Payment for Medicaid services

Content provided by the Health Care Financing Administration (“HCFA”)

Medicaid operates as a vendor payment program, with States paying providers directly. Providers participating in Medicaid must accept the Medicaid reimbursement level as payment in full. With a few specific exceptions, each State has broad discretion in determining (within Federally-imposed upper limits and specific restrictions) the reimbursement methodology and resulting rate for services.

States may impose nominal deductibles, coinsurance or copayments on some Medicaid recipients for certain services. However, certain Medicaid recipients must be excluded from cost sharing: pregnant women, children under age 18, hospital or nursing home patients who are expected to contribute most of their income to institutional care, and categorically needy enrollees in HMOs. In addition, emergency services and family planning services must be exempt from co-payments for all recipients.

The portion of each State’s Medicaid program which is paid by the Federal government, known as the Federal Medical Assistance Percentage (FMAP), is determined annually by a formula that compares the State’s average per capita income level with the national income average. By law, the FMAP cannot be lower than 50 percent nor higher than 83 percent. The wealthier States have a smaller share of their costs reimbursed. In 1994, the FMAPs varied from 50 percent (paid to 11 States and D.C.) to 78.9 percent (to Mississippi), with the average Federal share among all States being 57.5 percent.

The Federal government also shares in the State’s expenditures for administration of the Medicaid program. Most administrative costs are matched at 50 percent for all States. However, depending on the complexities and the need for incentives for a particular service, higher matching rates are authorized for certain functions and activities.

Federal Medicaid payments to States have no set limit (cap); rather, the Federal government matches (at FMAP rates) the State payments for the mandatory services plus the optional services that the individual State decides to provide for eligible recipients. Reimbursement rates must be sufficient to enlist enough providers so that Medicaid care and services are available under the State Plan at least to the extent that comparable care and services are available to the general population within that geographic area.

States also must augment payment to qualified hospitals that provide inpatient services to a disproportionate number of Medicaid recipients and/or to other low-income persons under what is known as the “disproportionate share hospital” (DSH) program. Under this program — which was coupled with refundable donations and provider taxes — some States made large DSH payments in order to get higher Federal matching monies with little or no increase in the State’s share. However, under legislation passed in 1991, these DSH payments are now limited.

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