Strategy 3: Intergovernmental Transfers and Other Alternative Funding Mechanisms

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Description of Strategy

A state may use a number of alternative funding mechanisms to help it enhance the federal contribution to a state's Medicaid program. The most common of these mechanisms are intergovernmental transfers (IGTs); disproportionate share hospital payments (DSH); and provider taxes, assessments and voluntary contributions. Although these financing arrangements are permitted by law, the federal government has placed some restrictions on how states can use them to maximize federal matching payments.

Intergovernmental transfers (IGTs) involve a transfer of funds among or between different levels of government. Under statutory authority, state-owned or operated facilities or "units" of local government (city, county, special purpose district or other governmental unit within a state) can make an IGT. In the case of Medicaid, one of these "units" of government transfers funds to the state Medicaid agency, which then uses the money to draw down the federal match for payment to a publicly owned provider for Medicaid services. The federal government's match is based on the state's federal matching rate.

IGTs can enhance a state's federal match (and thus bring additional funds to the state) in two main ways.

1. States can use county funds instead of state funds to generate a federal match to support services provided by counties. Wisconsin, for example, uses county funds to generate federal revenue for case management services; certain community-based waiver programs; and services such as crisis intervention, community supported living arrangements, and child care institutions.

2. States can use IGTs to help it claim additional federal funds based on upper payment limits. Under this model, a state can make payments to eligible public facilities using the rate Medicare pays for the same service, a rate that may exceed the state's standard Medicaid reimbursement rate. If it chooses to do so, a state then could use a portion of the new revenues generated-a share of the portion that remains after the standard Medicaid rate is paid-for other goods or services. To accomplish this goal, an IGT program must be carefully designed and must follow the federal guidelines that govern the amount of reimbursement a state can claim. This enables states to bring additional federal revenue into the state that exceeds the amount that could be generated from submitting service claims. (See figure 3.)

Rules governing the use of IGTs have changed considerably as a result of federal rules that became effective on March 13, 2001. These rules require states to separate UPLs by facility type, thus limiting a state's capacity to maximize their revenues by aggregating UPLs. Except for county-owned hospitals, the upper payment limits for each group of providers is100 percent of Medicare costs. County-owned hospitals can be paid 150 percent of Medicare costs. Thirty-four states now have UPL arrangements that were initiated under the previous rules. Activities under way in those states that are inconsistent with the new rules are being phased out over an eight-year transition period.

Disproportionate share hospital (DSH) payments support hospitals that serve large numbers of Medicaid beneficiaries and uninsured patients. Under federal law, states are required to make additional (not regular Medicaid) payments to these safety net hospitals. States receive federal Medicaid matching funds for these payments at the regular federal matching rate (50 percent to 76 percent). The state determines the formula for allocating the extra money to safety net providers.

Under the Balanced Budget Act of 1997 (BBA), the federal government limited the amount of federal funds available for DSH payments. This cap is different for each state, but generally relates to the amount of money the state historically spent on DSH. In addition, the BBA placed specific caps on 1) the amount of federal money available for DSH payments to mental health facilities and 2) the amount of money available for DSH payments to individual hospitals. States can work within the cap imposed in 1997 and the changed formula to allocate payments among eligible hospitals, but this does not bring in additional funds.

Provider taxes, assessments and voluntary contributions include taxes on classes of health care providers, donations or voluntary contributions made by health care providers, or assessments levied on health care providers. Several important provisos govern these funding sources. Provider assessments must be broad-based and applied uniformly to classes of providers. Donations or voluntary contributions must not have a direct or indirect relationship with Medicaid payments to that provider or class of providers, and intergovernmental transfers funded by taxes or donations prohibited under Medicaid law cannot be used as a state match for federal funds. Money from taxes could be used, for example, to augment the state Medicaid budget, maintain services, or pay higher rates.

Pros and Cons

Pros

Money obtained from these strategies can be used augment a state's Medicaid budget. It could, for example, enable states to pay higher rates or continue to cover optional services.

States can use DSH payments to help develop or maintain safety net providers in areas of the most need.

Cons

The cost of administering IGTs may exceed the additional revenue generated, especially if the state has few public Medicaid providers.

This is an area of endeavor in which the boundaries of state activity are continuing to be defined by the federal government due to concerns about abuses by some states. Recent tightening of rules and the potential for additional rule tightening may make states uncertain about whether this will be a reliable source of funding in the future.

State Experiences

Wisconsin is using both intergovernmental transfers and assessments on nursing homes. Its experiences are discussed in Medical Assistance and BadgerCare,(1) which describes the state's provider assessments levied on nursing homes and its intergovernmental transfer program. One portion of the intergovernmental transfer program uses county funds rather than state funds to generate federal revenues for services such as case management and crisis intervention. The other portion of the IGT program brings in additional federal revenue through claims based on unreimbursed expenses of county-owned nursing homes. The report notes that the federal government is challenging certain portions of Wisconsin's IGT program. The state's experience suggests that states considering IGTs or other alternative funding mechanisms should craft their proposals in consultation with the federal government and with the advice of legal experts.

Design and Policy Issues

What is the goal of this strategy? To generate flexible funds for the Medicaid program? To help support safety-net providers? To expand or maintain services? To enhance rates to attract more Medicaid providers?

Do the benefits of implementing these strategies exceed the costs? For example, does the state have a sufficient number of public providers to make the cost of administering an IGT program worthwhile? Can alternative financing be found if federal legislative or regulatory changes further constrain this funding source?

Would strategies such as provider taxes be politically feasible and help the state achieve one of its goals? What would it take to make them feasible? This strategy potentially can provide substantial funding for states but comes with great uncertainty, given the potential for continued federal rule making constraining states.

Federal and State Involvement/Constraints

The amount of federal funding a state can generate through intergovernmental transfers is limited by the upper payment limit (UPL). The upper payment limit is the maximum amount a state can pay a provider for services rendered to Medicaid patients. It is equal to the amount Medicare would pay for the same set of services. In other words, a state may not request federal support beyond certain limits associated with Medicare payment rates. Recent changes in the upper payment limit rules establish a separate upper payment limit for three separate groups of facilities: state-owned; private; and public, non-state. For each group, the state can continue to pay the maximum amount permissible under Medicare payment principles. Under the new rules, it no longer will be possible (after a phase-out period) to use any gaps between Medicare payment to private facilities and actual payments to private facilities to increase payments related to non-state, public facilities.(2)

Notes

1 An informational paper from the Legislative Fiscal Bureau published in January 2001. Wisconsin, Legislative Fiscal Bureau, Informational Paper 43, January 2001, at http://www.legis.state.wi.us/lfb/informationalpapers/2001/43.pdf

2 See Federal Register 66, no. 9 (Jan. 12, 2001), 42CFR Part 447. Provisions effective March 13, 2001.

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Strategy 3: Intergovernmental Transfers and Other Alternative Funding Mechanisms

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Description of Strategy

Pros and Cons

Pros

Cons

State Experiences

Design and Policy Issues

Federal and State Involvement/Constraints

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Notes

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