The End of Provider Pooling? What Providers and States Need to Know about CMS’ Recent Regulations

The Big Picture

States use a wide range of approaches for financing the state (or “non-federal”) share of Medicaid spending, including legislative appropriations, intergovernmental transfers from public providers or local governments, and taxes on healthcare providers. Provider taxes have become increasingly widespread in recent years—accounting for nearly a fifth of Medicaid non-federal funds in 2018—and often finance the non-federal share of supplemental or state directed payments (SDPs)¹ to providers, such as hospitals, nursing homes and physicians.

In order to build consensus among providers subject to these taxes, some states and provider groups have used so-called provider tax “pooling” arrangements, where providers redistribute payments so that all taxpaying providers receive payments at least equal to their tax paid. In recent years, CMS and other oversight bodies have increasingly scrutinized these arrangements, arguing that they violate federal non-federal share financing rules.

In its recent set of final Medicaid access regulations (here and here), CMS reinforced its commitment to prohibiting pooling arrangements. Some states have objected to CMS’s position, and two states have challenged the legality of CMS’s interpretation.^2,3 The Supreme Court's recent decision overturning Chevron raises further questions about whether this provision will withstand legal challenge.⁴ Other critics of CMS’ position have argued that the pooling prohibition could undermine the political agreement around provider taxes in states where pooling exists and, as a result, could lead to reductions in Medicaid payment levels to providers if the taxes are discontinued.

Though CMS separately announced that it will largely not enforce this prohibition until 2028 to give time for new financing arrangements to be put in place, states and providers in states with pooling arrangements will need to begin developing different approaches that maintain the political consensus around provider taxes or identifies other sources of the nonfederal share, in order to maintain provider payment levels and Medicaid beneficiaries’ access to care.

What are “Pooling” Arrangements?

Provider taxes are subject to a series of federal rules aimed at protecting the fiscal integrity of the Medicaid program. Among other requirements, the “hold harmless” prohibition specifies that such taxes may not provide for a direct or indirect guarantee that providers will be repaid for all or a portion of the amount of taxes that they contribute.⁵

When a provider tax finances the non-federal share of Medicaid payments to providers subject to the tax, there are often “winners” and “losers”. Since provider taxes are typically calculated as a percentage of total revenues or costs across payers, “winners” tend to be high-Medicaid providers that often receive Medicaid payments exceeding the cost of the tax. “Losers” are generally low-Medicaid providers that sometimes end up paying more in taxes than they receive in Medicaid payments. While low-Medicaid providers tend to be “losers” in the narrow context of Medicaid payments and provider taxes, they generally have a higher share of commercial revenues, and as a result, have stronger overall financial performance.

To build political consensus around provider taxes, some provider groups have developed “pooling” arrangements, whereby “winners” under a tax transfer payments to the “losers”. In recent years, CMS and other oversight bodies have grown increasingly concerned that these types of arrangements violate the federal hold harmless prohibition.

Federal Action on Pooling Arrangements

In the final rule, CMS expanded upon its 2023 Informational Bulletin and reinforced its intent to prohibit pooling arrangements. CMS reiterated its policy that impermissible hold harmless arrangements exist when there is a “reasonable expectation” that taxpayers will “directly or indirectly” receive their tax payments back, regardless of whether the state is involved in the redistribution of payments. CMS has argued that inclusion of the words “or indirectly” in federal regulation means the arrangement is prohibited even without the state’s involvement. To promote compliance, CMS also finalized a requirement that states must collect attestations from providers included in any SDP affirming that they do not participate in a hold harmless arrangement. This requirement will take effect beginning in 2028.

In a companion Informational Bulletin released with the final rule, CMS clarified that it will not enforce its interpretation of the prohibition on pooling until January 1, 2028.⁶

A Path Forward for States and Providers

Given CMS’s position, provider groups with pooling arrangements will want to start considering alternative approaches. Fortunately, states and providers have a range of tools, which we describe below. These tools are not intended to recreate pooling arrangements by other means, but they can support broader financing strategies that prioritize adequate provider payment levels and the continued viability of provider taxes within CMS guardrails. Key tools include:

• Maximizing the Value of Supplemental Payments. In managed care, CMS permits states to make payments up to the average commercial rate (ACR) under SDPs.⁷ ACR SDPs have often provided for substantial increases in reimbursement relative to Medicaid base payments in many states. CMS also provides states with a range of permissible approaches for calculating fee-for-service (FFS) Upper Payment Limits (UPL) and Medicaid graduate medical education payments, which may offer opportunities to enhance payments to certain providers.
  
  Enhancing supplemental payments would provide the most significant benefit to high-Medicaid providers, but it would also make Medicaid a more competitive payer and potentially encourage low-Medicaid providers to see more Medicaid patients. These strategies are likely to be most effective in states with higher federal matching rates, where states will be able to draw down a higher share of federal matching funds for every dollar of tax paid.
• Expanding Medicaid. For states that have not already expanded Medicaid, doing so would bring in billions in new federal Medicaid dollars and reduce uncompensated care. This could provide a significant financial boost for many providers.
• Targeting Existing Supplemental Payments. States have considerable flexibility to target specific subsets of providers through Medicaid supplemental payments. In managed care, CMS provides states with significant flexibility to define eligible provider classes for purposes of SDPs, subject to certain federal guardrails.⁸ In FFS, CMS also allows for flexibility in how states allocate UPL payments and in determining eligibility for Disproportionate Share Hospital payments, so long as such payments are not designed to hold providers harmless from the impact of a provider tax. These options may be most appealing for states that are already maximizing the value of their supplemental payments.
• Targeting Provider Taxes. States may also be able to redistribute the net impact of Medicaid payments (i.e., gross Medicaid payments minus provider tax contributions) by making changes to their tax programs. For example, states could explore excluding certain providers or varying tax rates for subsets of providers within existing federal parameters. To do this, states must demonstrate that any taxes remain “generally redistributive” by passing one of two statistical tests specified in federal regulation.⁹ In general, these tests are intended to prevent states from imposing taxes that disproportionately target Medicaid revenues, so states will need to consider approaches that accomplish their goals while not directly targeting high-Medicaid providers with higher taxes.¹⁰

_{¹ SDPs allow states to direct Medicaid managed care plans to use specific provider payment methodologies that promote access, quality, and delivery system reform. Unlike supplemental payments in Medicaid fee-for-service, SDPs must be tied utilization of services.}

_{² Order, State of Texas v. Brooks-LaSure, No. 23 Civ. 161 (E.D. Tex. June 30, 2023), ECF No. 31.}

_{³ Florida v. Brooks-LaSure, No. 24-10875 (11th Cir. appeal docketed Mar. 22, 2024)}

_{⁴ Loper Bright Enters. v. Raimondo, No. 22-451 (U.S. June 28, 2024)}

_{⁵ 42 C.F.R. § 433.68(f)}

_{⁶ CMS will not enforce this prohibition for existing hold harmless arrangements until 2028 but may seek to limit any new arrangements.}

_{⁷ CMS has informally permitted ACR SDPs in recent years, but the limitation was codified for a subset of services through the final rule.}

_{⁸ The final rule also provides states with enhanced flexibility on how to calculate the ACR, including allowing states to base ACR calculations on the set of services included in the SDP instead of limiting to only providers included in the SDP. This could benefit high-Medicaid providers that often receive relatively low commercial rates.}

_{⁹ 42 C.F.R. § 433.68(e)}

_{¹⁰ In response to concerns that some states are “gaming” these tests and disproportionately imposing the burden of taxes on Medicaid revenues, CMS indicated through a recent tax waiver approval that it is considering developing new regulations to address this issue.}