use of financing mechanisms other than general funds increases the federal share by five percentage points.
  • What would MFAR change? Among other things, MFAR would: (1) add new federal oversight of supplemental payments, provider taxes, and other state Medicaid financing mechanisms; (2) limit some financing arrangements, such as upper payment limits and intergovernmental transfers; and (3) ultimately expand the circumstances under which CMS can deny these arrangements. See Kaiser Family Foundation’s detailed overview of the changes.
  • Why does this matter? MFAR is a very technical proposed rule that is aimed at enhancing program integrity through increased federal oversight of state Medicaid financing arrangements. Many stakeholders suggest that MFAR will undermine states’ budgeting decisions and disrupt the federal-state financing relationship, which ultimately imposes risks on Medicaid providers and beneficiary access to health services. Some argue that MFAR will potentially limit how states can raise revenue to pay for Medicaid, create budget uncertainty for states, and curtail funding for safety net providers through Medicaid. If implemented, some estimate the cuts to Medicaid spending — federal and state combined — could be in the range of $37-49 billion or 6-8 percent. In light of COVID-19, there are new concerns that, if fully implemented during the next year, MFAR could destabilize states’ Medicaid financing at a time of increasing enrollment, provider financial instability, reduced state revenues, and increased state budget uncertainty.
  • What are stakeholders requesting? NAMD requested a two-year delay and NGA requested that MFAR not move forward at all. Similarly, organizations like LA Care, one of the largest public managed care organizations in the nation, are calling on CMS to suspend MFAR.
  • What’s the bottom line? The current system of Medicaid financing is very complex and often difficult to follow. The federal government — along with the nation’s taxpayers — has a legitimate interest in streamlining and increasing transparency to understand how providers are paid. Yet, the current Medicaid financing system took decades to build and is now the underpinning of the entire safety net. At the same time, states also have a legitimate interest in preserving their autonomy in how they raise revenues. This is the classic clash of state and federal interests that have historically colored the Medicaid state-federal partnership. If implemented, MFAR would drastically impact how states generate revenue to fund their share of Medicaid costs. Particularly now as states are grappling with fragile budgets, many stakeholders are calling for a delay or total abandonment of MFAR.

What Else is Worth Watching?

  • Justice-involved population and COVID-19: The pandemic has implications for the US criminal justice system, including populations in detention centers and the staff who work there. A recent Kaiser Family Foundation brief explores this topic, with a focus on the health care needs of the justice-involved population during COVID-19.
  • Supporting Medicaid IT systems: Data systems are essential to Medicaid program operations. Providing clear and usable data is essential for state efforts around testing, evaluation, and cross-sector alignment. State Health and Value Strategies recently released an overview of strategies to strengthen Medicaid IT systems during the pandemic.
  • The impact of COVID-19 on maternity care: The pandemic accelerated significant advancements in telehealth, a shift in care delivery that also affects maternity care services. A recent Commonwealth Fund brief explores this dynamic.

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