CMS Update: How Do Recent Federal Regulation Changes Affect Your Life?

1. CMS Update: How Do Recent Federal Regulation Changes Affect Your Life? Dale Jarvis, CPA NCCBH Consultant MCPP Healthcare Consulting dale@mcpp.net www.mcpphealthcare.com

2. Session Overview • Since 2003, there have been a series of federal legislative and regulatory changes that impact how Community Mental Health Services Programs and Community Mental Health Boards are managed and funded. If you want to make sense of the alphabet soup of BBA, DRA, CMS, PIHP, come to this session where we will explore the following topics: • Historical overview of mental health funding in the United States • The early role of managed care in public mental health • The Michigan 1915(b)(c) “combo” waiver • The 2003 sea change brought on by the implementation of the Balanced Budget Act • How the Deficit Reduction Act and subsequent regulations have further tightened the rules • What’s next for the community behavioral health system

3. Chapter 1 Some Relevant History about Public Mental Health Funding

4. A bit of relevant history • The 1963 Community Mental Health Centers Construction Act (PL 88-164) and its subsequent amendments required grantees to provide five core elements of service: outpatient, inpatient, consultation/education, partial hospitalization, and emergency/crisis intervention. • Categorical grant funding enabled community mental health centers (CHMCs) to serve all members of the community, regardless of their ability to pay, effectively creating a mental health safety net. (Note: Several items of “relevant history” are from the Maine Rural Health Research Center, Edmund S. Muskie School of Public Service, University of Southern Maine)

5. A bit of relevant history • In part as a consequence of the deinstitutionalization movement that began in earnest in the 1960s, many CMHCs abandoned their roles as multiple service agencies to devote an increasing proportion of their resources to the needs of individuals defined by their state mental health agencies as members of priority populations. • Children and adolescents under the age of 18 with a diagnosis of mental illness who exhibit severe emotional or social disabilities which are life threatening or require prolonged intervention; and • Adults who have severe and persistent mental illness such as schizophrenia, major depression, manic depressive disorder, or other severely disabling mental disorders which require crisis resolution or ongoing support and treatment.

6. A bit of relevant history • President Reagan’s Omnibus Budget Reconciliation Act of 1981 (PL 97-35) consolidated federal mental health funding into block grants to be administered by the state mental health agencies. • This further hastened the transition of CMHCs away from their safety net roles. • By the way, this was also accompanied by a 21% funding cut.

7. New Term… • shift and shaftv. To shift programs to a lower level of government without providing the means with which to pay for those programs.—shift and shaftn.—shift-and-shaftadj. The Colorado Municipal League's Sam Mamet coined the term 'shift and shaft' to describe this process back in the Reagan era, when the feds began shifting many of their responsibilities to the states — and shafting them by not also forwarding the money to pay for those programs.

8. Medicaid and Mental Health • The next major funding phase began in the late 1980s and early 1990s with the rise of Medicaid managed behavioral healthcare, which injected substantial funding into community mental health centers.

9. Medicaid as a % of Total MH Revenue

10. President Bush’s FY2008 Federal Budget Proposal • In mid-February, President Bush released his proposed $2.9 trillion budget for FFY2008 that includes the following non-Medicaid cuts related to public behavioral health: • While many of the proposals made by the administration for FFY 2008 will likely be rejected by a Democratically-controlled Congress, the budget will place many programs in a defensive posture.

11. President Bush’s FY2008 Federal Budget Proposal • President Bush’s FFY2008 budget also includes the following assumptions about Medicaid funding:

12. Strategic efforts to sidestep the Democratic Congress • Now that the Democratic takeover of Congress has blocked one route for weakening the federal government's regulatory role, the Bush administration has found another. Under an executive order signed by President Bush last month, federal agencies will have to establish offices staffed with political appointees to make sure that any new rules or guidance documents are in line with the administration's anti regulation agenda. • Agencies issue rules to flesh out the broadly worded laws that Congress passes to ensure clean air and water, safe food and drugs, and hazard-free workplaces. The rule makers are agency scientists and civil servants whom the White House cannot always count on to favor special interests over the public interest. The new regulatory oversight offices will make sure that agencies keep an aggregate account of the costs and benefits of all their regulations, not just new ones. They will be involved in the framing of regulations from the beginning, not just overseeing the final product. From a Boston Globe editorial Wednesday, February 7, 2007

