California’s response to the CMS Medicaid Fiscal Accountability Rule proposal

The California Department of Health Care Services (DHCS) has released its comments in response to the Center for Medicare & Medicaid Services (CMS) proposed Medicaid Fiscal Accountability Regulation (MFAR).  

The rule, entitled “Medicaid Program; Medicaid Fiscal Accountability Regulation” was published November 18, 2019 and is aimed at safeguarding the fiscal integrity of the Medicaid program through rules designed to ensure states receiving federal matching funds are complying with federal law. 

DHCS issued pointed comments about the rule’s substance, scope, and financial impact.

The Proposed Rule, nearly in its entirety, is significantly flawed and would have devastating impacts to State programs and budgets. While we agree with the importance of ensuring fiscal accountability and transparency in Medicaid administration, DHCS believes the proposal goes far beyond these purported goals by uprooting past and current policies on which Medicaid programs are built and financed.”

One health policy insider told State of Reform the financial impact to California could start at $25 billion.

DHCS took particular issue with the notion that the rule’s language doesn’t upend established norms regarding the purview of CMS, writing:

The Proposed Rule includes many instances of overreach or inconsistency with authorizing Medicaid statute and constitutes a significant departure from longstanding CMS interpretations (many in place for decades). As a result, we strongly object to the characterization that the proposal is largely a codification of existing CMS policies.” 

DHCS also raised the alarm about the rule’s potential to render current regulations unfair by affording CMS undue discretion over Medicaid expenditures.

DHCS rounded out its case by lamenting bureaucratic inefficiencies the rule could usher in: “the rule imposes a multitude of new reporting requirements that are overly burdensome and duplicative and will require wholesale changes at the State and local levels.”


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The rule’s changes to CMS interpretations regarding several Medicaid funding mechanisms — intergovernmental transfers (IGTs), Certified Public Expenditures (CPEs), and provider taxes — were singled out near the top of DHCS’s released comments.   

The changes, according to DHCS, “seemingly threaten a sizeable portion of the funds that support services and administrative activities performed by safety net providers that are the foundation of California’s Medicaid Program (known as Medi-Cal).”

Furthermore, DHCS did not mince words on the rule’s proposed changes to the regulatory structure and authority of CMS.

The proposed changes also exceed the authority granted in the Medicaid Act by codifying a type of open-ended discretion and ill-defined regulatory framework that is ripe for arbitrary and capricious treatment of States. If finalized, this will not only result in inconsistent results among programs, but will also leave States straddled with significant uncertainty over approvals or the availability of federal financial participation for such arrangements. This will make it nearly impossible to sufficiently plan for operational and budget needs.”

Though the rule relates to Medicaid fiscal accountability, the issues raised by DHCS did not just concern Medicaid; “such impacts would almost assuredly diminish the ability of our beneficiaries to access timely care, would leave States hamstrung in pursuing value-based and other innovative payment and delivery initiatives, and would cause instability in health care markets even beyond Medicaid.”

The comments also offered a diagnosis for how to make the rule, should it be finalized, more workable for states. Namely, DHCS is calling for modifications to language surrounding state/local taxes, providers tax waivers, supplemental payments, and fee-for-Service Payment and Provider Contribution Reporting.

The modifications proposed by DHCS are copied below. 

State/local taxes

Revert to the existing “public funds” language at § 433.51 or add substantial clarification recognizing the legitimacy of patient care revenue and other sources of State/local funds.”

Provider tax waivers

Rescind the “undue burden” test proposed at § 433.68(e), or provide for a safe harbor in waiver approvals with a reasonable 3:1 allowable magnitude of differential tax treatment between Medicaid and non-Medicaid activities.”

Supplemental Payments

Allow for at least three State fiscal years following the finalized rule to begin a staggered phase-in of the time-limited approval periods for supplemental payments under § 447.252(d).”

Fee-for-Service Payment and Provider Contribution Reporting

Provide States at least five State fiscal years following the finalization rule before § 447.288(c)(1)-(3) is effective. Limit new reporting to a single annual report on a cash accounting basis and that is due one year from the close of the fiscal year.”