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Comparing Fee-for-Service and Cost-Based Reimbursement for School-Based Medicaid Programs

Dec 18, 2023

State school-based Medicaid programs play a critical role in providing students with access to the health services they need while in the school environment. Expanding the range of available services within schools can improve health and educational outcomes, so it’s imperative that your state selects an effective reimbursement method.

There are two types of reimbursement methodologies used in most states: fee-for-service and cost-based reimbursements. There are benefits and challenges associated with both fee-for-service and cost-reporting reimbursement methodologies. Centers for Medicaid Services (“CMS”) does not make recommendations on which methodology to use, however it’s clear based on the new guidance that a reimbursement based on cost is preferred. Below, we outline each methodology and how to decide if your state should switch.

The basics of fee-for-service reporting

A fee-for-service program is the most straightforward of the reimbursement programs and is a familiar model that most states use in community and clinical settings. With this methodology, a provider in a school setting provides a service to a student and submits a bill for that service based on community rates.

CMS understands that services provided in a school setting may have a higher cost than community providers, so states can set different rates based on these higher costs. However, this requires the state to collect cost data from some or all participating education agencies, which can be complicated and often results in incomplete data.

A fee-for-service program is very specific about what is included as part of a service, and there are several key factors to consider with this methodology:

  • The fee per service may not adequately capture all associated tasks related to that direct service. For example, there may be extensive travel based on location and availability of providers.  Services may require additional classroom observations or teacher consultations.
  • Rates are applied statewide, but providing services in a rural district is usually more expensive simply due to a lack of providers. Schools in rural areas have two options: pay a higher rate to attract local providers or contracted providers from an urban area and pay a rate that includes a travel fee.
  • In some cases, this fee-for-service structure does not capture Medicaid Administrative Claiming component related to the school-based Medicaid program. To capture this cost, a time study and cost reporting structure must be utilized.

In most cases, the local education agency (“LEA”) pays a billing vendor to bill for a service since the necessary forms are very time-consuming to fill out. The fee-for-service structure requires each provider to decide if a service is Medicaid claimable. Depending on a provider’s understanding of the school-based Medicaid program, they may be reluctant to claim. Additionally, smaller school districts may not participate in the fee for service process if they determine the cost of billing outweighs the benefits of the amount of reimbursement.

Cost-based reimbursement and the importance of a time study

Cost-based reimbursement requires capturing the actual cost of providing services and allocating some of those costs to Medicaid. This methodology is more complex but also more closely aligns the cost of providing services with the reimbursement. The most common tool for cost allocation in school-based claiming is a time study.

The time study is a statewide survey that determines how much of a provider’s time is spent providing services and performing other related tasks. The time study captures the amount of time spent providing medical services, educational services, Medicaid administrative tasks, and general administrative tasks. Cost-based reimbursement requires a cost report form that uses various other factors such as Medicaid eligibility and indirect cost rates to calculate the Medicaid allowable costs.

While there are many variables used in this methodology, this reimbursement is tied directly to cost. As costs rise, so does reimbursement. Likewise, as providers spend more time providing services to students, the time study variable increases, and this too will increase reimbursement.

Which reimbursement method should your state choose?

Since fee-for-service billing reimbursements are easier to administer, many states opt to use that methodology instead of cost-based. It may seem simple to go the fee-for-service route. However, the rates may not include all costs or tasks associated with school-based providers, so the method doesn’t always maximize the potential for reimbursement.  Additionally, a fee-for-service methodology does not include Medicaid Administrative Claiming, including outreach and care coordination tasks.

Most of the effort for a cost reporting structure is borne by the state Medicaid agency, due to the statewide time study and review of cost reports. Because cost reporting is a less burdensome process for LEAs, there is greater statewide participation. The amount of time a school district must invest in this reimbursement method is generally proportional to the size of the district.

States can choose to do fee-for-service billing even if they are working under a cost-based reimbursement. These billings are used for interim cashflow for LEAs and to capture information related to the types and number of services being provided. The latest CMS guidance allows for other interim payments for cashflow. States are allowed to make monthly payments based on cost reimbursements from the prior year or normal monthly billings.

The service documentation is the same for all reimbursement methodologies. CMS provides documentation guidelines that are similar to what many state boards and best practice guidelines require.

Converting from fee-for-service to a cost-based model

Effective implementation is vital to amplifying the impact of updates to your state's school-based Medicaid plan. Since implementation begins before the state plan is even finalized with CMS, this step must start especially early if your state is one of the many that will change from fee-for-service to a cost-based model. The cost-based model is more complex and requires some infrastructure at the state level. The state will need to develop a cost report and cost allocation methodology approved by CMS.

It's worth noting that approved changes to your school-based Medicaid plan are effective from the submission date rather than the approval date for your updated plan. Therefore, it is crucial to capture data beginning with the plan submission date so that you can submit claims dating back to the original date of state plan submission.

Download EisnerAmper’s Guide to Updating Your State’s School-Based Medicaid Program

Since services must be provided to students as required by the Individuals with Disabilities Education Act (“IDEA”), the federal government has set aside funding through Medicaid to pay for the services. The amount of effort to request reimbursement and who bears that effort is up to the state. In a fee-for-service program, the burden is mostly on the school district. In a cost-based reimbursement program, the burden is mostly on the state Medicaid department but often allows for greater participation statewide.

If your state is considering a shift to cost-based reimbursement methodology, seek out an advisor who has administered this type of program and has the experience and tools needed to administer the time study cost allocation methodology.

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Jason Coker

Jason Coker is an Associate Director in the firm’s Assurance group and has over 15 years of experience. 

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