medicaid upper payment limit policies: overcoming a barrier to managed
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Medicaid Upper Payment Limit Policies:
Overcoming a Barrier to
Managed Care Expansion
Prepared by: The Lewin GroupAaron McKethan
Joel Menges
Sponsored by:Medicaid Health Plans of America
November 13, 2006
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I. Executive Summary
Expanding Medicaid managed care enrollment has the potential to slow the growth of Medicaid
costs, lead to more efficient service delivery, and promote high quality integrated systems of
care. The potential benefits of managed care have led many States to consider expansions in
capitated Medicaid programs to the extent that they are consistent with state health care policy
goals and specific market and political conditions. However, current Medicaid hospital
reimbursement calculations only include fee-for-service Medicaid utilization, which places
significant barriers to expanded use of capitated Medicaid managed care contracting in some
states.
The practical result of this dilemma is that states considering expanding Medicaid managed care
must balance any potential benefits against the risk of losing substantial Federal Upper Payment
Limit (UPL) funds that play an increasingly important role in supporting the public health care
sector, including public safety net hospitals. The fact that Medicaid UPL payment methods limit
states ability to expand managed care has certainly not been a conscious policy choice of the
Federal government it is an unintended consequence.
This report explores Medicaid UPL issues and recommends a policy solution to preserve existing
federal funds flow to support public safety net and other providers while also removing barriers
to the expansion of Medicaid managed care. The preferred policy approach would establish an
annual ceiling on extra Federal funds paid through the UPL and related mechanisms based on
each States existing stream of added Federal funds. Federal regulations would be revised to
permit managed Medicaid days to be counted towards the hospital UPL, subject to the limitation
that total additional UPL-related Federal payments cannot exceed specified annual ceilings. The
annual ceiling could increase for a reasonable inflation factor, and it could increase in proportion
to increases in overall Medicaid eligibility and inpatient admission volume. The purpose of this
policy change would be to remove an unintended barrier to managed care expansion, which
would in turn allow policy makers to evaluate more clearly the costs and benefits of their
Medicaid contracting strategies and make policy choices according to what works best for their
state.
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II. Introduction
Despite notably slower Medicaid growth and rebounding state revenues in 2006, pressure to
control Medicaid spending remains a priority for State and Federal policymakers. State
requirements to balance state budgets each year, rising health care costs, and growing numbers of
uninsured, elderly, and persons with disabilities continue to impose demands on Medicaid
programs across the country.1
One option for slowing the growth of Medicaid costs is to enroll more Medicaid beneficiaries
into capitated managed care organizations (MCOs). Under capitated contracting, MCOs receive
a monthly premium payment for each enrolled Medicaid beneficiary and are at risk for the costof covered services rendered to their enrolled population. Numerous studies indicate that
expanded Medicaid managed care enrollment has the potential to slow the growth of Medicaid
costs, lead to more efficient service delivery, and promote high quality integrated systems of
care.2
Moreover, capitated managed care also offers greater budget predictability compared to
fee-for-service (FFS) based approaches.
Nationally, only 16 percent of Medicaid expenditures were capitated as of Fiscal Year 2003.3
Thus, there is room for significant expansion nationally and in most states. Numerous factors
have limited the expansion of capitated arrangements in Medicaid programs. For example,
policymakers in some states have determined that expanded Medicaid capitation contracting is
not their best option for certain population subgroups given the states specific policy objectives,
market conditions, and political dynamics.
However, for many states, an important barrier is Federal payment policies that allow states to
claim supplemental upper payment limit (UPL) Federal matching funds related primarily to
hospital payments that are calculated based on the volume of fee-for-service (FFS) care
provided. As State leaders consider shifting more Medicaid beneficiaries from FFS to capitated
plans, they must balance the cost savings and other benefits of capitated managed care against
the reduction in UPL funds triggered by FFS service delivery.
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The Lewin Group (Lewin) has been engaged by the Medicaid Health Plans of America (MHPA)
to outline the brief history of the UPL mechanism and describe the impacts of the UPL on
capitated Medicaid managed care expansion in several states. This report includes the following
components:
An overview of common UPL program structures
A discussion of how and why UPL issues have served as an impediment to the expansion
of Medicaid managed care
Examples of how the UPL issues have evolved with respect to Medicaid managed care in
four states: Florida, Georgia, California, and Texas
A delineation of various policy options to navigate the challenges that the UPL funding
streams and capitated Medicaid managed care programs create
Recommendations on which option(s) seems most appropriate
III. Background on Upper Payment Limit Financing Arrangements
Federal policymakers and government officials have long sought to balance the need to provide
sufficient funding to Medicaid providers and maintain the fiscal integrity of the program. While
states have flexibility in designing and administrating State Medicaid programs and setting
provider payment rates, they must meet certain Federal requirements. In general, payment for
Medicaid services must be consistent with efficiency, economy, and quality of care. 4 For
example, Federal regulations place a ceiling on the State Medicaid expenditures that are eligible
for Federal matching funds for certain types of services. These UPLs for different types of
services apply in the aggregate to all payments to particular classes of providers, such as public
safety-net hospitals. For hospital services, UPLs are established as the amount that the Federal
Medicare program would pay for the same services.5
The rates that states pay their hospitals are often lower than Federal Medicare rates. Since the
UPL is linked to Medicare rates, states can receive additional Federal funding for the amount
under the UPL ceiling by making supplemental payments to hospitals beyond regular Medicaid
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rates. This usually involves a provider tax arrangement and/or intergovernmental transfers (IGT)
of funds from county or municipal governments (often the owners of local public hospitals) to
State governments. Table 1 presents a depiction of how the UPL Federal Maximization
financing mechanism is often structured, using hypothetical figures to illustrate the concept.
