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Supplemental payments

Some states make substantial payments to providers above what they pay for individual services through Medicaid rates. These additional payments fall into two categories: disproportionate share hospital (DSH) payments, which help offset hospital uncompensated care costs, and UPL (upper payment limit) supplemental payments, which are intended to make the difference between fee-for-service payments and the amount that Medicare would have paid for the same service.

The origins of UPL payments

From enactment, Medicaid hospital payment policies mirrored Medicare’s and, using a process known as retrospective cost reimbursement, states reimbursed hospitals for their reported costs of providing care. Changes were made in statute and regulation over time that weakened the link between Medicare and Medicaid. This provided states with more flexibility in determining payment rates but necessitated a new measure by which to assess the reasonableness of Medicaid payment rates.

Current policy

Federal regulations, first promulgated in 1981, prohibit federal financial participation  for Medicaid fee-for-service (FFS) payments in excess of an upper payment limit, intended to prevent Medicaid from paying more than Medicare would pay for the same services. Rather than applying a UPL on a claim-by-claim basis, however, the regulations limit the aggregate amount of Medicaid payments that a state can make to a class of providers. As a result, states may make—and receive federal matching dollars for—payments beyond those for services provided by any institution, as long as total Medicaid payments do not exceed the UPL for the specific group of institutions.

The institutions subject to the UPL requirement are hospitals (separated into inpatient services and outpatient services), nursing facilities, intermediate care facilities for persons with intellectual disabilities (ICFs/ID), and freestanding non-hospital clinics. Separate UPLs apply to three separate ownership categories (governmentally operated, non-state governmentally operated, and private) for each provider type. Some states also make supplemental payments to physicians, typically those employed by state university hospitals. Although there is not a federal regulation that establishes a UPL for such non-institutional providers, the Centers for Medicare & Medicaid Services (CMS) has indicated that Medicare rates and average commercial rates for physician services may be used as upper limits (CMS 2013).

In determining whether and how much money to allocate to UPL payments, states start by calculating the difference between the UPL for services provided by a class of institutions and the aggregate amount Medicaid paid for those services under FFS. States then target the amount of the difference—or some portion of it—to a subgroup of institutions, allocating it among eligible institutions based on state-defined criteria that sometimes, but not always, include Medicaid days, visits, or discharges.  There are no provider-specific limits and, therefore, individual providers may receive more than their reported Medicaid costs as long as the aggregate payments to all providers in their class do not exceed the aggregate UPL. (However, payments for inpatient hospital services may not exceed a provider’s customary charges to the general public for services.) As of 2013, states are required to submit annual UPL calculations to CMS and demonstrate that Medicaid payments do not exceed the UPL.

UPL payments are subject to the same broad federal requirements as most Medicaid payments. If a state makes UPL payments, the payment methodology must be documented in the Medicaid state plan, subject to CMS approval.

Interaction between UPLs and Medicaid managed care

The ability to make UPL supplemental payment policies has important implications for states’ decisions regarding the use of Medicaid managed care.  Since UPLs are computed based only on FFS days in a hospital or other institutional setting, transitioning populations from FFS to managed care means fewer FFS days and lower potential UPL supplemental payments. If the shift in inpatient days from FFS to managed care is large enough in a particular state, the loss of federal matching dollars for UPL payments may outweigh the savings the state realizes through managed care. Furthermore, since higher-cost populations, such as individuals with disabilities, account for a significant share of hospital days, transitioning these populations into managed care has the most significant effect on the UPL.

Some states expanding managed care models (e.g., California, Florida, Texas) have received Section 1115 demonstration waiver authority to allow for the continued use of supplemental payments while expanding the use of Medicaid managed care. In the 1115 waivers that have been approved by CMS, states’ supplemental payments have been contingent upon additional requirements that do not typically apply to FFS UPL payments. For example, payments from uncompensated care pools created under the waivers may not exceed the cost of uncompensated care as defined for DSH payments, while payments from delivery system reform incentive programs (DSRIP) have been contingent upon provider achievement of metrics related to delivery system improvements.

Learn more by reading the following MACPAC documents:

Upper Payment Limit Supplemental Payments (November 2021)

Medicaid Base and Supplemental Payments to Hospitals (May 2022)

Oversight of Upper Payment Limit Supplemental Payments to Hospitals (March 2019)

Factors Affecting the Development of Medicaid Hospital Payment Policies (October 2018)

Using Medicaid Supplemental Payments to Drive Delivery System Reform (June 2015)

Examining the Policy Implications of Medicaid Non-Disproportionate Share Hospital Supplemental Payments (March 2015)