Health Reform Legislation Expands Coverage Through Medicaid

27 April 2010 Publication
Authors: Denise R. Rodriguez Anil Shankar

Legal News Alert: Health Care

The federal health reform effort relies on the Medicaid state/federal partnership to extend health care coverage to new groups of low-income individuals and provides incentives to the states to improve the delivery of quality health care to Medicaid recipients. Because each state’s Medicaid program is unique, numerous federal and state policy decisions will be necessary to implement this piece of the health reform law.

CMS will have to interpret and implement the new law in a manner that allows each state to fit the new opportunities and requirements into its existing Medicaid program. Some of those decisions will be made through state laws or state and federal rulemaking processes, while others will be implemented through less formal mechanisms such as Medicaid state plan amendments or demonstration project applications.

Once the law is implemented, much-needed revenue should flow to those safety net health care providers that have been serving the neediest in their communities with little or no reimbursement. To ensure that the new federal dollars flow to those providers in the states that are in the best position to meet the needs of the newly expanded Medicaid population, health care providers and other interested parties should be alert to opportunities to participate throughout the implementation process.

This article summarizes the significant Medicaid changes adopted in the Patient Protection and Affordable Care Act (Affordable Care Act) as amended by the Health Care and Education Reconciliation Act of 2010 and identifies many of the important policy decisions that will have to be made at the federal level and in each state during the next few years.

Coverage Expansions

Historically, childless adults who are less than 65 years old and are not disabled or pregnant have not been eligible for Medicaid, regardless of their level of financial need. While some states have been able to obtain federal funding for services to uninsured, low-income individuals in this group through Medicaid demonstration projects, for the most part, their care has been covered through state and local programs or charity care. To a large extent, health care providers are simply not compensated at all for the services they render to these needy individuals.

As of 2014, each state Medicaid program will be required to cover childless adults with incomes below 133 percent of the federal poverty level. This group must receive a comprehensive range of services known as a benchmark or benchmark equivalent package. For three years, this eligibility expansion is financed fully by the federal government. The federal matching rate is then gradually reduced until 2020, when the federal medical assistance percentage for services rendered to this group is set at 90 percent. Effective April 1, 2010, states may elect to cover this entire group or may phase in coverage by income level, but federal matching funds will be available at the enhanced rates only when the coverage becomes mandatory in 2014.

CMS has taken the first step in implementing this expansion through the issuance of a letter to all State Medicaid Directors with initial guidance on establishing the new eligibility group. (SMDL #10-005; PPACA #1, April 9, 2010.) The letter notes that to preserve the earliest possible effective date of April 1, 2010 for the optional expansion, states must submit proposed state plan amendments by June 30, 2010. CMS will issue pre-printed forms to assist the states in this process. CMS takes the position that the increased federal matching rate available under the American Recovery and Reinvestment Act of 2009 (ARRA) is not available for this new optional group.

The Affordable Care Act also makes a change that could affect Medicaid eligibility for children in some states. Prior to the new law, states were required to cover children from ages one to six in families with incomes below 133 percent of the federal poverty level, and children ages six to 19 in families with incomes below 100 percent of the federal poverty level. The legislation amends the requirement for children ages six to 19 to require coverage up to 133 percent of the federal poverty level.

Effective January 1, 2014, young adults just out of foster care who were receiving Medicaid as foster children will continue to be eligible for Medicaid until they are 26 years old. The law also creates a new optional coverage category under which the states can provide family planning services and supplies only to non-pregnant individuals up to certain higher income levels than might otherwise apply.

With the increased federal dollars available to the states under the coverage expansions, Congress has imposed certain requirements designed to ensure that states maintain their financial contributions to the Medicaid program. As a condition of receiving any federal Medicaid dollars, effective immediately and until the insurance exchange is established in a state, the state cannot impose more restrictive eligibility requirements than those in effect on the date of enactment. This maintenance of effort requirement applies through September 30, 2014 with respect to children. However, from 2011 – 2013, there is a limited exception for certain eligibility groups with incomes more than 133 percent of the poverty line, if the state is experiencing a budget deficit.

