This is the second article in our series addressing important topics for federally qualified health centers (FQHC) and the providers who work with them. Our first post in the series offered five tips for contracting with FQHCs.

The typical FQHC predominately serves Medicaid patients and relies on Medicaid revenue to support its operations more than any other funding source. Yet understanding the nuts and bolts of Medicaid reimbursement for FQHCs can seem hopeless when faced with the tangle of federal statutes, state laws, and agency interpretations that are relevant to the subject. To unknot the tangle, this article covers the basics of how FQHCs must be paid under the federal Medicaid statute.

All States Must Provide the Medicaid FQHC Benefit

The term “FQHC” denotes both a category of service and a category of provider. State Medicaid programs are obligated under federal law to pay for “federally qualified health center services,” which include the services of physicians and certain other qualified health professionals, as well as “incident to” services provided under the supervision of qualified health professionals. They are also obligated to pay for “any other ambulatory service offered by a Federally-qualified health center and which are otherwise included in the [state’s Medicaid plan.]” In other words, the Medicaid FQHC benefit is defined to include not only a core set of professional services, but also a range of other services furnished by the FQHC.

FQHCs Must Be Paid at Least the Prospective Payment System Rate

While states have some latitude in designing Medicaid FQHC payments, there is a federal floor that payments cannot fall below, which is effectuated through the prospective payment system (PPS). The PPS establishes a single, per-visit payment designed to compensate an FQHC for all the costs it reasonably incurs serving Medicaid patients. States that do not pay FQHCs at least the PPS rate for visits with Medicaid patients forfeit their right to federal financial support.

The PPS rate is identical for each billable patient visit, no matter how sick the patient or how intense the required services. A billable patient visit may be defined differently in every state, but will generally be based on a face-to-face interaction with a medical practitioner such as a physician or nurse practitioner. With some exceptions, states limit FQHC billing to a single visit per patient per day. While states are permitted to use alternative payment methodologies (APM) in place of the PPS, an APM must result in payment to the FQHC that is at least equal to the PPS amount it would otherwise be entitled to receive.

PPS Rates Are Based on Reasonable Costs

PPS rates are established by the FQHC submitting a cost report that documents all the FQHC’s allowable costs and patient visits in a ratesetting year. The calculated PPS rate is equal to the FQHC’s total allowable costs divided by its total patient visits in that ratesetting year. Alternatively, an FQHC may choose to receive the same PPS rate already in use by an FQHC or group of FQHCs in the same geographic area with a similar caseload—a so-called “comparable center” methodology intended to reduce the administrative burden of ratesetting while still ensuring the FQHC is paid a rate that covers all its reasonable costs.

Once a PPS rate is established (whichever method is selected), an FQHC is not automatically required to submit a new cost report in a subsequent year and receive a new rate. Although initially based on cost, the PPS rate is truly “prospective” because it applies indefinitely into the future.

PPS Rates Are Adjusted After a Change in Scope of Services

Established FQHC PPS rates are adjusted in two ways. First, they are increased each year by Medicare’s measure of inflation for primary care. Second, the rate must be adjusted when the FQHC changes its scope of services. The Centers for Medicare & Medicaid Services (CMS) have described a change in scope of services as “a change in the type, intensity, duration and/or amount of services.” Requesting a change in scope of services allows an FQHC to refresh its PPS rate by submitting a new cost report—which is vitally important when the FQHC’s costs per patient increase because it has begun providing more intense care or serving a sicker population.

States Must Make Up the Difference Between Managed Care Payments and PPS Rates

FQHCs are also entitled to supplemental payments for services provided under contract with a Medicaid managed care plan. Federal law directs each state to ensure that an FQHC is made whole when it is paid by a Medicaid managed care plan: if the managed care plan’s payments are less than what the FQHC would have received for the same services under the PPS methodology, the state must pay the difference. States are required to make these supplemental payments (often called wraparound payments) on an agreed-upon schedule that is no less frequent than every four months. Given the increasing prevalence of managed care in state Medicaid programs, wraparound payments are an essential mechanism to ensure adequate FQHC reimbursement.

Stay tuned as the next article in this series will explore critical state variations in the implementation and interpretation of these payment requirements.