Table 1. Illustration of UPL Federal Maximization Mechanism (all figures hypothetical)
TypicalMedicaidPaymentApproach
Federal UPLMaximization
Approach, StateRetains Savings
Federal UPLMaximization
Approach,Hospital Realizes
Extra Revenue
Annual Medicaid FFS Number of Discharges 15,000 15,000 15,000
Payments to Hospital Per Discharge (assume thatUPL for the hospitals averages $10,000 perdischarge) $7,500 $10,000 $10,000
Total Claims Payments to Hospital for MedicaidDischarges (multiplies above two rows)
$112,500,000 $150,000,000 $150,000,000
Federal Payments (50% match rate assumed) $56,250,000 $75,000,000 $75,000,000
Initial State Payments (50% match rate assumed) $56,250,000 $75,000,000 $75,000,000
State Revenue From Provider Tax or IGT $0 $37,500,000 $37,500,000
Net Payments To Hospital (total) $112,500,000 $112,500,000 $131,250,000
Net Payments To Hospital (Federal share) $56,250,000 $75,000,000 $75,000,000
Net Payments To Hospital (State share) $56,250,000 $37,500,000 $56,250,000
Net Federal Cost of Maximization Arrangement $0 $18,750,000 $18,750,000
Net State Savings from MaximizationArrangement
$0 $18,750,000 $0
Net Hospital Revenue Gain via MaximizationArrangement
$0 $0 $18,750,000
Source: Hypothetical example prepared by The Lewin Group.
While the figures shown in Table 1 are hypothetical, these arrangements have large financial
implications for the Centers for Medicare and Medicaid Services (CMS), for State Medicaid
agencies, and for hospitals typically representing at least tens of millions of dollars annually in
any given State. The added Federal funds extracted through the UPL arrangement have no
strings regarding their use. Such funds can be retained by the State (as depicted in the second
column in Table 1) as net savings or used to finance other programs (which may or may not be
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health care related). Alternatively, the added Federal funds can be paid to hospitals and/or other
providers (as shown in Table 1s third column) or divided between the State and the provider
community in any other fashion based on the political outcome of the UPL arrangements
program design.
Many policymakers view UPL arrangements as Federal matching fund schemes that violate
the intended nature of the intergovernmental Medicaid partnership. In recent years, the Federal
government has attempted to curtail the practices of some states claiming Federal UPL funds,
particularly when such funds are used for non-health purposes. Nonetheless, for most states UPL
programs represent important sources of funding for safety-net hospitals and other providers.
Regardless of how the added Federal funds garnered through a UPL arrangement are being
deployed, any State realizing UPL revenues will understandably view Federal curtailment of the
arrangement as a significant takeaway. Thus, the future of Medicaid UPL arrangements is
uncertain. The political process will determine the degree to which such programs expand,
contract, or are maintained at existing monetary levels.
IV. UPL Issues Related To Medicaid Managed Care
Federal UPL payment policies have become an important consideration for states exploring how
best to design and implement Medicaid managed care initiatives. In calculating UPL payments,
states can only count the services utilized by Medicaid beneficiaries that are paid on a FFS basis.
Services provided to Medicaid beneficiaries enrolled in MCOs on a capitated contracting basis
are not counted. The intention of this distinction is to avoid having the Federal Governments
UPL-related extra payments balloon upward as both managed care and FFS days are counted.6
Thus, for admissions involving Medicaid MCO enrollees, hospitals currently do not have access
to any additional payment beyond the amount obtained from the health plan.
According to a document released by CMS in 2005, sixteen states use IGTs in ways that may be
deemed by CMS to be inappropriate. CMSs efforts to protect the fiscal integrity of the
Medicaid program and to curtail the questionable IGT practices of some states are
understandable. However, current UPL rules place strong barriers to capitated managed care
contracting in Medicaid programs. The practical result of this dilemma is that those states
considering expanding Medicaid managed care must balance the potential cost savings and other
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benefits attributed to capitation contracting against the risk of losing substantial Federal UPL
funds.
