The Centers for Medicare & Medicaid Services’ (CMS) recent reversal of course on a policy will help entities such as local health departments, school districts, and child protective service agencies stretch scarce resources for public health further.
The CMS policy known as the “free care rule” did not allow Medicaid payment for health services available to individuals without charge. The policy made it more difficult for states to seek federal participation under Medicaid for valuable public health services ranging from childhood immunizations administered in health departments to services provided in schools, including under an Individualized Education Plan (IEP) pursuant to the Individuals with Disabilities in Education Act (IDEA). Fortunately, in December 2014, CMS acknowledged that the free care rule did not have any legal basis and rescinded it in a State Medicaid Director Letter.
CMS first articulated the free care rule in two guidance documents relating to school-based services: Medicaid and School Health: A Technical Assistance Guide (1997) and Medicaid School-Based Administrative Claiming Guide (2003), which justified the rule as an extension of the principle that Medicaid serves as “payor of last resort.” In general, Medicaid will pay for services only to the extent that “third parties,” such as Medicare, a private insurance company, or a tortfeasor, are not liable for the service. States must take reasonable measures to ascertain the legal liability of third parties to pay for care and services primary to Medicaid. Medicaid beneficiaries must cooperate in identifying third party resources and, in most cases, providers must bill legally liable third parties before billing Medicaid. Under the “free care” rule, CMS considered schools and similar agencies providing free care as liable third parties.
Medicaid regulations define a third party as “any individual, entity or program that is or may be liable to pay all or part of the expenditures for medical assistance furnished under a state plan.” 42 C.F.R. § 433.136. In the school-based claiming manuals, CMS concluded that schools and other public entities had a general responsibility to ensure that their students or clientele obtained necessary health services and, as such, were “entities or programs” subject to the Medicaid third-party liability provisions. CMS advised that in the context of school-based services, “[t]he services of a school nurse who attends to a Medicaid child’s sore throat, sprained ankle, or other acute medical problem cannot be reimbursed by Medicaid if similar services provided by the nurse to non-Medicaid children are not billed.”
The CMS free care rule thus deterred localities from providing Medicaid school-based services, since many school districts and health departments lacked the capability to bill private insurance companies, and as a policy matter, did not want to charge uninsured clients for services. Given the critical role that school-based services and local health departments play in making preventive and primary care services available to vulnerable individuals, the free care rule was damaging from a public health perspective. Public health advocates lamented that CMS was effectively preventing states from using a proven tool to combat chronic childhood diseases such as asthma. In some school districts, private foundations stepped in to provide support for care to uninsured students, enabling the district to continue to provide Medicaid school-based services without running afoul of the free care rule, but many districts abandoned school-based services.
CMS relied on the free care rule during the 2000s to disallow federal financial participation claimed by states for school-based services provided under the Medicaid Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) benefit. The State of Oklahoma appealed such a disallowance to the Department of Health and Human Services Departmental Appeals Board (DAB). The DAB overturned the disallowance, concluding that the free care rule had no basis in the third-party liability provisions of the Medicaid statute and regulations.
In its letter to state medical directors, CMS stated that the DAB rulings motivated the withdrawal of its free care policy and reasoned that “public agencies or programs that are carrying out general responsibilities to ensure access to needed health care” are fundamentally different from third parties such as private insurance companies, tortfeasors, and employers. While the latter type of third party has a specific legal liability to pay for services, the public agencies and schools have more “general responsibilities to ensure” that needed care is provided.
The guidance also helpfully clarified that, the free care rule notwithstanding, payment under Medicaid is statutorily required for certain services provided to children with disabilities. Under Section 1903(c) of the Social Security Act, in an exception to the “payor of last resort” principle, Medicaid serves as primary payer to schools and providers under an IEP or Individualized Family Service Plan pursuant to IDEA.
The withdrawal of the free care rule represents an important opportunity for state policymakers and public health advocates. State agencies should review their rules and state plans to ensure that state law and policy do not impede public entities from providing Medicaid services, and advocates should educate public officials on demise of the free care rule.
This guest post was developed by Susannah Vance Gopalan, partner, and Elizabeth Karan, associate, with the law firm Feldesman Tucker Leifer Fidell LLP. Susannah’s practice includes regulatory counseling and litigation in the health care area, with a distinct focus on Medicaid and the new coverage options under the Affordable Care Act. Elizabeth counsels a diverse array of organizations including local health departments, health centers, primary care associations, and other federal grantees on issues related to Medicaid and Medicare reimbursement, health care regulatory matters, grants compliance, provider collaborations, and other contractual arrangements.
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