How the Pandemic Continues to Shape Medicaid Priorities: Results from an Annual Medicaid Budget Survey for State Fiscal Years 2022 and 2023

Provider Rates and Taxes

Context

In general, states have broad latitude under federal laws and regulations to determine fee-for-service (FFS) provider payments so long as the payments: are consistent with efficiency, economy, and quality of care; safeguard against unnecessary utilization; and are sufficient to enlist enough providers to ensure that Medicaid beneficiaries have access to care that is equal to the level of access enjoyed by the general population in the same geographic area.¹ Subject to certain exceptions,² states are not permitted to set the rates that managed care entities pay to providers. However, state-determined FFS rates remain important benchmarks for MCO payments in most states, often serving as the state-mandated payment floor.

Historically, FFS provider rate changes generally reflect broader economic conditions. During economic downturns where states may face revenue shortfalls, states have typically turned to provider rate restrictions to contain costs. Conversely, states are more likely to increase provider rates during periods of recovery and revenue growth. Early in the COVID-19 pandemic, however, states were largely deterred from using rate reductions to address budget challenges due to the financial strains that providers were experiencing from the increased costs of COVID-19 testing and treatment or from declining utilization for non-urgent care. Instead, Congress, states, and the Administration adopted a number of policies to ease financial pressure on states, hospitals, and other health care providers, including enhanced Medicaid matching funds for states – tied to the Public Health Emergency (PHE) – and enhanced funding for home and community-based services (HCBS) (that remains available for expenditure through March 21, 2025) designed to bolster rates and the direct care workforce.

States have considerable flexibility in determining how to finance the non-federal share of state Medicaid payments, within certain limits. In addition to state general funds appropriated directly to the state Medicaid program, most states also rely on funding from health care providers and local governments generated through provider taxes, intergovernmental transfers (IGTs), and certified public expenditures (CPEs). Over time, states have increased their reliance on provider taxes, with expansions often driven by economic downturns.

This section provides information about:

• FFS reimbursement rates
• Provider taxes

Findings

FFS Reimbursement Rates

At the time of the survey, responding states had implemented or were planning more FFS rate increases than rate restrictions in both FY 2022 and FY 2023 (Figure 11 and Tables 3 and 4). All responding states in FY 2022 (49 states) and all but one responding state in FY 2023 (48 of 49), reported implementing rate increases for at least one category of provider. Significantly fewer states (19 in FY 2022 and 25 in FY 2023), had implemented or were planning to implement at least one rate restriction.

Many states noted that worsening inflation in recent months and workforce shortages driving higher labor costs were resulting in growing calls from providers and others for rate increases. Some states noted, however, that their FY 2023 budgets do not account for current inflation levels, as they were introduced in late calendar year 2021 and early 2022 before inflation began to dramatically accelerate, but that inflation remains a concern looking ahead. Many states also noted that they employ cost-based reimbursement methodologies for some provider types, such as nursing facilities, that automatically adjust for inflation and other cost factors during the rate setting process. A number of states reported that rates for some provider types are benchmarked to Medicare rates and therefore increase commensurate with Medicare increases. Finally, several states reported comprehensive rate reform analyses impacting multiple provider types had been completed or were underway. For example:

• Alabama reported that it was in the process of putting an access assessment process into place that would include rate reassessments every three to five years in alignment with the assessment process.
• Indiana reported plans to initiate “rate matrix” work, starting first with home health and HCBS waiver rates. The goal of this long-term project, in part, is to establish a regular cadence of rate updates by provider category.
• As a result of a comprehensive rate system analysis, first initiated in 2019, Maine is implementing its Rate System Reform plan in FY 2023. The plan calls for the utilization of Medicare benchmarks across services, where available; review and update of methodologies and rates on a regular schedule; and continued movement away from cost-based methodologies and toward value-based payments.
• New Mexico is currently conducting a Provider Rate Benchmarking Study to further the goals of ensuring access to high-quality care for its members; attracting and retaining providers; and establishing a methodology, process, and schedule for conducting routine rate reviews.
• South Carolina reported that it is currently conducting rate analyses for several services that could result in additional rate increase recommendations in FY 2023.