Table 2 demonstrates the dilemma States must often face, as the gains from the UPL funding
mechanism can easily more than offset the managed care savings a state can achieve. While the
Table 2 figures are also hypothetical, they are derived from the information presented earlier in
Table 1. In this scenario, if the target population generating the inpatient services shown in
Table 1 were transitioned into capitated MCOs, the annual Medicaid savings would be
approximately $14 million and these savings would be shared equally between the Federal and
state governments. However, the cost of these savings for the state would be the lost UPL
Federal revenues of nearly $19 million. Under this scenario, the implementation of the
Medicaid managed care program would yield a net Federal savings of $26 million but a State net
loss of $12 million. Given these dynamics, when forced to choose between expanding managed
care and preserving existing Federal maximization arrangements, it is understandable why the
UPL has become a major barrier to expansion of the capitated model. Conversely, Table 2 also
demonstrates the value of Medicaid managed care expansion to all parties if the UPL issues can
be successfully addressed (as both the Federal and State governments would save $7 million in
the example shown with no offsetting loss).
Table 2. Hypothetical Comparison of Managed Care Savings Versus UPL Funding Stream
Dollar Amount Comments
Total Claims Payments for Target Population $281,250,000Assumes inpatient costs in Table 1
are 40% of total claims costs for targetpopulation
Estimated Capitation Payments to MCOs $267,187,500Assumes Medicaid savings of 5%
compared to FFS costs
Estimated Medicaid Savings $14,062,500
Federal Savings $7,031,250 50% of total
State Savings $7,031,250 50% of total
Additional Federal Funds from UPLMaximization
$18,750,000 Derived in Table 1
Net Gain (Loss) to State Associated withManaged Care Expansion
($11,718,750)Loss of UPL funds: $18,750,000;
Gain from managed care: $7,031,250
Net Gain (Loss) to Federal GovernmentAssociated with Managed Care Expansion
$25,781,250UPL savings: $18,750,000;
managed care savings: $7,031,250
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Under current UPL rules, States face a challenging set of options:
States with UPL arrangements can maintain their existing FFS client base and continue to
receive UPL funding. This arrangement effectively eliminates the opportunity to lower
per capita costs through more coordinated service delivery associated with expansion of
Medicaid managed care. However, this arrangement preserves the UPL funds flow that
is calculated on the basis of Medicaid FFS population. States selecting this option can
use UPL proceeds to support safety net hospitals providing uncompensated care or to
achieve other policy goals.
States with existing UPL arrangements can transition their FFS client base to one ofnumerous coordinated or managed care models that exist in the Medicaid arena.
According to several studies conducted by Lewin in recent years, savings projections
associated with expansion of Medicaid managed care contracting range from 2 to 19
percent.7 This variation is attributable to state demographics, client characteristics, and
other factors. Despite these potential savings, however, states that choose to expand
managed care contracting for Medicaid beneficiaries lose the ability to claim Federal
UPL funds, which can contribute tens of millions of dollars annually into state coffers.
States with a current mix of FFS and managed care financing arrangements can maintain
this current financing model and avoid implementing any further expansions of capitated
managed care contracting. In the near term, this strategy effectively preserves existing
UPL funds flow (although such funds may eventually decrease due to future Federal
policy changes). However, in many situations this approach forces the state to maintain
what is a largely ineffective Medicaid FFS financing model.
States can also seek Federal demonstration authority to seek a specialized arrangement to
find a workable solution that preserves existing UPL funds to stabilize public safety net
hospitals while allowing for the expansion of Medicaid capitated contracting. The next
section highlights examples of how some states have made arrangements with CMS as
components of larger demonstrations. However, this approach is difficult to pursue, as it
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requires states to engage in lengthy and sometimes costly negotiations with CMS. This
approach also carries with it uncertain short-term and longer range outcomes and does
not produce national policy solutions to address the current problems that many States are
facing.
V. A View from Four States
States have responded to the challenges posed by UPL policies in numerous ways. Some have
opted to maintain the status quo and avoid undertaking major Medicaid managed care
expansions. Others have attempted to modify managed care contracts by carving out hospital
services on a FFS basis to qualify for UPL and still benefit to some extent from care. Still others
have consolidated supplemental payment funds into separate pools to allow for the more flexibledistribution of funding to safety net providers. This section outlines illustrative examples of how
UPL funding considerations have interacted with Medicaid managed care issues in four states.
It is important to note that UPL and IGT issues are interwoven with Medicaid managed care
expansion policies in several other states as well. In Illinois, for example, IGT and UPL
arrangements have played a key role in policy decisions not only to avoid expanding the use of
capitation contracting in Medicaid, but also to eliminate MCO contracting altogether. Potential
loss of UPL funds has also contributed to the implementation hurdles of managed care expansion
in Ohio.
