Client Alert: CMS Issues Guidance on Payment Methodologies Under Medicaid and CHIP

By Published On: May 2, 2016

On April 26, 2016, the Centers for Medicare and Medicaid Services (“CMS”) released new guidance (State Health Official Letter #16-006) regarding the Medicaid and Children’s Health Insurance Program (“CHIP”) payment requirements for federally-qualified health centers (“FQHC”) and rural health clinics (“RHC”) operating in a managed care environment.

In the SHO Letter, CMS reiterates its longstanding interpretation of those reimbursement requirements.  More significantly, CMS provides new clarifying guidance regarding (1) the use of alternative payment methodologies (“APM”) to achieve what is sometimes referred to as “delegated wraparound” (a concept explained below); and (2) the extent to which managed care entities (“MCEs”) are legally required to include FQHCs and RHCs in their provider networks.

In the SHO Letter, CMS explains that Section 1902(bb)(5) of the Social Security Act, which provides for supplemental (or “wraparound”) payments to FQHCs that provide services under contract with MCEs, is designed to ensure that FQHCs and RHCs receive their full Medicaid prospective payment system (“PPS”) reimbursement rates regardless of what payments they receive from MCEs.  Further, CMS notes that federal law requires States to ensure through their MCE contracts that the MCE pays FQHCs and RHCs at a rate that is “not less than” the amount the MCE pays other providers of similar services.

Second, CMS notes that the statutory provisions for FQHC/RHC wraparound have created a number of concerns for both States and providers, including problems of timely payment and proper reconciliation.  Consequently, CMS explains, States have expressed interest in “alleviating these issues and the complexity of supplemental payments” by requiring MCEs to reimburse FQHCs and RHCs directly at their PPS rates – the concept sometimes referred to as “delegated wraparound.”

CMS states in the Letter that a State could accomplish this goal by implementing an APM under Section 1902(bb)(6) of the Social Security Act.  By federal statute, an APM, (1) must be agreed to by each FQHC or RHC subject to the arrangement; and 2) must result in payment to FQHC or RHC of at least its full PPS rate.  CMS emphasized in the Letter that these requirements would be fully applicable to “delegated wraparound” implemented through an APM.

CMS explains that States using such an APM must carry out various steps.  Those steps include adding provisions in their MCE contracts requiring the MCE to pay the full PPS rate, as well as ensuring that their MCE capitation rates are based on an analysis of “actuarial soundness” that takes into account the MCE’s obligation to pay the full PPS rate.

Helpfully, CMS clarifies in the SHO Letter that even under such an APM, States will remain responsible for ensuring FQHCs and RHCs receive their full PPS rates, and must maintain their reconciliation and oversight processes.

Because many States have implemented APM or other “full payment” provisions without CMS approval, CMS notes that it will give States until July 1, 2017 to submit APM State Plan Amendments that comply with the requirements stated above.  CMS emphasizes that those State Plan provisions must demonstrate that each affected FQHC or RHC has agreed to the payment mechanism.

In addition, as for reimbursement in the CHIP program, CMS notes that the APM provisions described above apply equally, and that States delivering CHIP benefits from MCEs under a separate CHIP program should similarly submit State Plan Amendments to come into compliance.  For states operating separate CHIP programs, CMS offers to provide assistance in developing APMs for FQHCs and RHCs.

Finally, CMS addresses the question of “network adequacy” for FQHCs – i.e., how many FQHCs must be included within a managed care plan’s network in order for this service, which is classified as mandatory for categorically needy individuals under the Social Security Act, to be deemed accessible to all enrollees in the service area.  CMS explains in the SHO Letter that in its interpretation, each MCE operating in each service area must include access to at least one FQHC or RHC, if available.  If FQHC or RHC services are not included in a state’s MCE contract, those services must be provided by the state directly.

As health centers and PCAs interpret the new guidance, several points are critical.  First, CMS emphasized in the Letter that “delegated wraparound” is permissible as an APM only if each FQHC subject to the arrangement agrees to it.  Health centers should carefully evaluate proposed APMs and be careful not to commit to an APM through an instrument that hinders them from withdrawing their consent if the arrangement ultimately proves unworkable.

Second, while CMS does not address in the SHO Letter the type of actuarial analysis that would be required in order to incorporate PPS payments into the capitation payments made to plans, it bears noting that this type of actuarial analysis is complex, given that the PPS is an individualized rate and each FQHC serves a distinct service area.  Health centers and PCAs should closely monitor their States’ processes for implementing the APM.

If you have any questions about the impact of SHO Letter # 16-006, please contact our Health Care and Federal Grants practice groups at Feldesman Tucker Leifer Fidell LLP, www.ftlf.com or 202-466-8960.


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