13. Federal Budget Outlook Cliff Notes Version of this Slide: Current projections assume that the AMT won’t change, all of the 2001 and 2003 tax cuts will sunset, and we will still add $1.6 trillion to the national debt. Note: Off Budget Surplus is almost all Social Security (plus a little Post Office)Data Source: Congressional Budget Office CBO Caveats • Revenues are projected to rise from 18.6 percent of GDP this year to almost 20 percent of GDP in 2012 and then remain near that historically high level through 2017. Much of that increase results from two aspects of current law that have been subject to recent policy changes: the growing impact of the alternative minimum tax (AMT) and, even more significantly, various provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and modified by subsequent legislation, which are scheduled to expire by December 31, 2010. • Outlays for discretionary programs (activities whose spending levels are set anew each year through appropriation acts) are projected to decline from 7.8 percent of GDP last year to 5.8 percent of GDP by 2017—a lower percentage than any recorded in the past 45 years. That projection derives mainly from the assumption in the baseline that discretionary funding will grow at the rate of inflation, which is lower than the growth rate that CBO projects for nominal GDP. The projection for discretionary spending implicitly assumes that no additional funding is provided for the war in Iraq in 2007 and that future appropriations for activities related to the war on terrorism remain equivalent, in real (inflation-adjusted) terms, to the $70 billion appropriated so far this year.

14. Starve the Beast.. • Starve the Beast, v. To cut taxes with the intent of using the reduced revenue as an excuse to drastically reduce the size and number of services offered by a government. —starve-the-beastn., adj.—starving the beastn., pp.—starve-the-beastern. (source: www.wordspy.com)

15. Starve the Beast… The starve-the-beast doctrine is now firmly within the conservative mainstream. George W. Bush himself seemed to endorse the doctrine as the budget surplus evaporated: in August 2001 he called the disappearing surplus "incredibly positive news" because it would put Congress in a "fiscal straitjacket." Like supply-siders, starve-the-beasters favor tax cuts mainly for people with high incomes. That is partly because, like supply-siders, they emphasize the incentive effects of cutting the top marginal rate; they just don't believe that those incentive effects are big enough that tax cuts pay for themselves. But they have another reason for cutting taxes mainly on the rich, which has become known as the "lucky ducky" argument. Here's how the argument runs: to starve the beast, you must not only deny funds to the government; you must make voters hate the government. There's a danger that working-class families might see government as their friend: because their incomes are low, they don't pay much in taxes, while they benefit from public spending. So in starving the beast, you must take care not to cut taxes on these "lucky duckies." (Yes, that's what The Wall Street Journal called them in a famous editorial.) In fact, if possible, you must raise taxes on working-class Americans in order, as The Journal said, to get their "blood boiling with tax rage." —Paul Krugman, "The Tax-Cut Con," The New York Times, 9/14/2003

16. Chapter 2 Along comes the Balanced Budget Act of 1997

17. Key BBA Questions • What is the financial impact of the Actuarial Rate Setting Process on States, Plans and Providers? • How is CMS’ new oversight role and the DRA affecting States, Medicaid Plans and Providers?

18. Overview • In August 2003 the Balanced Budget Act (BBA) of 1997’s Final Rules for Medicaid Managed Care went into effect. This new “rulebook” changes how states with Medicaid Behavioral Health Managed Care Waivers are paid for services and manage their programs. • Let’s start with the question, “What is the financial impact of the Actuarial Rate Setting Process on States, Plans and Providers?”

19. Pre – Balanced Budget Act • The “Old Rules” • Under managed care, there is added flexibility to give clients what they need, even if it doesn’t fit into a defined service code. • Cost savings from the Medicaid managed care plan can be used to provide additional mental health services; we don’t have to worry about giving money back if we don’t spend it. • Recording and tracking every unit of services is not as important because we’re not begin paid fee for service. • We should be focusing more on managing to client outcomes than managing our unit cost and productivity levels.