Florida
In October 2005, CMS approved a Section 1115 demonstration allowing the State of Florida to
make fundamental changes to its Medicaid program.8 The program is changing from a defined
benefit to a defined contribution program in which the State allocates risk-adjusted premiums to
managed care plans for their Medicaid enrollees. Beneficiaries may use these premiums tochoose from among different coverage options, some of which will have maximum benefit limits
for adults. Medicaid will also subsidize beneficiaries enrolling in employer-sponsored or self-
employed health insurance coverage.
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The States need to contain Medicaid expenditure growth was an important impetus for Medicaid
reform. One strategy that State officials considered to achieve this goal was the expansion of
managed care enrollment among Medicaid beneficiaries. In recent years before reform was
implemented, only about 11 percent of total Medicaid expenditures were capitated in Florida,
leaving much room for expansion. However, shifting more Medicaid beneficiaries to managed
care plans posed numerous challenges before the demonstration was implemented. The
Medicaid programs hospital UPL program had generated significant Federal funds for hospitals
in the State. Before implementing its initiative, the State of Florida projected that it would
collect nearly $281 million in non-Federal funds (primarily from county governments through
IGTs). These funds would in turn generate nearly $402 million in additional matching Federal
funds for hospital UPL payments. Because Federal UPL matching funds are based on FFS
services and expenditures (and do not count capitated contracts), expanding enrollment in
capitated managed care would have effectively reduced the amount of UPL funding available
from the Federal government.
Protecting UPL funding was a high priority for Florida policymakers when the State negotiated
its Medicaid reform features with CMS. The State legislature made its action authorizing waiver
authority for Floridas Agency for Health Care Administration (AHCA) to establish a Medicaid
reform program contingent on Federal approval to preserve the UPL funding mechanism for
hospitals.9 The agreement that AHCA and CMS reached required the State to terminate its UPL
program. In its place, CMS approved a new Low Income Pool (LIP) to help ensure continued
support for health care providers serving uninsured and underinsured populations in Florida.
The LIP includes an annual allotment of $1 billion in total expenditures (Federal and non-Federal
shares) for each of the five years of the demonstration period. This represents an increase of
$300 million per year, net $1.5 billion over the five-year period of the waiver, compared to the
prior year UPL program total of $700M. Floridas current Federal medical assistance percentage
(FMAP) determines the Federal share of the annual $1 billion in LIP funds. With an FMAP of
59 percent, the State could generate $590 million per year in Federal funds for the LIP with the
remainder financed by State and local funds. According to the terms and conditions of Floridas
demonstration, CMS must approve all non-Federal funding sources used to trigger Federal funds
in the LIP. While Floridas Medicaid program is guaranteed $700 million (Federal and non-
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Federal shares) in LIP funds each year, the remaining $300 million is linked to achieving certain
milestones approved by CMS.
LIP payments may be used for health care expenditures including hospitals, clinics, or other
providers caring for the States Medicaid, uninsured, or underinsured populations.10 As part of
the transition from UPL to the LIP, funding for hospital providers that previously received
hospital UPL distributions (the States core safety-net providers) receive priority in the LIP
distribution methodology. Unlike the UPL program, AHCA is not required to calculate LIP
payments based on what Medicare would have paid for services provided by different hospital
types. The LIP also eliminates the distinction between MC and FFS contracting, effectively
allowing the expansion of capitated managed care contracting without reducing Federal
matching funds to providers. Moreover, from the standpoint of the Federal government,
Floridas LIP program establishes some budget predictability for supplemental payments.
Georgia
Georgia's Medicaid managed care program, Georgia Healthy Families, was implemented in June
2006 for Atlanta and Central regions and was expanded statewide by September 2006. The
program was part of a reform package to reduce the State's Medicaid costs. Slightly fewer than
one million TANF/Medicaid and SCHIP beneficiaries are enrolled in managed care plans in the
state, as of November 2006.
Prior to reform, the State had three UPL programs: inpatient hospital, outpatient hospital, and
nursing homes. In FY 2005, the State allocated approximately $536 million in UPL funds to
hospitals, compared to total disproportionate share hospital (DSH) disbursements of
approximately $420 million in total funds. Local governmental entities contributed IGT funds to
the State to qualify for Federal UPL matching funds. Critical access hospitals participate in UPL
without providing an IGT.
In recent years, the State had collected IGT revenue from local governmental entities in excess of
what was needed to generate Federal UPL payments. The State had directed excess revenue to
the regular Medicaid program to be used to generate a Federal match for additional funds into the
State. CMS required the state to eliminate the IGT requirement for FY 2006 as a condition of
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receiving UPL payments.a This agreement resulted in annual revenue reductions of $147 million
in overmatching funds the state lost that were previously used to generate Federal Revenue for
regular Medicaid payments.b
Managed care expansion will affect hospitals' UPL payments starting in FY 2007. Aggregate
hospital UPL payments are projected to decrease by approximately 50 percent when the program
is fully operational. Thus, the FY 07 impact will likely be less than a 50 percent reduction due to
the phase-in of the program.
