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Medicaid: Overview and Impact of New Regulations - Issue Paper medicaid
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Medicaid: Overview and Impact of New Regulations
Overview
In the past year the Administration has moved forward with changes to the Medicaid program
via rule making that have noteworthy implications for states, providers, beneficiaries and federal
spending. Medicaid serves multiple and unique roles in the health care system. The program
provides health coverage and long-term care supports to over 44 million people in low-income
families and nearly 14 million elderly and disabled people. The program is jointly financed by
the states and the federal government, but Medicaid is administered on a day-to-day basis by the
states within the parameters of federal law and regulations. The Centers for Medicare and
Medicaid Services (CMS) is the federal agency responsible for interpreting and implementing
the federal Medicaid statute through regulations and other guidance. In recent years, CMS
issued new regulations and guidance to help implement two major pieces of federal legislation:
The Medicare Modernization Act and the Deficit Reduction Act of 2005. In addition, the
Administration has also proposed major regulatory initiatives that would change long-standing
Medicaid policy by regulation rather than legislative action. In some cases, the policy changes
had been first proposed as legislative changes and then rejected by Congress.
Taken together, six new regulations could result in an estimated $12 billion reduction in federal
Medicaid spending over the next five years according to the regulatory impact statements
prepared by CMS. The Administration maintains that each of these rules is vitally important to
ensure the integrity of the Medicaid program.and that taxpayers are receiving the full value of
their dollars that are spent through Medicaid.
1
The Administration views the estimated five
year reduction in federal Medicaid spending as a very small share of expected Medicaid
spending over the next five years. However, members of Congress, states, beneficiaries and
providers have raised concerns that these changes could have serious negative consequences and
may be inconsistent with Medicaid policies enacted by the Congress. Congress has imposed
moratoriums on four of the six rules discussed in the brief and the effect of these regulations was
the subject of a Congressional Hearing on November 1, 2007.
2
Congressional action to block
regulations with estimated federal savings has budget implications because of CBO scoring rules
and PAYGO rules that require Congress to find offsets to pay for these changes.
While there is widespread agreement on the need to protect the fiscal integrity of the Medicaid
program, critics argue that the cumulative effect of these regulations and other federal actions
could adversely affect vulnerable beneficiaries, safety-net providers, and states in how they
administer and budget for Medicaid. States have also raised concerns that estimated federal
savings actually represents a shift in costs to states (i.e. states would have to either use state-
only funds to maintain programs or terminate critical services). Because states must balance
their budgets each year, this cost shift could significantly affect their ability to maintain services
January 2008 00

for current beneficiaries or to use the Medicaid program as a foundation and building block to
expand coverage to the uninsured. This cost shift to states would occur when many are already
expected to face budget shortfalls due to the weakening economy.
This brief focuses on six new regulations that have been the source of considerable controversy.
The brief explains current policy, the proposed regulatory changes as well as the impact and
issues with these changes. (Exhibit 1)
Exhibit 1
Regulations
Description
Estimated
Federal Cost
Impact
2008-2012
Status
Cost Limit for Providers
Operated by Units of
Government
Rule would limit reimbursement for
government providers to cost;
narrow the definition of a unit of
government and require providers
to retain all Medicaid payments.
$3.9 billion
reduction
Final rule - 5/29/07.
Moratorium through
5/25/08.
Graduate Medical
Education (GME)
Rule would eliminate Medicaid
reimbursement for GME (cost of
medical residents)
$1.8 billion
reduction
Proposed rule -
5/30/07.
Moratorium through
5/25/08
Rehabilitation (Rehab)
Service Option
Rule would restrict the scope of
rehab services that are eligible for
federal Medicaid matching
payments and eliminate coverage
for day habilitation services for
people with developmental
disabilities.
$2.3 billion
reduction
Proposed rule -
8/13/07.
Moratorium through
6/30/08
Administrative Claiming
and Transportation Costs
for School Based
Services
Rule would prohibit Medicaid
payments for administrative
activities (including outreach,
enrollment and support in gaining
access to EPSDT services)
performed by schools and
transportation of school-age
children to and from school.
$2.8 billion
reduction
Final rule- 12/28/07.
Moratorium through
6/30/08
Outpatient Services
Rule would restrict the scope of
Medicaid outpatient hospital
services and clarify the outpatient
upper payment calculation
CMS cannot
determine the
fiscal impact
Proposed rule -
9/28/07.
Targeted Case
Management (TCM)
The rule restricts the scope of case
management services and targeted
case management (TCM) and
specifies that federal Medicaid is
not available for TCM if there are
other third parties liable to pay for
those services.
$1.3 billion
reduction
Interim final rule -
12/4/07 00

New Medicaid Rules
The Administration proposed a series of new regulations that could reduce federal Medicaid
spending by an estimated $12 billion over the next five years, but critics believe at the cost of
adversely affecting states, providers and beneficiaries (Figure 1). Implementation of regulations
does not require Congressional action; however, if Congress determines that rules are
inconsistent with Congressional statutory intent, then legislative action is required to bar the
implementation of the regulations. Individuals or injured parties may also challenge rules in
federal court if they allege that the rulemaking process did not comport with the Administrative
Procedures Act (APA) or other federal laws, or if they allege that a rule exceeds the regulatory
authority granted by Congress. The regulations discussed below are all in various stages of the
regulatory process.
1. Medicaid Cost Limit for Providers Operated by Units of Government and
Provisions to Ensure the Integrity of the Federal-State Partnership
Current Policy. Under current policy, states are able to use intergovernmental transfers (IGTs)
to finance their Medicaid programs. IGTs are transfers of public funds between governmental
entities (i.e. counties to states) or within the same level of government (i.e. from a state
university hospital to the state Medicaid agency). The federal Medicaid statute explicitly
recognizes the legitimacy of IGTs involving tax revenues. Section 1903(w)(6)(A) of the Social
Security Act specifies that "the Secretary may not restrict States' use of funds where such funds
are derived from State or local taxes (or funds appropriated to State university teaching hospitals)
transferred from or certified by units of government within a State as the non-Federal share of
expenditures under this title, regardless of whether the unit of government is also a health care
K A I S E R C O M M I S S I O N O N
Medicaid and the Uninsured
Figure 1
Estimated Federal Medicaid Spending
Reductions For Regulations 2008-2012
23%
19%
11%
32%
15%
Note: CMS cannot determine the fiscal impact for the Outpatient Rule. SOURCE: OMB
estimated regulatory impact statements from proposed Medicaid rules.
2008-2012 Estimated Reduction in Federal
Medicaid Spending = 12.1 Billion
School-Based
Administration and
Transportation
Cost Limit for
Government Providers /
Definition of Unit of
Government
Rehab Option
Case Management /
Targeted Case
Management
Graduate Medical
Education
53% Reduced
Scope of Services
47% Reduced
Reimbursement
for Safety-Net
Hospitals 00

provider. The state share of Medicaid spending must consist of public funds and no more than
60 percent of the state share may be from local funds.
The rules around Upper Payment Limits (UPLs) govern how states pay types and classes o