20. Actuarial Soundness • The Final Rules include a very important change in the Federal financing of Medicaid managed care programs - the repeal of the Upper Payment Limit (UPL). • The UPL has been replaced with the requirement for States to set Actuarially Sound Capitation Rates.

21. Actuarially Sound Rates • The New Math – Medicaid Rates are based on: • Counting the historical services that have been reported, • Multiplying them by a rate for each service, and • Adding/subtracting adjustments for inflation and expected changes in utilization • Rates must be based only on Medicaid services • If a provider provides services outside the state plan and they’re not one of the approved 1915(b)3 alternative service, they won’t be counted • Rates must only pay for services to Medicaid beneficiaries • If a plan uses any savings to serve persons who have lost their Medicaid coverage, they won’t be counted (and they will be subject to recoupment in an audit)

22. Actuarially Sound Rates (continued) • “Savings” in a world of Actuarially Sound Rates • If a Plan has any money is left over at the end of the year, the savings must be put into a Community Reinvestment Fund, which must be earmarked for service delivery projects to Medicaid enrollees, to be spent in the following 12 months. • If the Plan is a governmental entity, savings equal payments minus expenses; no provision for surpluses. • If a provider is related to the government-run Plan (e.g. any overlap of board members), the provider organization will likely be considered a related party and any unexpended provider funds will also be called savings.

23. Impact of Actuarial Soundness • A number of States have managed mental health care systems where Medicaid Health Plans have passed a portion of their capitated risk down to providers in the form of case rates or sub-capitation payments with the expectation that: • Providers must meet the needs of the clients/populations for which they are responsible. • Providers are at risk for excess utilization and cost under case rates, plus penetration risk under sub-capitation. • Providers can reap the “reward” if savings were achieved. • These reimbursement methods inadvertently broke the link between recording/submitting services and being paid. As a result, there was a drop in reported state plan services and the inability to quantify how much was due to decreased clinical effort, and how much to service capture problems.

24. Impact of Actuarial Soundness

25. Impact of Actuarial Soundness • “No Boren Amendment: Rates do NOT have to be adequate to cover the costs of an efficiently run organization” (Brenda Jackson, CMS/SAMHSA Conference, October 2004) • The BBA brought about the repeal of a provision of Medicaid law commonly known as the “Boren Amendment”, which stated that states’ Medicaid payments to hospitals, nursing facilities and ICF/MRs had to be sufficient to cover the cost of “efficiently and economically operated facilities”. Under the BBA the only requirement is that states must open their Medicaid ratesetting process to the public. • When the unit cost portion of the “actuarial math problem” is completed, there’s no assurance that the actuaries will use figures that are relevant to the cost of doing business in the community mental health systems

26. Impact of Actuarial Soundness • Issue: A number of actuarial firms are beginning to examine unit costs in publicly-funded mental health systems; in a number of non-fee for service managed care states this issue had previously fallen below the radar screen. • Concern: In States with Medicaid Health Plan designs that pay providers using methods other than Fee for Service, actual unit costs may be well above costs used in the actuarial studies and the provider community will not be able to respond quickly enough, which could result in loss of capacity and system instability.

27. Cost per Hour Example (actual data)

28. Back to “Fee for Service” • Under a system that uses actuarial approaches to set capitation rates, if a service has not been properly recorded at the provider agency, accurately transmitted to the Medicaid Health Plan, and then submitted and accepted by the State Mental Health Department’s data system, the service “did not occur”. Regardless of the payment methods used by states to pay plans, and plans to pay providers, we have moved to what is essentially a fee for service system.

29. Impact on Providers • If you’re in a state where the Medicaid authority pays you on a fee for service basis, the world has come back around to your “point of view” and you should experience little or no impact. • If you’re in a state where any Medicaid services are paid via subcapitation, case rates, grant-in-aid, or similar non-fee for service methods, there is a high probability that your Medicaid funding will be cut. • Furthermore, if you fall into this second category, if your state pays Medicaid health plans the same rate throughout the state, you’re in greater jeopardy.