To compensate for the loss of UPL funds, the State legislature authorized a new quality
assessment fee (HMO tax) and financing mechanism to be paid by participating managed care
organizations. Authorization to use these fees required further negotiation of a waiver with
CMS. The proceeds of these fees, which are applied uniformly to all managed care plans and
cannot exceed 3 percent of revenues, are deposited into a segregated account within the States
Indigent Care Trust Fund. These funds are then redirected to targeted safety net providers.
According to the Georgia Department of Community Health (DCH), it is not yet known whether
the HMO premium tax arrangement will fully hold hospitals harmless from the loss in UPL
funds associated with expansion of Medicaid managed care. Moreover, given CMSs concern
about various Medicaid maximization schemes, it is not clear how long such arrangements will
be possible. DCH is also considering other arrangements, such as pursuing demonstration
authority to implement a low-income pool similar to the one that Florida recently implemented
or seeking additional DSH funding.
a The nursing home UPL was not impacted.b The $147 million was a budgeted figure and the actual amount varied each year depending on the UPL level
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California
Californias Medi-Cal program, which serves more than 6 million eligible persons annually and
exceeds $34 billion in total annual costs, recently implemented a new hospital financing
methodology. The new methodology involves the use of certified public expenditures, the
creation of a safety net care pool and changes in the use of IGTs. These changes were made
because of increased scrutiny by CMS and concerns that IGT arrangements were not consistent
with federal policy. Moreover, these changes were made given the financial impacts to hospital
safety net care providers of Medi-Cals major managed care expansion proposal mandating the
enrollment of seniors and persons with disabilities into managed care.
In CY2004, California developed an initial concept on how to restructure hospital financing that
would ultimately establish a stable and sustainable financial structure to accommodate Medi-Cal
redesign proposals in order for the program to operate with maximum efficiency while providing
access to health care and sustainability of the network of safety-net hospitals. In attempting to
come into compliance with federal policies regarding the use of IGTs, Californias hospital
financing restructuring will result in the decreased use of IGT payments from approximately $1
billion annually to an annual figure of approximately $300 million. To address this potential
shortfall and to continue to fulfill the obligation to compensate public hospitals for their full
costs of all the patients they serve, the California Department of Health Services (CDHS)
designed a federal section 1115 demonstration and negotiated the provisions of the Special
Terms and Conditions (STC) of the demonstration with CMS. Major features of the STC include
moving to the use of certified public expenditures for reimbursements to public hospitals,
redirecting DSH funding from private safety net hospitals to public safety net hospitals, and the
creation of a Safety Net Care Pool to preserve federal funding historically used for
uncompensated care costs for both eligible Medi-Cal beneficiaries and the uninsured. The
demonstration was approved in August 2005 and became operational September 1, 2005.
The demonstration includes provisions removing the special financing barrier to expand the use
of capitated managed care and provides an additional $180 million annually of Federal funds via
the Safety Net Care Pool for the five-year demonstration period. The additional $180 million
annual allotment of Federal funds is contingent on the State achieving certain milestones,
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including the implementation of mandatory enrollment of seniors and most persons with
disabilities into managed care during Years 1 and 2, consistent with the Medi-Cal Redesign 2005
proposal. Another key milestone is the implementation of a Healthcare Coverage Initiative in
Years 3 - 5 for the purpose of providing health care coverage to uninsured individuals.
CDHS has proceeded to expand the Medi-Cal managed care program into 13 additional counties,
but there has been considerable political pressure notto implement the mandatory enrollment of
seniors and persons with disabilities into managed care with the exception of those managed care
plans in certain counties where the entire population is already mandatorily enrolled into
managed care. At the current time, the CDHS has yet to expand capitated Medi-Cal for
mandatorily enrolling seniors and persons with disabilities into managed care, which over the
course of years 1 and 2 of the demonstration would mean the loss of $360 million of additional
Federal funds.
Californias experience to date is important in demonstrating that while the special financing
arrangements and UPL-related issues are a significant barrier to expansion of the capitated
model, these arrangements are by no means the only barrier. Extending the capitated model to
high-need disabled Medi-Cal subgroups has been politically controversial both in the advocate
community and in the provider community. The attributes of the disabled population (stable
Medicaid eligibility, high costs in areas such as inpatient and pharmacy that MCOs are typicallymost able to influence, etc.) seem to be a strong fit for the fully integrated, capitated MCO
approach. Nonetheless, the political realities in many states entail widespread distrust in the
clinical outcomes that might occur. Moreover, the reality of saving money in Medicaid is that
providers will collectively receive less. The capitated MCO model, in applying the fullest array
of cost containment features available to a State Medicaid agency, offers the largest potential
savings but therefore also often brings about the strongest provider political resistance
(particularly among the hospital community). For states desiring to expand Medicaid managed
care, these and other political challenges must be overcome in addition to the barriers posed by
UPL and other special financing arrangements.
