Medicaid is generally the payer of last resort: by law, all other sources of coverage must pay claims under their policies before Medicaid will pay for the care of an eligible individual. Federal regulation refers to this requirement as third party liability (TPL), meaning payment is the responsibility of a third party other than the individual or Medicaid. To implement the Medicaid TPL requirements, federal rules require states to take reasonable measures to identify potentially liable third parties and process claims accordingly. Medicaid enrollees also must cooperate with state efforts to pursue other sources of coverage.
A large number of Medicaid enrollees have additional sources of insurance coverage. The Government Accountability Office (GAO) estimates that out of the 56 million people enrolled in the Medicaid program in 2012, 7.6 million had private coverage and 10.6 million Medicaid enrollees had access to other public coverage, including Medicare and veterans’ and military health programs (GAO 2015).
Given the large proportion of Medicaid enrollees with access to public and private sources of third-party coverage, the potential savings to the states and federal government through effective recoveries of TPL are significant. In 2013, the U.S. Department of Health and Human Services Office of the Inspector General (OIG) estimated that state and federal Medicaid savings from TPL totaled $13.6 billion in 2011, up from $3.7 billion in 2001 (OIG 2013). The GAO noted that while states have improved TPL efforts in recent years, the increasing proportion of Medicaid enrollees with private health insurance creates additional opportunities to avoid and recover Medicaid funds (GAO 2015).
Third Party Liability in Health Insurance
In the United States there are many sources of health coverage, including indemnity health insurers, group health plans, managed care organizations, pharmacy benefit managers, and long-term care insurers. Other sources of coverage include worker’s compensation and property and auto insurers. Finally, many public agencies other than Medicaid provide health coverage, including Medicare, the State Children’s Health Insurance Program, the Indian Health Service, the U.S. Department of Defense, and the U.S. Department of Veterans Affairs.
There are many situations in which more than one party is responsible for a health care claim. For example, a person can be covered through his or her own employer and under a family policy through a spouse; have coverage through an employer and through Medicaid; or have employer-sponsored coverage and receive coverage of accident-related health claims through an auto insurer.
Insurers routinely coordinate benefits by determining whether a third party is liable for payment of a particular service provided to a covered member and then denying payment up front or collecting reimbursement from the third party. Medicaid coordinates benefits with other insurers as a secondary payer to all other payers. This means that if an insurer and Medicaid both provide coverage of a given benefit, the other payer is first responsible for making payment and Medicaid is responsible only for any balance covered under Medicaid payment rules.
Medicaid TPL Authorities
Medicaid TPL policies are governed by Medicaid statute and regulation. The implementing regulations for Medicaid TPL are described in Subpart D of 42 CFR Part 433. Congress has made additions and clarifications to the statute over time to further protect Medicaid from improper payment of claims that are the responsibility of a third party. For example, the Deficit Reduction Act of 2005 (DRA, P.L. 109-171) added a number of provisions related to TPL and coordination of benefits for Medicaid beneficiaries (CMS 2006). The statute clarifies which specific entities are considered third parties and health insurers for purposes of Medicaid third party liability, prohibits potentially liable third parties from discriminating against individuals on the basis of Medicaid eligibility, and requires states to require health insurers to cooperate with Medicaid TPL efforts.
Federal statutes also assign responsibility when an individual is covered by more than one public program. Generally, Medicare and other state and federal programs can be liable third parties unless specifically excluded by federal statute.1 Public programs that have been statutorily designated as payers of last resort after Medicaid include the Ryan White HIV/AIDS grant program, the Title V Maternal and Child Health block grant program, the Indian Health Service, and Individuals with Disabilities Education Act programs.
Identification of TPL
States have two main sources of information on whether there may be a liable third party for a particular claim: (1) Medicaid enrollees themselves and (2) data matches with other insurers or data clearinghouses.
States request information about other health coverage and potentially liable third parties as part of the Medicaid application and renewal process. Such information may include the name of the policyholder, his or her relationship to the applicant or enrollee, Social Security Number (SSN), and the name and address of the insurance company and policy number. For child applicants, the state must collect and include in the case file the names and SSNs of absent or custodial parents, to the extent such information is available.2 In addition, state child support agencies are required to notify the Medicaid agency whenever a parent has acquired health coverage for a child as a result of a court order.
States conduct a variety of data matches to identify third-party resources. States can conduct these matches themselves or hire contractors to complete the required matches, and may delegate their authority to obtain information from third parties to a contractor.3
Database matches. Per 42 CFR 433.138, states are required to conduct matches with wage and income databases, workers’ compensation programs, and state motor vehicle accident files, and may conduct data matches with other potential sources of coverage, such as the Department of Defense, which may provide health coverage for persons or dependents who also qualify for Medicaid. These data matches may not provide information on third-party coverage but may indicate potential sources of coverage that the state must then investigate. For example, data matches with an income database may indicate that an applicant or enrollee receives Social Security retirement or disability, which may indicate eligibility for Medicare. Child support payments from an absent parent can indicate potential medical support for a child.4
Insurer data matches. States also conduct data matches with insurers. States are required by federal statute to have laws that compel health insurers in the state to provide at least four data elements to support identification of TPL: the insured’s name, address, group or member ID number, and periods of coverage (§1902(a)(25) of the Act). (States can determine exactly what information is required to be submitted by the health plans.) Every health plan in a state is required to provide these files to the state Medicaid agency for purposes of identifying potential TPL.5 Despite these federal statutes, numerous GAO and OIG reports have found that states continue to experience challenges in obtaining coverage information from insurers (GAO 2015, OIG 2013). States can request information from insurers located in other states, if necessary, but cannot require insurers in other states to provide routine data matches.
