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FQHCs: Four Reimbursement Traps for the Unwary

This is the third article in our series addressing important topics for federally qualified health centers (FQHCs) and the providers who work with them. The first post in the series offered five tips for contracting with FQHCs and the second post covered the nuts and bolts of Medicaid FQHC Reimbursement.  

Choices that individual state Medicaid agencies make to implement the federal FQHC payment requirements will significantly impact the bottom line of FQHC reimbursement.  While state decisions might be challenged and possibly overturned in court when they are inconsistent with federal rules, not every interpretation will be litigated, and states may have discretion to choose from a range of alternatives that satisfy federal requirements.  This article discusses four key areas where FQHCs should be aware of state interpretations.  

1. Scope of Services Changes

Although federal law requires prospective payment system (PPS) rates to be adjusted after an increase or decrease in an FQHC’s scope of services, this is no clear definition of what represents a change in scope of services.  Some state Medicaid agencies have construed the term restrictively to disqualify changes such as the expansion of an existing service to a new patient population or the onboarding of a new kind of licensed provider.  Restrictive state definitions may impair the ability of FQHCs to refresh their PPS rates, which can have negative financial consequences since the FQHC is providing more services but at a static historical rate based on fewer services.  Before making a significant change to operations—especially a change that is likely to increase the average cost of a visit—FQHCs should investigate whether they will be eligible to apply for a new PPS rate after the contemplated change. 

2. Productivity Standards 

States are required to recognize reasonable costs when establishing FQHC PPS rates based on a submitted cost report.  Some states, however, have taken positions on how to assess reasonableness that significantly reduce the costs that are allowed to be incorporated into a PPS rate.  For example, productivity standards can be used to set a defined expectation for how many patients should be seen by an FQHC’s employees or contracted providers in a year.  

States typically implement productivity standards by discounting the costs incurred by the FQHC to employ or contract with a health care provider who does not meet his or her required productivity threshold.  If, for example, a physician were expected to have 4,200 patient visits per year under the state’s standard, but the physician instead saw 3,570 patients, then only 85% of the FQHC’s costs of employing the physician would be recognized in a ratesetting cost report.  Unfortunately, productivity standards are often based on national survey data that are potentially outdated or otherwise limited to basic primary care services, which results in unrealistic expectations for FQHCs that serve low-income populations disproportionately composed of medically complex patients who require longer visits than average. 

3. Billable Visits 

Another critical reimbursement issue is what counts as a visit that entitles an FQHC to receive a PPS payment.  The definition of a visit should not have a reimbursement impact in the ratesetting year (lower visit counts resulting from a more restrictive definition of visit also mean higher payment per visit).  However, in future years, there may be a risk that the state Medicaid agency may narrow its definition so that the same amount of costs are spread across fewer visits.  Restrictive definitions also can be problematic if an FQHC’s operations evolve over time in ways that bring its PPS rate out of alignment with its current per-visit costs.  FQHCs expanding into newer models of care, such as telehealth or intensive case management, should be sensitive to the need to evaluate how state law and policy defining visits and setting rates will impact their ability to receive adequate payment for new kinds of visits.    

4. Incentive Payments and Managed Care Contracts

Many FQHCs that contract with Medicaid managed care plans are eligible for incentive payments for controlling costs, reducing utilization, or improving patient outcomes.  Guidance from the Centers for Medicare & Medicaid Services (CMS) instructs states to exclude managed care incentive payments from the state’s calculation of supplemental payments due to the FQHC.  This means that FQHCs that earn incentive payments receive them in addition to total PPS reimbursement.  CMS adopted this policy to ensure that incentive payments would matter; without such a policy, FQHCs would be guaranteed the same reimbursement regardless of whether or not they met the goals set by managed care plans, undermining any incentive effect.  

In practice, however, it is not always straightforward to determine what payment amount is an incentive, and some states have expressed concerns that FQHCs could receive a windfall if payments made for services were improperly characterized as incentive payments.  States have addressed this issue through a mix of formal guidance about managed care incentive payments and informal auditing decisions.  It is critically important for an FQHC participating in a managed care incentive program to understand the rules that apply in its state, as well as the terms of the agreements they are negotiating.  

Relatedly, FQHCs are increasingly contracting with managed care plans on a more comprehensive basis and assuming costs of services outside the scope of the Medicaid FQHC benefit.  In these cases, how state Medicaid agencies treat the managed-care payments received for non-FQHC services when calculating supplemental payments due to the FQHC is emerging as a contested issue.  As with the treatment of incentive payments, it is essential for FQHCs engaging in these kinds of managed care contracts to monitor evolving state policy positions to avoid surprises.

© 2023 Foley & Lardner LLPNational Law Review, Volume IX, Number 343

About this Author

Adam Hepworth,  Health Care Attorney, Foley Law Firm

Adam J. Hepworth is an associate and health care business lawyer with Foley & Lardner LLP. He is a member of the firm’s Health Care Industry Team.

Prior to joining Foley, Mr. Hepworth was a law clerk for Judge Harris L. Hartz on the United States Court of Appeals for the Tenth Circuit. He also interned in the San Francisco City Attorney’s health group and externed in the Civil Division of the United States Attorney’s Office in San Jose. Before he attended law school he was a policy intern for Sierra Health Foundation, where he worked on...

Diane Ung, Federal, Health Care Legislation, Medicare, Foley and Lardner Law Fir

Diane Ung is a partner and health care business lawyer with Foley & Lardner LLP. Ms. Ung focuses her practice on federal and state health care legislation and payment issues arising under government programs such as Medicare and Medicaid. Her practice includes regulatory, legislative, health care and business matters for public agency clients. Ms. Ung has specific experience in structuring Medicaid financing for safety net providers in the context of disproportionate share hospital payment programs and under federal Medicaid demonstrations authorized under Section...