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Texas
Texas is another State that declared its intention to significantly expand capitated Medicaid
managed care for the elderly and disabled Medicaid population but experienced a shift in
priorities due to political and financial hurdles. In Texas case, the UPL issues loomed large in
changing the direction of the program. The shift away from full-risk capitation for the SSI
population has been particularly problematic in Texas given that the Medicaid agency (the
Health and Human Services Commission, or HHSC) conducted a large procurement for
capitated managed care contracts. HHSC prepared a detailed RFP in 2004 and 2005 and
received submissions from several health plans to serve the SSI population in most of Texas
large urban areas. However, this extensive developmental work by both HHSC and the MCO
community was ultimately negated by the decision not to implement the expansion of the SSI
MCO program expansion, STAR+Plus.
STAR+Plus has been hailed as an exemplary managed care pilot program integrating acute and
long term care services serving Harris County (Houston). The program has improved
beneficiary access to appropriate services while substantially reducing costs for State and Federal
governments. However, the Medicaid programs proposal to expand the STAR+Plus program to
additional counties met with resistance from public hospitals wary of losing UPL revenues.
Since the pilot effectively mandated managed care enrollment for eligible populations, UPLfunding streams tied to FFS services stand to decline significantly. HHSC estimated if
STAR+Plus expansion were implemented on a fully capitated basis, the State would lose $150
million in Federal UPL funds over a two year period.
Expansion of STAR+Plus was halted in 2005. To preserve UPL funds but continue with some
form of managed care for the SSI population, the legislature directed the Medicaid agency to
proceed with the STAR+Plus expansion, but also to carve out inpatient hospital services from the
MCOs capitation payments. This revised managed care expansion is in the process of being
implemented. While few involved parties view the inpatient carve-out as a cost-effective
solution for HHSC (given that this approach essentially makes the most expensive setting of care
free to the MCOs), many are optimistic that this initiative will occupy valuable middle
ground as the State seeks to overcome the UPL barriers described in this paper. In the near
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term, the target population will be transitioned into capitated health plans that provide an array of
care coordination programs and outreach. Over the longer term, many policymakers in the State
expect and hope to restore STAR+Plus to its intended full-risk design.
The Texas experience demonstrates the difficulties associated with expanding capitated managed
care if significant UPL issues exist. The UPL issue has been challenging for Texas policymakers
over the past two years, forcing them to abandon desired policy approaches and to patch together
alternatives that have significant flaws. During the same time period, however, other States
(such as Georgia) facing similar UPL concerns have been successful in devising solutions. The
difficulties associated with expanding managed in Texas can therefore only partially be
attributed to the UPL barriers themselves. These difficulties are also largely attributable to
various segments of the provider community being staunchly opposed to STAR+Plus expansion.
Thus, achieving the intended managed care expansion in Texas may be more politically
complicated than simply fixing the UPL issue.
VI. Policy Options
Existing Federal policies force a choice in many states between preserving existing UPL funding
streams and expanding the use of capitation. Given the financial benefits, it is very much in the
Federal governments interest to address this unintended problem. Importantly, there are many
policy approaches that would simultaneously preserve existing UPL funding levels and permit
expanded use of Medicaid capitation. These options are presented below.
Each of the options involve, as a first step, quantifying the additional Federal payments that have
been drawn down in each State by the existing UPL arrangement, and the degree to which such
funds are paid to Medicaid providers or used by the State for other purposes. One advantage of
the UPL arrangements is that the funding amounts are typically readily countable. Most states
involved in the UPL and IGT funding arrangements are keenly aware of the net monetary
impacts of the current arrangement, as are CMS and the involved Medicaid providers. Once the
level of additional Federal funds is quantified, there are many ways these funds can be both
protected and limited within the context of managed care expansion.
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1) Count Managed Care Days while Subjecting Each State to an Overall UPL Funding
Cap
Description: This approach would begin by establishing an overall annual ceiling on extra
Federal funds paid through the UPL and/or IGT mechanisms. The ceiling would be based on
each states existing stream of added Federal funds. The ceiling could be trended upwards
annually in accordance with an appropriate inflation index, and could also be adjusted upwards
in proportion to any changes in overall Medicaid eligibility and/or inpatient volume. Federal
regulations would be revised to permit managed Medicaid days to be counted towards the
hospital UPL, subject to the limitation that total additional UPL-related Federal payments cannot
exceed the specified annual ceilings. For example, if a certain public hospital in a State faces a
$50 million ceiling in annual Federal UPL payments, and this facilitys submitted claims
(including the managed care days) would lead to an added Federal payment of $70 million, the
hospitals additional payment would be recalibrated to be 5/7 of the initially tabulated amount.
Key Advantages: This approach makes no fundamental changes in the UPL funding mechanism,
beyond incorporating a cap on Federal costs (which neither increases nor decreases current
funding levels) and treating any Medicaid patient day or discharge equally regardless of whether
it occurs in the fee-for-service or capitated setting. Existing UPL funding streams would be
maintained and protected, Federal exposure to increased UPL outlays would be limited, and theUPL mechanism would no longer serve as a barrier to expanded use of capitation.
