Medicaid Regulatory Issues

Prepared for Members and Committees of Congress

This report provides a summary of seven proposed and final rules affecting the Medicaid program
that were issued by the Bush Administration during 2007 and 2008. Six of the seven rules are
currently under a congressional moratorium on further administrative action until April 1, 2009. A
description of possible administrative and legislative actions to modify these rules, which could th
be taken by the next administration or the 111 Congress, is also provided.

Graduate Medical Education (GME)........................................................................................1
Cost Limit for Public Providers................................................................................................1
Provider Taxes...........................................................................................................................2
Rehabilitative Services..............................................................................................................2
Case Management.....................................................................................................................3
School-Based Services..............................................................................................................3
Outpatient Hospital Services.....................................................................................................3
Options for Administrative and Legislative Actions.................................................................4
Table 1. Status of Medicaid Regulations.........................................................................................6
Author Contact Information............................................................................................................8

edicaid finances the delivery of primary and acute care medical services, and long-term
care, for certain low-income populations, including nearly 63 million individuals in
FY2008. Combined federal and state spending currently exceeds $300 billion each M

year. It is the largest or second-largest item in state budgets, and is second only to Medicare in
terms of federal spending on health care.
During 2007 and 2008, the Centers for Medicare and Medicaid Services (CMS), the federal
agency that administers Medicaid, issued a number of regulations for this program. Seven th
regulations were the subject of considerable controversy in the 110 Congress. Each of these
regulations, to differing degrees, would limit payments for certain services and/or affect payments
to providers. As per the Supplemental Appropriations Act, 2008 (P.L. 110-252, Section 7001), six
of these seven rules are currently under a congressional moratorium preventing further
administrative action until April 1, 2009 (see Table 1). The seventh rule affecting outpatient
hospital services was published as a final rule in the Federal Register on November 7, 2008, and
will become effective, absent any congressional action, on December 8, 2008.
Most states make Medicaid payments to help cover the costs of training new doctors in teaching
hospitals and other teaching programs. Historically, Medicare and most Medicaid programs have
recognized two components of GME costs: (1) direct graduate medical education, or DGME
(e.g., resident salaries, teaching supervision), and (2) indirect graduate medical education, or IME
(e.g., higher patient care costs because of additional tests ordered by residents). CMS argued that
GME payments are not authorized in Medicaid statute, are not included in the list of services
considered to be “medical assistance,” and are not recognized in the Medicaid statute as a
component of the costs of hospital care. The proposed rule would eliminate federal
reimbursement for both DGME and IME under Medicaid. The rule would also change the way in
which the Medicaid upper payment limit for hospital services is calculated, which would further
reduce the federal share of Medicaid costs for hospitals. Opponents argued that the rule represents
a reversal of long-standing Medicaid policy, that there are references to GME payments in both
Medicaid statute and regulations, that GME payments have previously been explicitly recognized
by CMS, and that the statute is broadly drafted, and even accompanying regulations do not
itemize every element of reimbursable costs. (For more details, see CRS Report RS22842,
Medicaid and Graduate Medical Education, by Elicia J. Herz and Sibyl Tilson.)
Intergovernmental transfers (IGTs) are one method used by some states to finance the non-federal
share of Medicaid costs. Certain IGTs are specifically allowed for funding the state share of
program costs (e.g., local units of governments such as counties may contribute to the state share
of Medicaid costs). Current federal law protects the ability of states to use funds derived from
state or local taxes and transferred or certified by units of government within a state. Some states
have instituted programs where all or portions of the Medicaid state share is paid by hospitals or
nursing homes that (1) are public providers, but not units of government; or (2) are units of
government, but the state share is returned to the provider sometimes through inflated Medicaid
payments. The purpose of such financing arrangements is generally to draw down additional
federal matching funds for which a state share may not otherwise be available.

