Major Medicaid Payment Policy Developments


Year Action
1965 Social Security Amendments of 1965 (P.L. 89-97)

  • create the Medicaid program as a federal-state partnership codified under Title XIX of the Social Security Act (the Act); and
  • require, in Section 1902(a)(13), that hospital payments are based on “reasonable cost.”
1968 Social Security Amendments of 1967 (P.L. 90-248)

  • adds Section 1902(a)(30)(A), requiring states to “assure that payments are not in excess of reasonable charges consistent with efficiency, economy, and quality of care.”
1972 Social Security Amendments of 1972 (P.L. 92-603)

  • repeal maintenance of effort, allowing states to reduce expenditures from one year to the next;
  • require, in Section 249, that payments are made to nursing facilities and intermediate care facilities (ICFs) on a reasonable cost-related basis; and
  • require that payments for inpatient hospital services do not exceed customary charges.
1977 The Secretary of the U.S. Department of Health, Education, and Welfare created the Health Care Financing Administration (HCFA) to administer Medicaid and Medicare.
1980 Boren Amendment, part of the Omnibus Budget Reconciliation Act of 1980 (P.L. 96-499)

  • removes the requirement to pay nursing facilities according to Medicare cost principles; and
  • requires payments to be “reasonable and adequate” to meet the costs of “efficiently and economically operated” facilities.
1981 Omnibus Budget Reconciliation Act of 1981 (P.L. 97-35)

  • expands Boren Amendment to hospitals, removing the requirement that Medicaid pay them according to Medicare cost principles.
  • removes “reasonable charges” limitation from 1902(a)(30)(A);
  • adds Section 1923, which allows for additional payments to hospitals serving a disproportionate share of Medicaid and low-income patients, later known as disproportionate share hospital (DSH) payments; and
  • permits 1915(b) freedom-of-choice waivers allowing, for example, states to pursue mandatory managed care for certain Medicaid populations.
1987 Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203)

  • requires that Medicaid payment methods for nursing facilities take into account the cost of complying with newly enacted quality requirements and
  • adds Section 1923 of the Act, strengthening DSH requirements and outlining payment methods.
1988 HCFA finalizes regulations establishing separate upper payment limits (UPLs) for state-owned and non-state-owned inpatient hospitals, nursing facilities, and ICFs.
1989 Omnibus Budget Reconciliation Act of 1989 (P.L. 101-239)

  • adds the requirement to 1902(a)(30)(A)―previously established only by regulation―that payments be sufficient to attract enough providers to ensure covered services will be as available to Medicaid beneficiaries as they are to the general population;
  • establishes specific reporting requirements for payment rates for obstetrics and pediatrics to allow the Secretary to determine the adequacy of state payments for these services;
  • requires coverage and full payment for “reasonable cost” of federally qualified health centers (FQHCs); and
  • requires room and board payment for hospice patients residing in nursing facilities equal to 95 percent of the nursing facility rate.
1990 Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508)

  • establishes the prescription drug rebate program requiring “best price” rebates to states and federal government;
  • modifies the Boren Amendment to include the Omnibus Budget Reconciliation Act of 1987’s provision requiring that Medicaid payments for nursing facilities take into account the cost of complying with new quality requirements; and
  • creates additional flexibility in design of DSH payment methods.
1991 Medicaid Voluntary Contribution and Provider-Specific Tax Amendments (P.L. 102-234)

  • restrict the use of provider donations and provider taxes as non-federal share;
  • prohibit HCFA from restricting intergovernmental transfers (IGTs) of state or local tax revenues; and
  • place national and state-specific ceilings on DSH payments to hospitals.

Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) places facility-specific ceilings on DSH payments.

U.S. Department of Health and Human Services (HHS) begins approving Section 1115 demonstration waivers under which states expand use of Medicaid managed care.

1997 Balanced Budget Act of 1997 (BBA 97, P.L. 105-33)

  • permits mandatory managed care without obtaining a waiver;
  • requires managed care payments to be actuarially sound;
  • codifies and reduces state-specific DSH allotments, including additional limits on DSH payments to institutions for mental diseases;
  • repeals OBRA 89 requirements for state reporting on obstetric and pediatric payments;
  • repeals the Boren Amendment and instead requires state agencies to use a public process to determine payment rates for inpatient hospitals, nursing facilities, and ICFs; and
  • begins phase-out of cost-based reimbursement for FQHCs and rural health clinics (RHCs) and added supplemental payments for the difference between Medicaid managed care and fee-for-service payments.
1999 Balanced Budget Refinement Act of 1999 (P.L. 106-113)

  • slows phase-out of cost based reimbursement for FQHCs and RHCs and
  • increases DSH allotments for the District of Columbia, Minnesota, New Mexico, and Wyoming.
2000 Medicare, Medicaid, and CHIP Benefits Improvement and Protection Act (BIPA, P.L. 106-554)

  • directs the Secretary of HHS to issue regulations tightening UPLs;
  • creates a new prospective payment system for FQHCs and RHCs and establishes a floor for payments; and
  • modifies DSH funding amounts.
2001 HCFA finalizes regulations implementing the UPL requirements in BIPA. Regulations also:

  • impose three separate UPL categories (state-owned, non-state government owned, and private) for inpatient hospitals, nursing facilities, and ICFs; and
  • add parallel UPL requirements for outpatient hospital and clinics.