In an effort to limit states’ ability to push their Medicaid costs down to local governments, Congress also included a restriction similar to the one included as a condition of increased federal Medicaid funding in ARRA. A state will not be eligible for the increased level of federal funding for the Medicaid expansion to childless adults if it requires local governments to bear more of the nonfederal share of Medicaid expenditures in the state than they did as of December 31, 2009. This provision includes a clarification, also applicable to ARRA, that local governments can voluntarily fund additional Medicaid expenditures without risking the loss of federal funding.

Service and Payment Changes

Health Homes. The Affordable Care Act creates an opportunity for health care providers with expertise in treating high-risk populations with chronic illnesses to work with their state Medicaid programs to shape a viable health home program. As of January 2011, states will have the option to provide specific “health home” services to Medicaid-eligible individuals with chronic conditions. This provision of the new law allows a state to focus a special care coordination program on certain groups or in certain geographic areas. As an incentive to the states to coordinate the health services rendered to this high-cost group of Medicaid recipients, state health home expenditures for the first two years of each state’s program will receive federal dollars at a 90-percent matching rate.

States will have flexibility to tailor their programs within the statutory parameters, subject to further guidelines to be developed by CMS. Individuals eligible to receive these health home services must have two chronic conditions such as asthma, diabetes, or heart disease or have one chronic condition and be at risk for another. Individuals with a serious and persistent mental health condition also will be eligible. Qualified providers will be designated by the states and approved by the Secretary, and can include physicians, clinics, home health agencies, or other entities that meet certain requirements. States choosing to provide health home services under their Medicaid state plans will be required to meet specific monitoring, evaluation, and reporting requirements related to the programs.

Preventive Care. The legislation also creates opportunities for state Medicaid programs to encourage preventive medicine. States now have the option to cover all clinical preventive services that the United States Preventive Task Force assigned a grade of A or B and, for adults, all vaccines that have been recommended by the Advisory Committee on Immunization Practices. The legislation offers a one-percent increase in the federal matching rate for these services, provided the state does not require cost-sharing. In addition, states are required to cover diagnostic, therapy, and counseling services and pharmacotherapy related to the cessation of tobacco use by pregnant women. Cost sharing for these services is prohibited.

Birth Centers. Effective on the date of enactment, state Medicaid programs are required to cover services at freestanding birth centers, which are health facilities other than hospitals where childbirth is planned to occur outside of a woman’s residence and which are licensed by the State to provide prenatal labor and delivery or postpartum care.

Payment Rates. The Affordable Care Act made only a few changes that directly affect payments to providers. The legislation does not contain provisions that had been included in the bill initially passed by the House, which would have required federal approval of state Medicaid rates. However, the law does clarify that the Medicaid and CHIP Payment and Access Commission (MACPAC), which was created by statute in 2009, is responsible for assessing Medicaid and CHIP payment policies for their impact on access and quality of care, including provider supply and the effect on providers who deal with a disproportionate share of low-income and other vulnerable populations. MACPAC does not have rulemaking power, but does submit recommendations to Congress, the Secretary of HHS, and the states.

Primary Care Services. Among the few specific changes to Medicaid provider payments, the law requires states to pay rates at least equal to Medicare payment rates for primary care services furnished in 2013 and 2014. Primary care services subject to this requirement include evaluation and management services and services related to immunization that are provided by a physician with a primary specialty of family medicine, general internal medicine, or pediatric medicine. Medicaid managed care plans also are subject to this requirement. Because many state Medicaid programs pay less than Medicare rates for physician services, this provision could result in a significant increase in reimbursement to eligible physicians during the two-year time period. These rate increases will be paid for by the federal government through a two-year increase in the federal medical assistance percentage to 100 percent for these services.

Disproportionate Share Hospitals. Based on the assumption that the new law will succeed in dramatically reducing the number of uninsured, Congress reduced Medicaid disproportionate share hospital (DSH) payments by $14.1 billion from 2014 through 2019 and imposed another $4 billion reduction in 2020. DSH payments are designed to compensate for the increased costs incurred by hospitals that serve a disproportionate number of Medicaid and other low-income individuals. For nearly 20 years, safety net hospitals throughout the country have relied on these payments as a source of funding to cover inadequate Medicaid payments and to help meet the costs incurred in serving the uninsured.

