WASHINGTON -- Legislation rushed through Congress last week easing new Medicaid financing rules will help states in the short run by giving them generous transition rules, but the long-term consequences of the measure are still unclear, lobbyists and rating agency officials said yesterday.
The measure was approved in response to states' complaints about Health Care Financing Administration rules that were issued Sept. 12 and had been scheduled to go into effect Jan. 1. Those rules were designed to prevent a state from counting certain tax revenues or donations from hospitals toward the contributions it makes to Medicaid that are eligible for matching federal funds.
The measure, which codifies a hastily drafted agreement between the National Governors Association and the health administration, makes the rules somewhat less stringent and changes the effective date. Some of the regulations now will become effective Oct. 1, 1992, and others will take effect in 1993.
"We see this as a positive," because the legislation allows states ample time to wean themselves away from relying on donations or taxes, said John Goetz, a vice president in the health care group of Moody's Investors Service.
"This regulation appears to be more generous to states than the [Sept. 12] regulations," said Elie Radinsky, a rating officer with Standard & Poor's Corp. "By allowing them to begin somewhere between Sept. 30, 1992, and June 30, 1993, states should have enough time to develop an appropriate [plan] in order to meet the potential Medicaid shortfall."
States and localities had argued that the Sept. 12 rules would wreak havoc with their budgets because they would become effective in the middle of most states' fiscal years. In October, Congress began drafting legislation that would have simply delayed the regulations and given the health agency and the states time to work out their differences.
But under the threat of a presidential veto, the governors' group worked frantically to negotiate an agreement acceptable both to states and the Bush administration. Other levels of government and the hospital industry have been cautious about endorsing the agreement, but they did say it was preferable to the Sept. 12 rules.
"Given the fiscal chaos that would have occurred on Jan. 1, we prefer the compromise," said Thomas Joseph, a lobbyist with the National Association of Counties.
"My general reaction is cautiously optimistic," said Michael Spivey, a lawyer with the firm of Powell, Goldstein, Frazer & Murphy, which represents the National Association of Public Hospitals.
"This was put together very quickly and passed very quickly, so I'm not sure anyone understands the full ramifications of what has just happened," Mr. Spivey said. "I think it's going to take some time for the situation to settle and sort itself out."
Mr. Radinsky pointed out that, even though the bill improves on the Sept. 12 rules, it will still cut Medicaid payments to states, a negative factor to weigh in examine states' credit ratings.
"Clearly, the states which rely heavily on these funding mechanisms ... will face the greatest challenge in supplanting them," Mr. Radinsky said. Those states "will come under further financial pressures, which, depending on their individual circumstances, might lead to a downgrading of their ratings."
The legislation covers four general areas:
* Donations: Under the Sept. 12 rules, states would have been banned from counting donations toward the Medicaid match beginning on Jan. 1,1992. Under the legislation passed by Congress, the ban will take effect Oct. 1, 1992. But states that did not have a donation program in effect as of Sept. 30, 1991, will not be allowed to operate one between now and Oct. 1.
* Intergovernmental transfers: This term refers to money a county or city government gives to the state that is subsequently counted toward the Medicaid match. The health agency wanted to curtail the use of such transfers as part of a state's share of Medicaid funds because it was concerned states could circumvent the new rules by funneling hospital donations or tax revenues through a lower level of government.
But the legislation flatly prohibits the health agency from placing any restrictions on intergovernmental transfers, and municipal lobbyists said this was an important victory. "We're particularly pleased that intergovernmental transfers are protected," Mr. Joseph said.
* Provider-specific taxes: The Sept. 12 rules would have almost eliminated the ability of states to count toward the Medicaid match revenues derived from taxes on hospitals and other health facilities -- so-called provider-specific taxes. Those restrictions were to have taken effect Jan. 1, 1992.
But under the legislation, states will be allowed to count provider-tax revenues toward the Medicaid match under certain conditions. The tax must uniformly apply to all providers in a particular class and must apply to their entire range of business. A state's revenues from the taxes could not exceed 25% of its total share of Medicaid funding.
The legislation carries various effective dates for those rules. For most states, the rules would become effective Oct. 1, 1992. But for states with fiscal years ending between July 1 and Oct. 1, the effective date is Jan. 1, 1992. For states that do not have a regularly scheduled legislative session in 1992, the effective date would be July 1, 1993.
The transition rules for provider taxes apply only to states with tax programs in effect as of Nov. 22, 1991. For those who put tax programs into effect after that date, the 25% limit would apply to them as of Jan. 1, 1992.
* Disproportionate-share hospitals: Such hospitals treat an unusually large -- or "disproportionate" -- number of poor patients. They receive extra Medicaid payments, and states have wide latitude to decide which hospitals receive that designation.
The health agency was concerned that states were inflating the number of those hospitals to get more Medicaid money. It proposed rules in October that would have set uniform standards for designating disproportionate share hospitals, to reduce their numbers.
The legislation, however, does away with that proposal and instead places a cap on the total amount a state can collect each year under Medicaid for disproporationate share hospitals to 12% of a state's total annual Medicaid program expenditures.
The 12% cap "reduces the amount of reimbursement [disproportionate share hospitals] will receive, but in the whole is more generous than the prior proposed regulations," Mr. Radinsky said.
This part of the measure, however, remains a sticking point with lobbyists outside the governors' group because it was crafted even more hurriedly than the rest of the package: The disproportionate share rules went from being a proposal in October to legislation that cleared Congress a month later.
"The limit on disproportionate share payments is of concern," Mr. Spivey said. "We'll have to see how this all plays out and what states are going to do to see the real-world results."