Key Drawbacks: Any ceiling on UPL funding levels in each State based on existing Federal
payment levels locks in current inequities between states. This seems to be a minor drawback,
given that such inequities already exist with regard to UPL mechanisms and the degree to which
each state is leveraging them today.
2) Convert Existing UPL Funds Into Extra Capitation Payments For All Medicaid
MCOs
Description: An option for a State that wishes to expand the use of capitated Medicaid managed
care is to create a UPL funding pool through extra capitation payments to MCOs (which would
be returned to the State in the form of a premium tax). Georgia, among others, has adopted an
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approach of this nature. Through this model, the State preserves its existing flow of extra
Federal funds; it just accesses these funds through a different door. As an example, a monthly
capitation payment that would normally be set at $200 might be raised to $206, with Federal
matching funds applied to the entire $206 capitation and the MCO returning extra $6 to the
State through a premium tax.
Key Advantages: States can continue to disburse the extra funds to safety net providers as has
occurred previously (and can also use the funds for other desired purposes). For States, the more
capitated models are used, the more that Federal funds can be drawn down. This arrangement
can not only maintain the extra stream of Federal funds that are used for safety net support, but
could expand it.
Key Drawbacks: Financing approaches specifically geared to drawing down extra Federal
funds and particularly those creating an open-ended Federal funding obligation are going to
be problematic for many Federal policymakers. Another drawback is the Federal position that
going forward, this kind of tax must be applied to all HMOs (not just Medicaid MCOs), which
would make HMOs less competitive financially in the commercial market relative to other
insurance products.
3) Convert Existing UPL Funds Into Extra Capitation Payments For Selected
Medicaid MCOs
Description: Massachusetts has created an enhanced Medicaid capitation rate mechanism only
for those MCOs that are owned by safety net hospitals. These health plans receive an enhanced
payment rate for all enrollees, and the enhanced MCO funds support the owner hospitals in their
role as major indigent care providers.
Key Advantages: This approach is effective in channeling extra funds to key targeted providers,
and the State can determine which strings are associated with the additional payments such
that certain safety net support objectives can be achieved.
Key Drawbacks: This approach creates an uneven playing field among the Medicaid MCOs in
the State. For example, in Massachusetts the MCOs receiving an enhanced capitation rate are,
all other things equal, able to pay network providers more than their competitor MCOs (or
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operate more profitably at similar provider payment rates). Thus, the subsidized MCOs enjoy
a substantial advantage in attracting enrollment and in operating viably.
4) Allow the Counting of Managed Care Days By Institutions Providing Care for High
Proportions of Medicaid Patients
Description: This approach is similar to the existing rules for making payments to
disproportionate share hospitals (DSH) and teaching hospitals for graduate medical education
(GME). Under the DSH program, facilities serving a disproportionate number of Medicaid
beneficiaries are compensated for those services through extra payments that make no distinction
between managed care and FFS volume. This approach would attempt to harmonize the
methods used to calculate UPL payments with DSH methods. According to a recent letter
written to the Bipartisan Commission on Medicaid Reform, the basic mechanics of this approach
is favored by Americas Health Insurance Plans (AHIP).11
Key Advantages: This approach would effectively remove the barriers to Medicaid managed
care expansion. It would also allow policymakers and CMS to avoid potentially challenging
determinations about how best to set overall annual UPL ceilings and growth factors for states as
required by Option # 1. Finally, this approach would benefit from the experience that CMS and
Medicaid agencies have with DSH payment methodologies.
Key Drawbacks: This approach could potentially lead to greater Federal outlays, even absent
managed care expansion. If a policy change counts managed care and FFS days in making UPL
calculations absent some form of a ceiling, states with existing capitated contracts would
immediately stand to gain significantly more funding at the expense of the Federal government.
This could be potentially mitigated by counting only managed care days after a certain date (i.e.
to include only managed care expansions), but this approach may be somewhat cumbersome to
administer and monitor.
5) Create an Explicit UPL Funding Pool for Each State
Description: Similar to Option # 1 above this option would involve essentially block granting
the additional Federal funds that are currently paid through the UPL/IGT arrangements in each
state. Through this approach, the state would dismantle all UPL-related arrangements that are
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generating extra Federal Medicaid funds, and creation of any new mechanisms would be
disallowed. In return, the Federal government would pay each state a lump sum representing the
existing level of UPL funds that are occurring. Each states and each hospitals levels could be
increased according to standard annual inflation index. Medicaid managed care programs of any
nature could then be implemented without impinging upon this special Federal funds flow.
Key Advantages: Each state could continue existing allocations of the extra Federal UPL
funds. States can also reallocate their pool of funds as deemed appropriate. Federal outlays
and future Federal exposure under these arrangements would be capped, but overall Medicaid
costs would not be limited.
