Section 1902 (a)(30)(A) of the Social Security Act is the foundational statutory provision for Medicaid provider payment. This provision requires that states provide payment for all Medicaid-covered services to “safeguard against unnecessary utilization,” be “consistent with efficiency, economy, and quality of care,” and be “sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area.”
Flexibility to develop payment policies has led to significant variation in states’ payment methods, which reflect individual state policy decisions, practice patterns, and geographic differences in markets and costs.
Learn more about the Medicaid fee-for-service payment process.
Payment for Inpatient Hospital Services
States have selected, and the Centers for Medicare & Medicaid Services (CMS) has approved, a wide range of payment methods for inpatient hospital services. Some states use payment methods that reimburse hospitals based on their reported costs, while others pay for the number of days that a patient is in the hospital. Most have adopted payment methods based on diagnosis-related groups (DRGs), a classification system adopted by Medicare in 1983. Under this method, hospitals are paid a fixed amount per discharge, with outlier payments for especially costly cases.
For more information, read the issue brief on Medicaid Inpatient Hospital Services Payment Policy. MACPAC also has compiled state-specific methodologies in State Medicaid Payment Policies for Inpatient Hospital Services. More detailed information on other aspects of hospital payment can be found in our description of disproportionate share hospital payments. MACPAC has also constructed a state-level payment index to compare fee-for-service (FFS) inpatient hospital payments across to states and to Medicare.
Payment for Outpatient Hospital Services
Similar to those used for inpatient services, payment methods for outpatient services include payment based on reported costs; payment based on the volume of services provided; and, in a few cases, payment based on the bundle of services commonly associated with a particular patient condition. States usually take one of four broad approaches to fee-for-service FFS payment for hospital outpatient services:
- cost reimbursement.
- ambulatory patient classification (APC) groups. The APC system used by Medicare classifies individual services into one of 833 APCs based on clinical and cost similarity. All services within an APC have the same payment rate. A single visit may have multiple APCs and multiple separate payments (MedPAC 2014).
- enhanced ambulatory patient groups (EAPGs). EAPGs bundle ancillary and other services commonly provided in the same medical visit; payment is based on the complexity of a patient’s illness.
- other fee schedules.
For more information, read the issue brief on Medicaid Outpatient Payment Policy. MACPAC also has compiled state-specific methodologies in State Medicaid Payment Policies for Outpatient Hospital Services.
Payments for Physician Services
Medicaid physician services are covered medical services provided by physicians in a variety of settings, including clinics, community health centers, and private offices.1 The Medicaid statute also authorizes payment for services provided by other health care professionals, such as certified nurse practitioners and nurse-midwives, and states have differing requirements as to how these professionals are paid.
In general, states have broad flexibility to determine payments for physician services. State Medicaid programs that pay physicians on a direct, FFS basis typically pay physicians and other clinicians using a fee schedule that establishes base payment rates for every covered service, as with Medicare and commercial payers. State Medicaid programs generally use one of three methods for establishing base payment rates (fee schedules): the resource-based relative value scale (RBRVS), a percentage of Medicare’s fee, or a state-developed fee schedule using local factors.
The RBRVS was developed initially for the Medicare program. It is based on the concept of relative value, whereby various physician services or procedures have different values based on the resources involved in performing a procedure or service. Resources include physician work, practice expense, and liability insurance. If one procedure is more complex and time consuming than another, then this procedure code is given more value. Other states tie physician payments directly to Medicare by basing their fee schedules on a fixed percentage of the Medicare fee schedule. The amount Medicaid pays typically is less than 100 percent of the Medicare amount. States also may develop their own physician fee schedules, which typically are determined based on market value or an internal process. Read the issue brief on Medicaid Physician Payment Policy. MACPAC also has documented state-specific methodologies in States’ Medicaid Fee-for-Service Physician Payment Policies.
States often apply a variety of adjustments and incentives to the base payment rates. Under the Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended), states were required to pay Medicare rates for certain primary care services in 2013 and 2014 when they were furnished by physicians with a primary specialty designation of family, general internal, or pediatric medicine. The Medicare rates were required under both FFS and managed care. States received 100 percent federal reimbursement for expenditures attributable to the amount by which Medicare payment rates exceed the state’s Medicaid rates as of July 1, 2009. The primary care payment increase expired on December 31, 2014, but some states continue to pay higher rates for primary care services relative to other physician services. Research is mixed on whether the primary care payment increase affected access to primary care. Read more about the payment increase in An Update on the Medicaid Primary Care Payment Increase, in MACPAC’s March 2015 report to Congress.
Federal rules do not prescribe how physicians should be paid or how much they should be paid, but only require that Medicaid payment policies should promote efficiency, economy, quality, access, and safeguard against unnecessary utilization. Faced with difficult tradeoffs to balance budgets, states generally try to balance economy (setting payment rates at a reasonable level compared to costs) with access (implementing payment policies that attract sufficient numbers of providers or providing additional payments to promote access to certain provider types).
Providers, however, often question the adequacy of Medicaid payments, particularly when states reduce rates. In some cases, providers have contested payment reductions in federal court. However, on March 31, 2015, the U.S. Supreme Court precluded future lawsuits when it decided, in Armstrong v. Exceptional Child Center, Inc., that Medicaid providers do not have the right to sue Medicaid agencies regarding payment rates under the Supremacy Clause of the Constitution or under 1902(a)(30)(A) of the Social Security Act. Additionally, a January 2016 CMS regulation now requires states to consider input from providers, beneficiaries, and other stakeholders when evaluating the potential impacts of rate changes prior to instituting provider payment rate reductions or changes in the provider payment structure. States must also analyze the effect that rate changes may have on beneficiary access to care and then monitor the effects for at least three years after the changes are effective.
Payment to Nursing Facilities
State Medicaid programs are required to cover nursing facility services, which are services provided by a Medicaid certified institution that offers 24-hour medical and skilled nursing care, rehabilitation, or health-related services to individuals who do not require hospital care.
States have broad flexibility to determine payments to nursing facilities. Read the issue brief on Medicaid nursing facility payment policy. MACPAC also has documented each state’s fee-for-service (FFS) nursing facility payment policy, including how individual states set their payment rates and various adjustments and supplemental payments, in States’ Medicaid Fee-for-Service Nursing Facility Payment Policies.
Payment to Community Health Centers
Community health centers and clinics in rural areas meeting certain requirements qualify for special payments for health care services covered by Medicaid. Although Congress has changed the payment methodology over time, state Medicaid programs generally reimburse these health centers based on service costs. Most recently, the Consolidated Appropriations Act of 2001 (P.L. 106-554) established a prospective payment methodology based on service costs in a base year and trended forward using factors included in statute. For more information, read the issue brief on Medicaid Payment Policy for Federally Qualified Health Centers.
1The Medicaid definition of physician is based on the Medicare definition in Section 1861 of the Social Security Act “as a doctor of medicine or osteopathy legally authorized to practice medicine.”