Coordination of Benefits
The payment rules for Medicaid claims subject to third party liability are described in federal regulation (42 CFR 433.139).
Cost avoidance. If the state is aware that a Medicaid enrollee has potential third-party coverage when the claim is filed—for example, if the eligibility file contains information on potential TPL—the state must reject the claim and instruct the provider to submit it to the potential primary payer. After the potential primary payer has processed the claim, the provider can resubmit a claim to Medicaid, which will pay if the Medicaid payment amount exceeds the amount of the primary payment. The GAO has noted that this type of cost avoidance accounts for most of the savings to Medicaid associated with TPL (GAO 2015).
There are several exceptions to the requirement for cost avoidance. States must pay first for claims for prenatal care and preventive pediatric services and then seek reimbursement from a liable third party, including an absent parent. States must also pay first on claims for Medicaid services provided to an individual for whom child support enforcement is being carried out by the state. States also have the option to pay claims for labor and delivery first and then seek reimbursement from a liable third party.
Pay and chase. If TPL is identified after a claim is filed or paid, the Medicaid agency must pay the claim and then promptly seek reimbursement from the primary insurer. In some circumstances, states can pay claims where TPL is probable (e.g., claims resulting from an auto accident), but still must pursue reimbursement promptly.
Benefit exceptions. In some cases, a Medicaid enrollee has TPL but the policy does not cover the specific Medicaid services provided (e.g., dental). Once a provider demonstrates that TPL does not apply to payment for certain Medicaid-covered services, future claims for those services can be paid by the state without first pursuing TPL.
Cost effectiveness. States do not need to pursue TPL if the agency determines that the cost of pursuing the recovery exceeds the potential TPL recoupment or if pursuing a recovery duplicates another activity, such as child support enforcement. States must specify the threshold amount or other guideline (e.g., dollar amount, period of time) that will be used to determine whether to seek recovery.
Coordination of Benefits: Special Situations
There are two situations in which state Medicaid agencies follow different rules for avoiding and recovering Medicaid expenditures: (1) when the state contracts with managed care plans to administer comprehensive benefits, and (2) when the state covers individuals eligible for both Medicare and Medicaid.
Medicaid managed care. If a state has a Medicaid managed care program, it has several options for complying with federal TPL rules. States can exclude enrollees with other insurance coverage from enrollment in a Medicaid managed care plan; many states have chosen this option. States can also choose to enroll beneficiaries with other insurance coverage into managed care plans, and either retain responsibility for administering TPL or delegate that responsibility to the managed care plan. The contract between the state and the managed care plan must describe the terms and conditions under which the plan assumes TPL responsibility and payment rates must be adjusted to take into account TPL recoveries.
Individuals eligible for Medicare and Medicaid. Coordination of benefits with the Medicare program has its own set of rules.
About 10.4 million low-income seniors and people with disabilities were dually eligible for both Medicare and Medicaid in 2012. For these individuals, Medicare is the primary payer for services such as physician visits, hospital stays, post-acute skilled care, and prescription drugs. State Medicaid programs cover certain benefits not covered by Medicare, such as long-term services and supports, and some of the costs of Medicare coverage, including cost sharing (e.g., deductibles and coinsurance) (MACPAC 2013).
Claims for Medicare coinsurance and deductibles are commonly referred to as crossover claims, because providers first submit a claim to the Medicare program, which pays the provider for the service and then crosses the claim over to Medicaid for payment of cost-sharing amounts. (Medicare payments sent to providers indicate when a claim has been crossed over to the Medicaid program, so providers do not bill Medicaid separately.) A federal contractor manages the crossover process for all Medicare claims, so adjudication of these payments is largely automated and state Medicaid agencies typically process batches of crossover claims at once.
States are not obligated to pay the full amount of Medicare cost sharing if the total payment to the provider would exceed the state’s Medicaid rate. Instead, states may limit their payment to the lesser of either the Medicare deductibles and coinsurance or the difference between the Medicaid rate and the amount already paid by Medicare (MACPAC 2013).
Federal Role in Medicaid TPL
Although Medicaid is jointly funded by states and the federal government, states are responsible for administering eligibility and claims processing functions, including TPL. The Centers for Medicare & Medicaid Services (CMS) is responsible for overseeing state compliance with federal Medicaid rules, including reviewing and approving state plans to implement TPL procedures and approving state claims processing systems.
CMS has issued guidance and provided technical assistance to states to facilitate and improve TPL avoidance and recovery activities. CMS maintains a web page on Medicaid third party liability and coordination of benefits, with links to a list of frequently asked questions and a guide to effective state agency practices (CMS 2015). CMS also coordinates a technical advisory group consisting of state and federal officials, which meets periodically to share information on policy and effective practices.
1 Public programs such as schools and public health or child welfare agencies carrying out their general responsibilities to ensure access to needed health care are not considered to be legally liable third parties.
2 Information on absent or custodial parents is collected in order to conduct data matching, but regulations at 42 CFR 433.183(l) allow states to request from CMS a waiver of these requirements if the state determines the activity to be not cost-effective.
3 Sharing of third party liability information between the state, its contractor, and providers or potentially liable third parties is permitted under the requirements of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) but must comply with the HIPAA business associate requirements, where applicable.
4 An absent parent may be required by court order to provide health insurance coverage for the child. If the absent parent is employed, with health insurance available through that employment, the state may be required to obtain a court order for health insurance coverage for the child.
5 States are pre-empted by the Employee Retirement Income Security Act of 1974 from regulating employer-sponsored health benefit plans that self-insure and cannot require that these plans submit files to the state for the purpose of identifying TPL.