Medicaid Upper Payment Limit Policies: Overcoming a Barrier to Managed

8/14/2019 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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