States reported rate increases for nursing facilities and home and community-based services (HCBS) providers more often than other provider categories (Figure 12). In some cases, state officials reported that nursing facility and HCBS rate increases included, at least in part, the continuation of pandemic-related payments (e.g., retainer payments and/or add-on payments) or represent temporary rate increases or supplemental payments to HCBS providers using ARPA funds. Some states noted that certain rate increases would be difficult to sustain without continuation of enhanced federal funding. Reflecting the ongoing staffing-related challenges impacting nursing facility and HCBS services, several states reported more significant nursing facility or HCBS rate increases. Examples of HCBS rate increases include the following:

• The District of Columbia reported that, beginning in FY 2023, the District will begin to issue a supplemental payment to qualifying HCBS providers to support increased wages for qualifying Direct Support Professionals (DSPs) to achieve an average wage rate of 117.6% of the District’s living/minimum wage by FY 2025. This supplemental payment aims to assist in the effort of maintaining the direct support workforce to ensure continuity of care.
• Oklahoma reported making a temporary 20% retroactive rate increase in FY 2022 for HCBS services paid during most of the PHE period and a 25% permanent rate increase for providers in its Advantage HCBS waiver (for frail seniors and adults with physical disabilities) effective October 1, 2022, or upon CMS approval.
• West Virginia reported a temporary 50% HCBS rate increase to improve retention in FY 2022 and a permanent 5% HCBS rate increase in FY 2023.

Examples of nursing facility rate increases include the following:

• Illinois reported a 27% nursing facility rate increase in FY 2023 to fund the recently enacted nursing home reform legislation that ties increased funding to staffing levels, creates a new pay scale for certified nursing assistants, and provides funding for improvement in key quality metrics.
• Nebraska reported a 20.2% nursing facility rate increase in FY 2023 intended to address the ongoing issue of facility closures in rural and frontier areas where the population is declining.
• Pennsylvania will increase Medicaid nursing facility rates by 17.5% in FY 2023 to increase staffing and accountability requirements, an increase described as the “single largest Medicaid reimbursement bump for nursing home resident care during a single Pennsylvania budget-cycle in the modern reimbursement era” by the Pennsylvania Health Care Association President.³

The 2022 survey found an increased focus on dental rates with about half of reporting states (20 in FY 2022 and 25 in FY 2023) reporting implementing or plans to implement a dental rate increase, in some cases benchmarked to the American Dental Association national fee survey. This compares to 14 states reporting increases each year in the 2019, 2020, and 2021 surveys.⁴ Most notably, Virginia reported plans to increase dental rates by 30% in FY 2023; Washington increased rates for adult dental services by 100% in FY 2022 and plans to increase rates for specific children’s dental services in FY 2022; and Wisconsin increased dental rates by 40% as of January 2022.

While states reported imposing more restrictions on inpatient hospital and nursing facility rates than on other provider types, most of these restrictions were rate freezes rather than actual reductions. (Because inpatient hospital and nursing facility services are more likely to receive routine cost-of-living adjustments than other provider types, this report counts rate freezes for these providers as restrictions.) No states reported legislative action to freeze or reduce rates across all or most provider categories in either FY 2022 or FY 2023. Mississippi indicated the legislative rate freeze enacted for all providers for FY 2022 through FY 2024 was lifted by the legislature before the end of 2022.

Provider Taxes

States continue to rely on provider taxes and fees to fund a portion of the non-federal share of Medicaid costs (Figure 13). Provider taxes are an integral source of Medicaid financing, comprising approximately 17% of the nonfederal share of total Medicaid payments in FY 2018 according to the Government Accountability Office (GAO).⁵ At the beginning of FY 2003, 21 states had at least one provider tax in place. Over the next decade, most states imposed new taxes or fees and increased existing tax rates and fees to raise revenue to support Medicaid. By FY 2013, all but one state (Alaska) had at least one provider tax or fee in place. In this year’s survey, states reported a continued reliance on provider taxes and fees to fund a portion of the non-federal share of Medicaid costs. Thirty-eight states had three or more provider taxes in place in FY 2022 and eight other states had two provider taxes in place (Figure 13).⁶

Few states made or are making significant changes to their provider tax structure in FY 2022 or FY 2023 (Table 5). The most common Medicaid provider taxes in place in FY 2022 were taxes on nursing facilities (46 states), followed by taxes on hospitals (44 states), intermediate care facilities for individuals with intellectual disabilities (33 states), and MCOs⁷ (18 states). Only three states reported plans to add new taxes in FY 2023: Alabama, Mississippi, and Wyoming reported new ambulance taxes. Taxes on ambulance providers represent the most common type of “other” taxes implemented by states, and the new taxes planned for FY 2023 will increase the number of states with ambulance taxes in FY 2023 to 13.⁸ Only one state (California) reported plans to eliminate a tax in FY 2023 (MCO tax is slated to expire on December 31, 2022). Eleven states reported planned increases to one or more provider taxes in FY 2023, while seven states reported planned decreases.⁹