A final rule issued by CMS clarifies the types of IGTs allowable for financing a portion of
Medicaid costs, imposes a limit on Medicaid reimbursements for government-owned hospitals
and other institutional providers, and requires certain providers to retain all of their Medicaid
reimbursements. The rule also establishes documentation requirements to substantiate that a
governmental entity is making a certified public expenditure (CPE) when contributing to the state
share of Medicaid costs. Opponents of the rule argued that CMS overstepped its authority to limit
IGTs, when Congress explicitly allows such transfers. Governors expressed fear that the rule
would inappropriately shift costs to states at a time when some states were facing difficult fiscal
situations. In addition to the moratorium on further administrative action on this rule, a federal
court held, in May, 2008, that the rule had been “improperly promulgated” and remanded the rule
back to CMS for further action. Alameda County Medicaid Center v. Leavitt, 559 F.3d 1 (D.D.C.
2008). However, the moratorium prohibits CMS from “tak[ing] any action (through the
promulgation of regulation, issuance of regulatory guidance, or other administrative action)” with
regard to the proposed and final rules prior to April 1, 2009. (For more details, see CRS Report
RS22848, Medicaid Regulation of Governmental Providers, by Jean Hearne.)
Provider-specific taxes have been used by many states over the last two decades to help pay for
the costs of the Medicaid program. Under these funding methods, states collect funds (through
taxes or other means) from providers and pay the money back to those providers as Medicaid
payments, and claim the federal matching share of those payments. States are essentially
“borrowing” their required state matching amounts from the providers. Once the state share has
been netted out, the federal matching funds claimed may be used to raise provider payment rates,
to fund other portions of the Medicaid program, or for other non-Medicaid purposes. Such taxes
are required to meet a number of federal laws and regulations, some of which have been in flux
recently. CMS issued a final rule that would (1) revise the threshold for determining if a tax
program is required to undergo a test to determine whether a provider is being “held harmless”
for the tax payment and clarify use of the term “revenues,” (2) clarify standards for determining
the existence of a hold harmless arrangement, (3) codify one class of health care services
permissible for establishing health care provider taxes, and (4) remove obsolete language.
Opponents of this rule expressed concern that it reduces consistency and clarity, that its changes
exceed the Secretary’s authority, and that it would impede a state’s ability to condition Medicaid
reimbursements on payment of required taxes. (For more details, see CRS Report RS22843,
Medicaid Provider Taxes, by Jean Hearne.)
Medicaid rehabilitation services include a full range of treatments designed to reduce physical or
mental disability or restore eligible beneficiaries to their best possible functional levels. Both the
executive and legislative branches have addressed this benefit. For example, in recent annual
budget submissions, the Bush Administration proposed administrative changes to reduce
Medicaid rehabilitation expenditures. Congressional and executive branch oversight
organizations have documented inconsistent policy guidance and states’ practices for claiming
federal matching funds that failed to comply with Medicaid rules. The current proposed rule was
intended to more clearly define the scope of the rehabilitation benefit and identify services that
could be claimed as rehabilitation under Medicaid. Opponents of this rule are concerned that it
creates new administrative barriers and restricts access by tightening the definition of
rehabilitation. Others argue this rule could reduce a key funding stream for community-based

