Federal Cut in Medicaid Repayment Rates Faces Suit

A group of national and state health organizations filed suit Thursday in a last-ditch effort to stop federal officials from cutting Medicaid reimbursement rates later this month.

The rate reduction is scheduled to be phased in starting March 19 and would close a regulatory loophole that allows many states to bill the federal government at 150% of the Medicaid payment rate.

The groups suing, led by the American Hospital Assn., allege the Department of Health and Human Services made “an arbitrary and capricious decision that will cause irreparable harm to the nation’s public hospitals and the patients they serve.”

They are asking the U.S. District Court in Little Rock, Ark., to issue an injunction preventing HHS from implementing the rule change on the grounds that the agency failed to follow proper procedures.

Tom Scully, administrator for HHS’ Centers for Medicare & Medicaid Services (CMS), dismissed those charges Thursday.

“Ending this practice is clearly the right policy decision for American taxpayers,” Scully said. “We are confident that we met all the requirements to make sure that this regulation would be effective in time to begin saving federal dollars.”

Thomas Nickels, a senior vice president for the hospital association, called the lawsuit a “last resort.”

“We talked to CMS, HHS and the administration to no avail,” Nickels said, adding that they hope for a ruling before the March 19 implementation.

In addition to leading national health organizations, the lawsuit is backed by hospitals and hospital organizations in California, Florida, Georgia, Arkansas and New York. The suit was filed in Arkansas because hospitals there would be particularly hard hit by the move, Nickels said.

The Bush administration has made ending “creative financing” of Medicaid by the states a priority. Administration officials estimate the move to reduce Medicaid reimbursement rates to be in line with Medicare payment rates will save $9 billion over the next five years. They and others have cited past abuses of the so-called upper payment limit--including states using such funds for road projects and other non-health-care needs--as justification for ending the practice entirely.

But critics argue that the $9 billion in savings amount to a significant reduction in the Medicaid program and will severely limit the ability of already cash-strapped public hospitals to serve the poor and uninsured.

California and Los Angeles County officials have warned that the state will be significantly harmed by the move, despite being given eight years to wean itself of the additional money now used to bolster “safety net” hospitals. The California Healthcare Assn., which joined the lawsuit, said that over the next seven years the state will lose “at least” $1 billion if the rule goes into effect.

“California has never abused the program; all of the money has gone directly back to health care,” said California Healthcare Assn. spokeswoman Jan Emerson. “We have followed the rules all along, and we’re using the money to benefit the people who are at greatest risk. The bottom line is real people will be hurt by this.”

Emerson and others backing the suit question why the administration wants to end a program that was reworked in the Clinton administration to eliminate abuses.

Nickels said Thursday that Scully’s statements about abuse within the program “would have been relevant a year ago, but not now.”

Scully, however, said the practice “effectively resulted in states obtaining excessive federal Medicaid payments without putting up the state share required by law or assuring that the additional money was being used for Medicaid-related expenses.”