Key Drawbacks: This would be a significant and controversial change in existing policy. The
approach locks in inequities among states regarding the level of extra funds CMS is currently
paying under the UPL arrangements. This would hardly be the only inequity across states in
Federal Medicaid spending (and existing UPL funding is in fact highly unequal across states),
but isolating the differential funding might nonetheless be difficult to achieve and defend.
6) Maintain The Status Quo
Description: CMS could maintain current UPL policies distinguishing between FFS and
managed care services. States would need to use the demonstration process to enact reforms and
UPL work-arounds with regard to managed care on an ad hoc basis.
Key Advantages: Some States have succeeded in effectively removed UPL barriers allowing
states to proceed with managed care expansion while preserving the flow of supplemental funds
to safety net and other providers.
Key Drawbacks: Demonstrations by nature are temporary and must be reauthorized or will
terminate after the demonstration period. The waiver process can be difficult to negotiate,requires significant investments of staff and other administrative resources, and results in ad hoc
rather than cohesive solutions that are applicable to all states. Moreover, some of the financing
arrangements being used by states to address UPL barriers, such as Georgias quality assessment
fee structure, are not likely to gain CMS approval going forward. Current Federal policy
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primarily forces states to choose between UPL preservation and managed care expansion, unless
a creative waiver solution can be designed, negotiated, and maintained.
VII. Lewin Recommendations
The degree to which desired managed care expansion initiatives are not being adopted due to
UPL and IGT issues appears to be growing by the year. Increasingly, states are seeking to
expand the capitated model to obtain maximum value from their available Medicaid dollars
and/or to achieve savings without imposing cuts in eligibility, benefits, or provider payment
rates. Ironically, the UPL mechanisms were never intended to prevent the implementation of
cost-effective models of managed care. Rather, managed care patient days were prohibited from
being counted towards UPL obligations simply as a means of preventing the gaming of Federal
funds from reaching far higher levels.
It is important that Federal policy be revised to remedy the current challenges states are
confronting as they seek to achieve needed Medicaid cost savings. The previous section outlined
a variety of policy options that seek to preserve existing UPL-related funds flows to safety net
providers, limit Federal exposure to UPL-related cost escalation, and remove barriers to the
expansion of capitated managed care programs.
Among the options identified, we recommend Option #1, as summarized below.
The Lewin Groups Recommended Policy Change: This approach would begin by
establishing an overall annual ceiling on extra Federal funds paid through the UPL and/or IGT
mechanisms. The ceiling would be based on each states existing stream of added Federal funds.
The ceiling could be trended upwards annually in accordance with an appropriate inflation index
and could also be adjusted upward in proportion to any changes in overall Medicaid eligibility
and/or inpatient volume. Federal regulations would be revised to permit managed Medicaid days
to be counted towards the hospital UPL, subject to the limitation that total additional UPL-
related Federal payments cannot exceed the specified annual ceilings.
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References
1 State Fiscal Conditions and Medicaid. October 2006. Kaiser Commission on Medicaid and the Uninsured. URL:http://www.kff.org/medicaid/upload/7580.pdf.
2 Four publicly available relevant studies in this area conducted by The Lewin Group include: ComparativeEvaluation of Pennsylvanias HealthChoices Program, May 2005,http://www.lewin.com/Lewin_Publications/Medicaid_and_S-CHIP/ComparativeEvalPAHealthChoices.htmAssessment of Medicaid Managed Care Expansion Options In Illinois, May 2005,http://www.lewin.com/Lewin_Publications/Medicaid_and_S-CHIP/MedicaidMCExpansion Options Illinois. htmActuarial Assessment of Medicaid Managed Care Expansion Options, January 2004,http://www.hhsc.State.tx.us/pubs/121503_MMC_CostEff_Amend.pdf,Comparison of Medicaid Pharmacy Costs and Usage between the Fee-for-Service and Capitated Setting, Jan. 2003,http://www.chcs.org/publications3960/publications_show.htm?doc_id=213037
3 Medicaid Capitation Expansions Potential Cost Savings. The Lewin Group. April 2006.4 Social Security Act, Title XIX, Section 1902(a)(30)(A). Available online at:
http://www.ssa.gov/OP_Home/ssact/title19/1902.htm5 42 U.S. Code of Federal Regulations 447.272
6 42 U.S. Code of Federal Regulations 438.607 Medicaid Managed Care Cost Savings A Synthesis of Fourteen Studies, conducted by The Lewin Group on
behalf of Americas Health Insurance Plans, 2004.8 Implementation of the demonstration began effective July 1, 2006 for Broward and Duval counties and will be
extended statewide by 2010.9 Florida Senate Bill 838, 2005. See: http://election.dos.State.fl.us/laws/05laws/convframe.html10 Permissible LIP expenditures are discussed in Special Terms and Conditions, 94.11 Letter to The Honorable Don Sundquist (Chairman) and The Honorable Angus King (Vice Chairman) from Karen
Ignagni (AHIP) (July 21, 2006).
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