Health Law Daily Agreement to change enhanced capitation payment method did not violate CMS regulations
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Thursday, October 19, 2017

Agreement to change enhanced capitation payment method did not violate CMS regulations

By Jeffrey H. Brochin, J.D.

An agreement entered into between the Department of Public Welfare of the Commonwealth of Pennsylvania (Department) and an intermediary managed care organization (MCO) and the Hospital and Healthsystems Association of Pennsylvania (HAP), to establish an alternative for the distribution of the enhanced capitation payments to hospitals, did not violate CMS regulations, a state court in Pennsylvania has ruled. As representatives of hospitals and MCOs, HAP and the MCO Coalition were free to enter into any agreement that they believed to be in the best interests of hospitals and the MCOs, and there was no evidence that CMS prohibited the use of the methodology agreed to (Armstrong County Memorial Hospital v. Department of Public Welfare of the Commonwealth of Pennsylvania, October 16, 2017, Brobson, P.).

Background. The Department is the state agency that administers Pennsylvania’s Medicaid program. It delivers Medicaid benefits in Pennsylvania through two payment systems: (1) a "fee-for-service" plan, where the provider of the care is paid on a claim basis; and (2) a "managed care" plan where an MCO, under contract with the Department, is paid on a monthly, fixed-fee basis per enrollee. Due to the fact that under the managed care model Medicaid funds go directly to the MCO and not to the provider of the healthcare service, the MCO pays the provider pursuant to the terms of an agreement between the MCO and the provider. Hospitals have provider agreements with the Department to provide health care services to patients covered under the managed care portion of the Department’s Medicaid program. Consequently, hospitals also have contracts with certain MCOs, through which hospitals are paid for the services they provide to the managed care Medicaid recipients.

The hospitals challenged certain aspects of the implementation of the Act of July 9, 2010, P.L. 336 (Act 49), which amended the Human Services Code and related statutes as they applied to the managed care side of the Department’s Medicaid program. The parties filed cross motions for summary judgment, and for the reasons discussed below, the court granted the motion of the Department and dismissed the case.

Imposition of assessment. Pennsylvania’s Act 49 authorized the Department to impose an assessment on covered hospitals whereby each covered hospital’s assessment was calculated by applying a fixed percentage to the hospital’s net inpatient revenue. Although the statutory language is somewhat convoluted, the apparent purpose of the assessment was to generate funds that would be used to augment payments to hospitals that provide services to medical assistance patients, either by direct payment under the fee for service side of the program or indirectly by enhanced capitation payments to MCOs, which, in turn, would provide supplemental payments to their contracted hospitals. The implementation of the augmented reimbursement provisions was dependent on the authority of the Department to impose the assessment under both state and federal law. Although Act 49 provided the Department with the state authority to impose the assessment, it was necessary for the Department to also secure approval of the assessment as a permitted "health care-related tax" from the CMS.

Department agreement with the MCOs and HAP. In order to obtain approval of the assessment from CMS, the Department needed to obtain a waiver permitting it to implement the assessment. The Department also needed to obtain approval of certain amendments to the State Plan, permitting it to alter the way in which it both reimbursed hospitals for Medicaid services and made supplemental payments to hospitals under the fee-for-service payment system. Finally, the Department needed to obtain approval of an amendment to its agreements with the MCOs as related to the enhanced capitation payments that would be paid to the MCOs.

On July 6, 2010, the Department and HAP entered into a letter of agreement wherein HAP and the Department agreed to work together to achieve the necessary federal approvals from CMS relative to the hospital fee-for-service, supplemental, and managed care enhanced payments pursuant to Act 49. The July Letter Agreement contained a very specific and detailed formula regarding how the MCOs would be required to distribute the enhanced the enhanced capitation payments to hospitals. On that same date, the Department also sent a letter to each of the MCOs in Pennsylvania, explaining the process by which the enhanced capitation payments would be paid to the MCOs and then distributed to hospitals as supplemental payments.

Agreements not illegal. Although the hospitals argued that the Department implemented the pass through scheme indirectly through HAP and the MCO Coalition and never told CMS about it, the court rejected that reading of the events and found it to be based on unreasonable inferences that were not supported by the evidence adduced during discovery. The court noted that the hospitals had not directed the court to a single piece of evidence that could establish that the Department violated CMS’s directive, nor that the Department directly or indirectly influenced HAP or the MCO Coalition to adopt its methodology regarding the MCOs’ distribution of the enhanced capitation payments to hospitals.

As representatives of hospitals and MCOs, HAP and the MCO Coalition were free to enter into any agreement that they believed to be in the best interests of hospitals and the MCOs, and there was no evidence that CMS prohibited the use of the methodology set forth in the July Letter Agreement or the involvement of HAP or the MCO Coalition in the process. Accordingly, the Department’s motion for summary judgment was granted, and that of the hospitals was denied.

The case is No. 438 M.D. 2012.

Attorneys: Daniel M. Mulholland, III (Horty, Springer & Mattern, PC) for Monongahela Valley Hospital, Inc. and Armstrong County Memorial Hospital.

Companies: Monongahela Valley Hospital, Inc.; Armstrong County Memorial Hospital; The Department of Public Welfare of the Commonwealth of Pennsylvania

MainStory: TopStory CaseDecisions CMSNews MedicaidNews MedicaidPaymentNews PennsylvaniaNews

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