Currently, each state is allotted a specific amount of federal DSH funding. The Affordable Care Act reduces the national total of these allotments annually beginning with a $500 million reduction in 2014 and increasing gradually to a $5.6 billion reduction in 2019. The reduction then decreases to $4 billion in 2020. Although the statute does not specify how to allocate the reductions among the states, the secretary of HHS is directed to develop a “DSH Health Reform methodology” that must impose the largest percentage reduction on those states with the lowest rates of uninsured. The allocation method also must favor those states that target their DSH dollars to hospitals that serve a large volume of Medicaid recipients or to those hospitals that continue to experience high levels of uncompensated costs.

Even though the new law does not change the rules governing how states make Medicaid DSH payments to providers, the DSH Health Reform methodology could encourage some states to amend their DSH payment rules in an effort to minimize future reductions in federal DSH funding. For those providers that serve Medicaid recipients and other low-income groups, the methodology, which will likely be adopted by the CMS through the rulemaking process, could be a critical component of health reform.

Drug Rebates. Through the Medicaid Drug Rebate Program, drug manufacturers are required to provide rebates to state Medicaid agencies for drugs covered under the state Medicaid plan. The health care reform law raises the amount of this rebate from 15.1 percent for most brand name drugs to 23.1 percent, and raises the rebate for generic drugs from 11 percent to 13 percent. These rebates reduce Medicaid expenditures for both the state and federal government, but the legislation provides that the increase in the rebate percentage will be remitted to the federal government. In addition, for the first time, the Medicaid Drug Rebate program is extended to Medicaid managed care organizations, many of which had previously carved out prescription drug benefits because the rebate was not available. CMS’ second State Medicaid Directors Letter on the implementation of the Accountable Care Act addresses prescription drug rebates. (SMDL #10-006, PPACA #2, April 22, 2010.)

Health Care Acquired Conditions. The Accountable Care Act   also directs the secretary of HHS to issue regulations by July 1, 2011, prohibiting federal Medicaid payment for certain health care acquired conditions selected by the secretary. CMS has a similar prohibition in effect under Medicare, as do many states and private insurance programs.

In addition to the major changes outlined here, numerous other amendments have been made to the Medicaid statute on critical issues such as eligibility, the enrollment process, and income determinations. These amendments, while more technical in nature, could significantly impact the total federal Medicaid funding available to a state.

Demonstration Projects and Other Opportunities for Flexibility in State Medicaid Programs

Since the early 1990s, demonstration projects, approved under Section 1115 of the Social Security Act, have allowed states to test new approaches to the delivery of health care under Medicaid. The Secretary of HHS has exercised the broad discretion authorized under Section 1115 to encourage reform at the state level by waiving statutory requirements and by providing federal matching dollars for the demonstration projects. Signaling that the flexibility offered through the demonstration authority will continue to be needed as national health care reform is implemented, Congress directed the Secretary to issue regulations within six months that set forth procedures for considering applications for new projects, and for the renewal of existing projects. When the regulations are adopted, for the first time, demonstration projects will be subject to specific regulations addressing such procedural matters as public notice and participation, evaluation, and reporting.

The Affordable Care Act also creates new opportunities for states to receive funding for demonstration projects and other special programs. For example, states may be eligible for incentive payments for offering home- and community-based services as an alternative to nursing homes and may, under certain circumstances, pay for community-based attendant services. The law also includes statutory authority for specific types of demonstration projects addressing alternative payment models such as bundled payments for hospital and post-hospital care and global payments to large safety net hospital systems. In addition, funds are available through the newly created Center for Medicare and Medicaid Innovation for a variety of projects that test innovative payment methods or service delivery models and address deficits of care for a defined population. The Secretary of HHS will select the projects and may choose from a list of 20 models included in the legislation.


During the next few years, CMS and state agencies will issue various notices and proposed regulations that will seek input from interested parties. For safety net providers and others interested in caring for the Medicaid population, this presents a broad spectrum of opportunities to participate in the development of new policies and programs designed to bring about meaningful reform.

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Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:

Denise Rios Rodriguez
Los Angeles, California

Anil Shankar
Los Angeles, California

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