30. Statewide Rates • States with county or regional-based Plans may have Medicaid PMPM rate models that could create a downward funding spiral • Example - Oregon Mental Health System: • Round 1: The PriceWaterhouse Coopers actuarial study found that, on the average, Plan PMPM rates were 16% higher than they could justify with their claims data; • Rates were cut across the board to the Plans • Plans with higher utilization lost money; Plans with lower utilization continued to be paid more than their utilization would justify.

31. Statewide Rates • Round 2: The most recent PriceWaterhouse Coopers actuarial study found that, on the average, Plan PMPM rates were 9.1% higher than they could be justified from claims data. • This analysis is translating into a second across the board cut (9.1%) that will be going into effect October 1, 2005. • Again, Plans with higher utilization will lose money; Plans with lower utilization will continue to be paid more than their utilization would justify. • Unless a targeted intervention is made this downward trend could continue.

32. Statewide Rates

33. “Flaw” in the Current Actuarial Process • Many States’ public mental health budgets are under-funded • Different studies in California, Oregon and Washington estimated that only ½ of the needed resources were available • ½ of the people were being served (CA) • ½ of the funding was available (OR, WA) • A more “conservative” 50 States analysis shows a similar picture of shortfalls…

34. Total FY 2002 SMHA-Controlled Per Capita Mental Health Expenditures

35. State by State Funding Comparison

36. “Flaw” in the Current Actuarial Process • This translates into a “driving by looking in the rear view mirror” process: • Each State’s rates are based on the math problem of counting historical services, not by analyzing the needs of the population. • The process, as it is currently used, maintains the inequities between states and is not a reflection of the service needs and cost of the covered population. • This is very different from how the process is handled in the general healthcare system.

37. Healthcare Example

38. “Flaw” in the Current Actuarial Process • Actuarial Science is not inconsistent with how the process “should occur”: • What are the target populations, what is the projected prevalence of mental illness in those groups, and how many people “ought to be” receiving service in a given year? How do these projections compare with the numbers of people served in the last three years? • Based on research and experience in this and other states, what services do clients need and how much of each type of service do they need? How do these projections compare with the service utilization over the course of the last three years? • What service capacity does the mental health system have in place to meet these needs? How well does capacity match with demand? What service should the provider network offer? What mechanisms should be put in place to ensure that willing and qualified providers offer services in the right scope, amount and duration? • What is the cost of meeting the projected demand (e.g. how much money “should” the state be spending on public mental health)? How do these projections compare with actual expenditures over the last three years?

39. Key BBA Question #2 How is CMS’ new oversight role and the DRA affecting States, Medicaid Plans and Providers?

40. CMS Oversight • The CMS Office of Inspector General has been taking a hard line against past CMS practices, finding them at fault for inadequate waiver oversight and approving state requests that are outside the “letter of the law” • The OIG is looking into issues in IA, KS, WA, UT, and CO and considering disallowances, de-categorizations and deferrals

41. CMS Oversight • CMS has stepped up their scrutiny of Medicaid contracts, waivers, state plan amendments, and state operations; • Past approval from CMS is no guarantee that they won’t come back and tell you the rules have changed

42. Issue 1: CMS Oversight Example

43. CMS Oversight • CMS has unveiled a plan to begin prospectively reviewing state Medicaid budgets • A draft State Medicaid Director Letter from Dennis Smith noted: • “Over the last decade states have initiated a number of financing mechanisms to enhance the allowable Federal funding for their Medicaid programs. CMS and the OIG reviews of these programs have resulted in the identification of a number of potential disallowances of Federal Funds involving billions of dollars that have accumulated over the years… To address these long standing problems, CMS will implement a prospective financial management review process…”

44. CMS Oversight • Soon afterward, the Administration made proposals in the President’s Budget to institute new Medicaid program integrity activities saving the federal government $1.5 billion in FY2005 and $23.5 billion over 10 years • Pushback by the National Governors Association resulted in a temporary pullback by Secretary Thompson, but… • Translation: Expect CMS to play “hardball” in their oversight role

