Currently, state Medicaid programs have flexibility in developing payment policies, including utilizing supplemental payments and non-federal supplemental payment mechanisms. Supplemental payments pay providers above what they receive for an individual service through Medicaid provider rates.  Supplemental payments include disproportionate share hospital (DSH) and upper payment limit (UPL) payments. States can fund the non-federal share of these payments through intergovernmental transfers, provider taxes, and certified public expenditures.

However, there is limited transparency and data available on supplemental payments. This leaves these payment options open to state gaming to increase the amount of federal funds states receive from Medicaid programs. In other words, states can increase their federal Medicaid match, while decreasing the state’s share of the Medicaid match. The total percentage of federal funding for each state’s Medicaid program is referred to as the effective Federal Medical Assistance Percentage (FMAP). However, due to data limitations on supplemental payments states can essentially hide their effective FMAP, leaving us in the dark as to what that percentage actually is.

The American Health Care Act is the House Republican bill to repeal and replace the Affordable Care Act. Its details became available on March 6th. This bill eliminates all Medicaid supplemental payments, with the exception of DSH payments. States’ reaction to the bill will tell us more about Medicaid supplemental payments than we’ve ever known, and whether the financing system in the proposed bill will provide equivalent federal funding.

Medicaid supplemental payments allow states to develop creative financing schemes to claim excess federal match funds. Supplemental payments, including DSH and UPL payments, as well as non-federal supplemental payment mechanisms, such as intergovernmental transfers, provider taxes, and certified public expenditures, are all used in this game. Although some state specific studies have shown that supplemental payments account for more than half of payments to providers, there is limited transparency and incomplete data available on these payments. This therefore limits our general understanding of spending in the Medicaid program.

With this much money at stake, states’ reaction to the bill will be most telling if they think the per capita cap financing will decrease their overall federal Medicaid funding. The American Health Care Act eliminates all but one of these supplemental payments. In the bill, year-to-year increases in per capita caps will be derived from the medical care component of the consumer price index for urban consumers (MCPI-U). We do not yet know if the MCPI-U is enough for states to move forward and embrace the per capita cap without the promise of supplemental payments.

Is a baseline in payments tied to MCPI-U enough to make states happy?  Not if they were doing far better than any analyst ever imagined through supplemental payments.  We will soon learn the answer.