The Department of Health and Human Services (HHS) has issued a final rule to close a loophole in Medicaid funding regulations that allowed many states to inappropriately bring in extra funds that were not necessarily spent on health care services for Medicaid beneficiaries.

Under previous rules, state Medicaid programs had flexibility to set their own rates for reimbursements to nursing homes, hospitals, and other healthcare providers. But some states used this flexibility to obtain extra federal funds by paying excessive rates to a few chosen county or municipal facilities. After receiving matching federal funds for the excess payments, the states would require the facilities to payback a portion. The funds paid back were often used for budget items having little or nothing to do with Medicaid.

The new rule eliminates this loophole by establishing separate aggregate upper limits for payments to government facilities and for payments to facilities that are not state-owned. The final rule will be effective March 13, 2001, but it includes a transition period for states with approved rate enhancement state plan amendments.