45. CMS Regulation 2258-P • On January 18th, CMS issued a sweeping, proposed regulation that is targeted specifically at public and other safety net providers, which would cut federal Medicaid payments by $3.87 billion over five years. This regulation: • Imposes cost limits on Medicaid payments to Government Providers that would have the effect of only covering the cost of the service provided to Medicaid enrollees for Medicaid services; any funds left unspent at the end of the year would have to be returned to CMS. • All states would have to institute a cost reporting system for government providers, similar to the Medicare Cost Report, as the basis for determining cost. This approach brings with it a set of non-allowable costs, which means that government safety net providers are put in a “cost-minus” Medicaid funding environment. • Restrictions are placed on Intergovernmental Transfers (IGT) and Certified Public Expenditures (CPE) that have the effect, in some states, of allowing CMS to wiggle out of paying the federal share of valid Medicaid expenditures.

46. DRA, etc… • The federal government has continually made clear its intent to detect and prosecute anyone who commits healthcare fraud and abuse. It is important that all CHC CFOs recognize that they and their organizations, including their organizations’ directors, can be held civilly and criminally liable for the acts of employees, even if that employee acted on his or her own and without the permission or knowledge of management. • There are several sources of regulation and guidance in this area including: • The Federal False Claims Act • Health Insurance Portability and Accountability Act of 1996 • Balanced Budget Act of 1997 • Sarbanes-Oxley Act • Deficit Reduction Act • DHHS OIG Regulation

47. DRA, etc… • Some government estimates indicate that healthcare fraud and abuse accounts for an estimated 10 percent of total federal healthcare spending in the United States. The current annual healthcare budget in the United States is $2 Trillion. 10% of that is $200 Billion. • Consequently, federal and state government interest in combating fraudulent and abusive practices is now widespread. High-profile settlements involving many types of providers and settlements into the hundreds of millions of dollars have provided additional incentives for the government to continue its scrutiny of the healthcare industry. • There are several federal departments that are charged to investigating healthcare fraud and abuse including the Justice Department, the Dept. Health and Human Services Office of Inspector General (DHHS-OIG), and the Centers for Medicare and Medicaid (CMS).

48. DRA, etc… • Here are a few important provisions: • The Federal False Claims Act: Any person found to be knowingly involved in submitting a false or fraudulent claim to the federal government is liable for a civil penalty of $5,500 to $11,000, plus three times the amount of damages. Healthcare providers run the risk of violating the FCA if they submit a claim for payment that they knew was fraudulent. While the government does not have to prove that an individual intended to defraud the government, it does have to prove that the individual: 1) had actual knowledge of the information; 2) acted in deliberate ignorance of the truth of the information; or 3) acted in reckless disregard of the truth or falsity of the information. • HIPAA of 1996 – Federal Criminal Law:HIPAA created new criminal statutes specificallyfor certain healthcare fraud activities. For example, anyone who knowingly and willfully defrauds a “healthcare benefit program” (e.g. Medicaid or Medicare) can face monetary fines and from 20 years to life imprisonment, or both, depending upon the severity of the violation.

49. DRA, etc… • Here are a few important provisions (continued): • HIPAA of 1996 – Civil Monetary Penalties: If an individual submits, or causes the submission of, a false or fraudulent claim for any federal healthcare program, they are subject to penalties three times the amount claimed for the service, and the fine is $10,000 for each item or involved service. Three actions were added to the existing list of actions: 1) the submission of a claim based on a code that will result in a greater payment than should be applicable (upcoding); 2) the submission of a claim for items or services that are not medically necessary; and 3) offering remuneration to beneficiaries to influence them to use a particular provider, practitioner, or supplier for anything that is reimbursable by Medicare or Medicaid.

50. DRA, etc… • Here are a few important provisions (continued): • October 5, 2005, the Centers for Medicare & Medicaid Services (CMS) published the Medicaid Program and State Children’s Health Insurance Program (SCHIP) Payment Error Rate Measurement regulation. This regulation contains information on CMS’ plans to engage a national contracting strategy in order to implement a portion of Public Law 107-300, the Improper Payments Information Act of 2002 (IPIA) in Medicaid and in SCHIP.