mental health services, resulting in reduced access to such services and increased reliance on
institutional care for individuals with mental retardation and developmental disabilities. (For
more details, see CRS Report RL34432, Medicaid Rehabilitation Services, by Cliff Binder.)
Case management services assist Medicaid beneficiaries in obtaining needed medical and related
services. Targeted case management (TCM) refers to case management for specific beneficiary
groups or for individuals who reside in state-designated geographic areas. The Bush
Administration proposed legislative changes to reduce Medicaid TCM expenditures in recent
annual budget submissions. In the Deficit Reduction Act of 2005 (DRA; P.L. 109-171), Congress
added new statutory language to both clarify and narrow the definition of case management and
directed the Secretary of HHS to issue regulations to guide states’ claims for federal matching
dollars for TCM. A proposed rule was issued which became final in March, 2008. All Medicaid
authorities, related to all case management services, including TCM and services delivered
through waivers, are subject to this rule. It also directly addresses case management issues that
previously might have been considered open to interpretation. Opponents of this rule argue that it
is more restrictive than Congress intended in DRA, and would result in cuts to TCM services
since alternatives to Medicaid funding are scare. In addition, the new administrative requirements
and complexities of the rule may increase state costs while decreasing provider participation and
beneficiaries’ access to quality medical care. (For more details, see CRS Report RL34426,
Medicaid Targeted Case Management (TCM) Benefits, by Cliff Binder.)
As a condition of accepting funds under the Individuals with Disabilities Education Act (IDEA),
public schools must provide special education and related services necessary for children with
disabilities to benefit from a public education. Generally, states can finance only a portion of
these costs with federal IDEA funds. Medicaid can cover IDEA required health-related services
for enrolled children as well as related administrative activities. According to federal
investigations and congressional hearings, Medicaid payments to schools have sometimes been
improper. To address these problems, CMS issued a final rule that restricts federal Medicaid
payments for school-based administrative activities (e.g., outreach, service coordination, referrals
performed by school employees or contractors), and for certain transportation services (e.g., from
home to school and back for certain school-age children). Opponents of this rule argue that it will
reduce the availability of, and access to, needed health care for children, is inconsistent with
decades of approved state plan amendments allowing federal funding of these administrative and
transportation services, and falsely assumes that health care administrative activities performed
by school personnel are inconsistent with the proper and efficient administration of the state
Medicaid plan because such activities improve children’s health, reduce inappropriate medical
care utilization, and thus ultimately save money. (For more details, see CRS Report RS22397,
Medicaid and Schools, by Elicia J. Herz.)
Under Medicaid, outpatient hospital (OPH) services are a mandatory benefit for most
beneficiaries. OPH services include preventive, diagnostic, therapeutic, rehabilitative, or
palliative services provided under the direction of a physician or a dentist in the hospital. These

outpatient facilities may be located on or off the hospital campus or in satellite facilities. States
use a number of different reimbursement methods for different types of services provided in OPH
departments and clinics. The proposed and final rules issued by the Bush Administration would
limit the definition and scope of Medicaid outpatient services in a hospital facility, hospital clinic,
or rural health clinic to include only those facility services (1) that Medicare pays for under its
outpatient prospective payment system (OPPS) or is recognized by Medicare as an OPH service
under an alternate payment methodology, (2) provided by an outpatient hospital facility, including
only those entities that meet standards for provider-based status as a department of an outpatient
hospital as defined in Medicare rules, and (3) not covered under the scope of any other Medicaid
benefit category.
Opponents of this provision of the rule argue that it would exclude many of the costs that states
now consider in calculating certain supplemental payments to qualifying hospitals (called
disproportionate share or DSH payments), which would in turn limit such DSH payments to these
hospitals. In addition, this provision would exclude federal matching funds for OPH programs
that provide required diagnostic and treatment services for persons under age 21 that may not be
covered under Medicare. Others argued that, because the OPH rule incorporates the new
definition of hospital categories adopted in the final rule regarding cost limits on government
providers (described above), this rule violated the moratorium on implementing any provision of
the rule on cost limits for government providers. On the other hand, given this moratorium, CMS
elected to exclude from its final OPH services rule the proposed regulatory language delineating
methods for demonstrating compliance with the upper payment limit for Medicaid OPH and
clinic services provided in privately operated facilities. Currently, there is no congressional
moratorium on this final rule. Without other legislative action, this rule will become effective on
December 8, 2008. (For more details, see CRS Report RS22852, Medicaid and Outpatient
Hospital Services, by Elicia J. Herz and Sibyl Tilson.)
The next administration may wish to change some or all of these Medicaid regulations. For final
rules that have already been published in the Federal Register, the only avenue for changing or
rescinding such rules is through the rulemaking process. The Administrative Procedure Act (APA) 1
defines “rulemaking” to include the process for “amending or repealing a rule.” Section 553 of
the APA establishes the general procedures that an agency must follow when promulgating, and 2
thus when amending or repealing, a rule. Agencies must publish a notice of proposed
rulemaking, provide an opportunity for the public to submit comments, and publish a final rule
and a general statement of basis and purpose in the Federal Register “not less than 30 days before 3
its effective date.” The APA permits agencies to forego notice and comment and to make a rule
effective immediately under the “good cause” exception in 5 U.S.C. § 553. However, an agency’s
use of the good cause exception is subject to judicial review.
For the six regulations currently under the congressional moratorium, either before or after April
1, 2009 (when the existing moratorium ends and both the final rules and the interim final rule
would become effective), the agency could decide to use the notice-and-comment rulemaking