Centers for Medicare & Medicaid Services (CMS)1 finalizes regulations implementing actuarial soundness requirements enacted in BBA 97.

CMS creates the National Institutional Reimbursement Team with responsibility to review payment reimbursement methodologies.

CMS creates Non-Institutional Provider Team to review non-institutional payment, including physicians.

2003 Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173)

  • increases DSH allotments by 16 percent in fiscal year (FY) 2004 for so-called high-DSH states for FY 2004 and limits subsequent growth in allotments to the greater of the FY 2004 allotment or the percentage change in the consumer price index for urban consumers (CPI-U)provides a 16 percent annual increase in DSH allotments for so called low-DSH states for FYs 2004-2008

CMS begins to require states to answer a set of specific questions about supplemental payment methodologies and UPL calculations as part of the state plan amendment approval process.

2005 Deficit Reduction Act (P.L. 109-171)

  • changes the basis of federal upper limit for multiple-source drugs from lowest published price to average manufacturer price and
  • improves collection of rebates on physician-administered drugs.
2007 Proposed UPL regulations would have limited payments to public providers to the cost of providing services. The regulation was never finalized, however, and was rescinded in 2010.
2009 American Recovery and Reinvestment Act of 2009 (P.L. 111-5)

  • includes a temporary DSH allotment increase for FY 2009 to FY 2010 and
  • increases the federal medical assistance percentage (FMAP) for all states by 6.2 percentage points for FY 2009 to FY 2010.
2010 Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended)

  • prohibits Medicaid payments for health care-acquired conditions;
  • includes funding for bundled payments demonstrations, global payment demonstrations for safety-net hospitals, pediatric accountable care organization demonstrations, and a demonstration project to provide Medicaid payment to institutions for mental disease in certain cases;
  • increases the payment rates of certain services furnished by certain primary care providers to 100 percent of Medicare rates;
  • establishes a new Center for Medicare and Medicaid Innovation to support pilot programs for innovative payment and delivery arrangements in Medicare and Medicaid;
  • schedules reductions in federal Medicaid DSH allotments from FY 2014 to FY 2020; and
  • applies the Medicaid drug rebate requirement to managed care plans.
2013 Bipartisan Budget Act of 2013 (P.L. 113-67)

  • delays the onset of Medicaid DSH allotment reductions until FY 2016 and extends the reductions to FY 2023.

CMS issues guidance to state Medicaid directors requiring them to submit annual UPL demonstrations for hospitals and other providers beginning in 2013.

2014 Protecting Access to Medicare Act of 2014 (P.L. 113-93)

  • delays the reduction in Medicaid DSH allotments until FY 2017 and extends reductions to FY 2024; and
  • requires MACPAC to submit an annual report to Congress on Medicaid DSH allotments.

Supreme Court rules in Armstrong v. Exceptional Child Center, Inc. that Medicaid providers cannot sue Medicaid agencies regarding payment rates.

CMS finalizes regulations requiring that each state develop and publish an access monitoring review plan to evaluate the impact of state policies (such as changes in provider payment rates) on access to care for beneficiaries enrolled in fee-for-service arrangements.

CMS proposes new rules for Medicaid managed care, including updates to rate-setting standards.

Medicare Access and CHIP Reauthorization Act of 2015 (P.L. 114-10) delays DSH allotment reductions to FY 2018 and extends reductions through FY 2025.

Bipartisan Budget Act of 2015 (P.L. 114-74) applies the Medicaid additional rebate requirement to generic drugs whose prices rise faster than the rate of inflation.

Consolidated Appropriations Act, 2016 (P.L. 114-113) limits federal Medicaid payment to states for durable medical equipment to Medicare payment rates.


CMS finalizes regulations implementing many of the ACA’s Medicaid drug rebate provisions and revising other requirements related to outpatient drugs.

21st Century Cures Act (P.L. 114-255)

  • beginning in FY 2018, limits federal financial participation (FFP) for Medicaid payments for durable medical equipment, prosthetics/orthotics, and supplies to Medicare payment rates;
  • prohibits FFP for items and services furnished by terminated providers (including those delivered through a managed care organization);
  • eliminates FFP for Medicaid expenditures for non-medically necessary prescription drugs used for cosmetic purposes or hair growth;
  • clarifies that Medicaid patients may see a physical and a mental health provider on the same day, eliminating the so-called same day billing glitch.

Comprehensive Addiction and Recovery Act of 2016 (CARA, P.L. 114-198)

  • excludes certain abuse-deterrent drug formulations from the definition of line-extension drugs in the Medicaid drug rebate program.

Bipartisan Budget Act of 2018 (P.L. 115-123)

Prescription drugs

  • makes a technical correction to the alternative rebate calculation for line extension drugs in Section 1927(c)(2)(C). The correction makes the additional rebate the greater of the line extension’s additional rebate or the highest additional rebate (calculated as a percentage of average manufacturer price) for any strength of the original single source drug or innovator multiple source drug.


  • eliminates DSH allotment reductions for FY 2018 and FY 2019
  • changes the amount of DSH allotment reductions for FYs 2020–2025

Third-party liability

  • eliminates requirement that states pay for prenatal care services and then seek reimbursement from the liable third party (i.e., pay and chase)
  • repeals the provision that permits states to recover a broader range of payments from third parties, and limits them to those where there is legal liability for health care items and services
  • applies Medicaid TPL requirements to CHIP

1 HCFA was renamed the Centers for Medicare & Medicaid Services in 2001.