1 5 U.S.C. § 551(5).
2 Homemakers North Shore, Inc. v. Bowen, 832 F.2d 408, 413 (7th Cir. 1987).
3 5 U.S.C. § 553.

process to repeal the six final rules. Additionally, the agency may use the notice-and-comment
process to amend or repeal the outpatient hospital services rule not subject to this moratorium that
will become effective on December 8, 2008. Agencies possess inherent authority to amend or 4
repeal their rules. An interested party may also petition for the amendment or repeal of a rule 5
pursuant to 5 U.S.C. § 553(e).
An agency may decide to amend or repeal an existing regulation for a wide variety of reasons,
ranging from a change in Administration, to a change in the statutory or regulatory environment, 6
to a determination on the part of the agency that a different standard is preferable. Rule
modifications are subject to substantive review by the courts. In Motor Vehicle Mfrs. Ass’n v.
State Farm Mutual Ins. Co., which addressed the rescission of a rule put in place by the Carter
Administration, the Supreme Court established that heightened scrutiny is required in instances
where an agency has abruptly changed a settled course of agency action, depending on the scope
and impact of the modification of the rule: “an agency changing its course by rescinding a rule is 7
obligated to supply a reasoned analysis for the change.” However, a change in an agency’s
settled course of action is not fatal to the rule if a reasoned analysis is provided. As the Supreme
Court said in Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., “[u]nexplained
inconsistency is, at most, a reason for holding an interpretation to be an arbitrary and capricious 8
change from agency practice under the [APA].” The Court went on to cite both “changed factual
circumstances [and] a change in administrations” as events that could lead an agency to reverse
its previous policy, where the agency’s policy change may still receive deference from a 9
reviewing court.
Additionally, the next administration could issue a memorandum or other document directing the
agency to not enforce the rules or to temporarily suspend the rules, as incoming presidential
administrations have done soon after they assumed office. However, a rule’s suspension itself
constitutes a rulemaking under the APA, therefore it is axiomatic that a suspending agency is 10
required to comply with the APA’s notice and comment procedures in implementing a stay.
Alternately, Congress could pass legislation to reinstate or extend the prior moratorium, to direct
the agency not to enforce the rules, to direct the agency to repeal the rules, or directly override the

4 See Committee for Effective Cellular Rules v. FCC, 53 F.3d 1309, 1317 (D.C. Cir. 1995).
5 “Each agency shall give an interested person the right to petition for the issuance, amendment, or repeal of a rule. 5
U.S.C. § 553(e).
6 See, for example, Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837 (1984) (stating
[a]n agency interpretation is not instantly carved in stone,” id. at 863, and explaining that an agency is under a
continuing obligation to ensure that a regulation is reasonable by evaluatingvarying interpretations and the wisdom of
its policy on a continuing basis. Id. at 863-64).
7 See, for example, Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837 (1984) (stating
[a]n agency interpretation is not instantly carved in stone,” id. at 863, and explaining that an agency is under a
continuing obligation to ensure that a regulation is reasonable by evaluatingvarying interpretations and the wisdom of
its policy on a continuing basis. Id. at 863-64).
8 545 U.S. 967, 981 (2005).
9 Id.
10 See Council of the Southern Mountains v. Donovan, 653 F.2d 573 (D.C. Cir. 1981); National Federation of Federal
Employees v. Devine, 671 F.2d 607 (D.C. Cir. 1982); National Resources Defense Council v. EPA, 683 F.2d 752 (3d
Cir. 1982); Environmental Defense Fund v. Gorsuch, 713 F.2d 802 (D.C. Cir. 1983); Environmental Defense Fund v.
EPA, 716 F.2d 915 (D.C. Cir. 1983).

rules. Congress could also withhold funding from the agency for the enforcement of the rules or 11
take other measures through the appropriations process.
If the next administration were to change a final or interim final rule through administrative
action (e.g., issue a new modified rule), it would not be legally required to come up with an offset
in the FY2010 budget. However, the recent historical practice is that both the Clinton and Bush
Administrations required agencies to propose administrative actions and pay for such actions in
their HHS budget proposals (e.g., a corresponding savings appeared elsewhere in the budget).
This was also required outside the process of developing a budget.
The Congressional Review Act (CRA) permits the use of expedited procedures in the Senate to
disapprove agencies’ final rules. The CRA requires that agencies submit all final rules to
Congress before they take effect. If Congress adjourns its annual session sine die less than 60
“legislative days” in the House of Representatives or 60 “session days” in the Senate after a rule
is submitted to it, then the rule is carried over to the next session of Congress and is subject to
possible disapproval during that session.
Final rules published after May 2008 may be able to be addressed by the 111th Congress via the
CRA. Among the seven Medicaid rules described in this report, the CRA would apply only to the
final rule on outpatient hospital services. Congress could also enact legislation that would repeal
the other six Medicaid rules. If there was a legislative change to modify or negate such a final
rule, PAYGO would apply for the Congressional Budget Office’s scoring purposes, if budget
enforcement rules are in effect.
For more information on administrative and legislative actions to change existing rules, see CRS
Report RL34747, Midnight Rulemaking: Considerations for Congress and a New Administration,
by Curtis W. Copeland.
Table 1. Status of Medicaid Regulations
Estimated Net
Effective Reduction in
Status and Publication Date for Outlays over 5
Rule Date Final Rules Years
Medicaid Program; Graduate Medical Proposed rule—72 Federal Not $0.8 billion
Education Register 28930, May 23, 2007 applicable
Medicaid Program; Cost Limit for Providers Proposed rule—72 Federal July 30, 2007 $9.0 billion for
Operated by Units of Government and Register 2236, January 18, final rule
Provisions to Ensure the Integrity of 2007; and Final rule—72
Federal-State Financial Partnership Federal Register 29748, May 29,
Medicaid Program; Coverage for Proposed rule—72 Federal Not $1.4 billion
Rehabilitative Services Register 45201, August 13, applicable
Medicaid Program; Optional State Plan Case Interim final rule—72 Federal March 3, $1.5 billion
Management Services Register 68077, December 4, 2008

11 See CRS Report RL34354, Congressional Influence on Rulemaking and Regulation Through Appropriations
Restrictions, by Curtis W. Copeland.

Estimated Net
Effective Reduction in
Status and Publication Date for Outlays over 5
Rule Date Final Rules Years
Medicaid Program; Elimination of Proposed rule—72 Federal February 26, $4.2 billion for
Reimbursement under Medicaid for School Register 51397, September 7, 2008 final rule
Administration Expenditures and Costs 2007; and Final rule—72
Related to Transportation of School-Age Federal Register 73635,
Children Between Home and School December 28, 2007
Medicaid Program; Health Care-Related Proposed rule—72 Federal April 22, 2008 $0.6 billion for
Taxes Register 13726, March 23, final rule
2007; and Final rule—73
Federal Register 9685, February
22, 2008.
Medicaid Program; Clarification of Proposed rule—72 Federal December 8, $0.3 billion for
Outpatient Hospital Facility (Including Register 55158, September 28, 2008 proposed rule
Outpatient Hospital Clinic) Services 2007; and Final rule—73
Definition Federal Register 66187,
November 7, 2008.
Notes: See Congressional Budget Office, Medicare, Medicaid and SCHIP Administrative Actions
Reflected in CBO’s Baseline, February 29, 2008. For proposed rules, CBO generally assigns a
weight of 50% in its baseline to reflect the uncertainties of the administrative process. After a
regulation becomes final, CBO fully incorporates the projected effects into the baseline (after any
applicable moratorium ends). All rules listed in this table, except the rule on outpatient hospital
services, are subject to a congressional moratorium on further action until April 1, 2009. The
reduction in outlays reported in this table may be lower, given the subsequent extension of the
moratoria assumed in CBO’s analysis.

Elicia J. Herz Vanessa K. Burrows
Specialist in Health Care Financing Legislative Attorney, 7-1377, 7-0831