DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
 
            SMDL#14-004 
 
May 9, 2014 
 
             RE:  Accountability #2: Financing and Donations 
 
Dear State Medicaid Director: 
 
This letter is the second in a series that provides guidance on mutual obligations and 
accountability on the part of state and Federal governments for the integrity of the Medicaid 
program and the development, application and improvement of program safeguards necessary to 
ensure proper and appropriate use of both Federal and state dollars.1  It provides guidance to 
states concerning Federal statute and regulations related to the allowable and unallowable use of 
provider-related donations and also addresses the use of certain types of public-private 
arrangements; such as Low-Income and Needy Care Collaboration Agreements (LINCCAs), 
Collaborative Endeavor Agreements (CEAs), and Public-Private Partnerships.  These 
arrangements generally involve Medicaid supplemental payments or special add-ons to the base 
payment rate that are contingent upon or otherwise related to agreements between government 
and private entities under which the private entities assume obligations to provide donated 
services or other transfers of value as directed in the arrangements.   
 
CMS understands that partnerships and other relationships between governmental and private 
entities are often beneficial and can further the organizational goals of the businesses or entities 
involved.  Such relationships may be contractual agreements to provide the state agency with 
goods and services for a fair market price arrived at through a states procurement process (such 
as contracts for accounting services, landscaping services, management services, or supplies).  
Such relationships could also involve grant programs in which governmental agencies provide 
funding to private entities to pursue common public objectives, for example, fair market lease 
agreements.  Nothing in this letter is intended to limit the ability of governments and businesses 
to establish these normal and important business relationships.  This letter only discusses 
situations where governmental entities and private entities enter into agreements or relationships 
that constitute non-bona fide provider-related donations, in which private entities provide a 
governmental entity with funds or other consideration and receive in return additional Medicaid 
payments typically in the form of a supplemental payment.   
 
Government entities are free to enter into agreements with private entities; however such 
agreements may affect the allowability of Medicaid funding if there is a hold harmless provision 
or practice.  A hold harmless practice exists if there is a positive correlation between the 
agreement and the Medicaid payments, Medicaid payments are conditioned upon the receipt of a 
donation from a private entity, or if there is a guarantee that the private entity will see a return of 
some, or all, of that donation through a Medicaid payment.  In cases where contracts and 
                                                           
1 The first letter, SMDL #13-003, is available at http://www.medicaid.gov/Federal-Policy-Guidance/Downloads/SMD-13-003-02.pdf.  Page 2  State Medicaid Director  
 
agreements do not directly or indirectly affect Medicaid base or supplemental payments, 
however, CMS generally would not consider these agreements as a barrier to approving a state 
plan amendment (SPA) or waiver. 
 
As explained in more detail below, these arrangements raise issues relating to private donations 
and could potentially result in a hold harmless arrangement under which the donations are 
returned in full or in part to the provider or provider class.  Donations that occur under such 
arrangements are not considered bona fide, and, as explained further below, the Centers for 
Medicare & Medicaid Services (CMS) will not approve SPAs that include non-bona fide 
donations as a portion, or all, of the non-Federal share of the Medicaid payments.  Payment 
methodologies contingent upon the receipt of a non-bona fide donation would also be grounds 
for disapproval of a SPA. 
 
Background 
 
Provider-Related Donations 
 
Federal regulations at 42 Code of Federal Regulations (CFR) 433.52, which implement section 
1903(w) of the Social Security Act (the Act), define a provider related donation as a donation or 
other voluntary payment (in cash or in kind) made directly or indirectly to a state or unit of local 
government by or on behalf of a health care provider, an entity related to such a health care 
provider, or an entity providing goods or services to the state for administration of the states 
Medicaid plan.   
 
Regulations at 42 CFR 433.54(a) define a bona fide donation as a provider-related donation . . . 
that has no direct or indirect relationship . . . to Medicaid payments made to (1) the health care 
provider; (2) any related entity providing health care items and services; or (3) other providers 
furnishing the same class of items or services as the provider or entity.  As set forth at 42 CFR 
433.54(b) and (c), this does not include donations that are part of a hold harmless arrangement 
that directly or indirectly returns some or all of the donation to the provider, the provider class, 
or any related entity. 
 
Section 1903(w)(1)(A) of the Act states that notwithstanding the previous provisions of this 
section, for purposes of determining the amount to be paid to a state (as defined in paragraph 
(7)(D)) under subsection (a)(1) for quarters in any fiscal year, the total amount expended during 
such fiscal year as medical assistance under the state plan (as determined without regard to this 
subsection) shall be reduced by the sum of any revenues received by the state (or by a unit of 
local government in the state) during the fiscal year(i) from provider-related donations (as 
defined in paragraph (2)(A)), other than - (I) bona fide provider-related donations (as defined in 
paragraph (2)(B)), and (II) donations described in paragraph (2)(C).  Because this provision 
indicates that Federal Medicaid payments must be reduced by the sum total of non-bona fide 
provider-related donations received by the state, state plans that rely on, or reference, non-bona 
fide provider-related donations would result in claims for Federal funding that would not be 
allowable. Also, supplemental payments supported by such donations would be unallowable 
because there is no valid source of the non-Federal share.  Therefore, CMS will not approve such 
state plan amendments.    Page 3  State Medicaid Director  
 
Base and Supplemental Payments to Providers 
 
Section 1902(a)(30) of the Act requires that states assure that payments are consistent with 
efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care 
and services are available under the plan at least to the extent that such care and services are 
available to the general population in the geographic area.  In addition to other considerations, 
CMS requires states to submit upper payment limit (UPL) calculations to demonstrate that 
payments to Medicaid providers are economical and efficient and that both base and 
supplemental payments are within the UPL.  Under 42 CFR 447.272 and 42 CFR 447.321,  
Medicaid payments for inpatient hospital, outpatient hospital, clinic, nursing facility, and 
ICF/IID services are limited to a reasonable estimate of the amount that Medicare would pay in 
the aggregate for each type of provider within three categories; state owned, non-state 
government owned, and privately owned.  Payments that exceed this limit are considered out of 
compliance with the Federal statute and regulations described above. 
 
Consistent with the regulatory UPL requirements, states may pay classes of providers up to the 
specified aggregate UPL levels for that class.  Many states pay providers up to these levels by 
making a combination of base and supplemental payments to specific providers.  Supplemental 
payments are typically targeted to specific kinds of providers.  For example, a targeted hospital 
might be a state designated safety-net provider, a hospital with high Medicaid utilization, or 
provide care at a higher level of quality than other providers in the state.   
 
In addition to the UPL requirements applied in the aggregate to classes of providers, CMS also 
reviews the reasonableness of fee-for-service payment rates to help ensure that payments are 
efficient and economical.  Even if consistent with regulatory UPL requirements, CMS may 
question payment rates to particular providers that exceed usual and customary charges or other 
measures of reasonableness, absent clear justification that the higher rates benefit the Medicaid 
program.  For example, CMS may question proposed payments to one or more providers that are 
orders of magnitude higher than payments to other providers of the same services.   
 
Public-Private Partnerships 
 
A public-private partnership arrangement is a relationship between a private entity and a 
government entity in which the private entity agrees, in some form, to provide a service or some 
other in-kind transfer of value to further the purposes of the government entity.  In the context of 
the Medicaid program, some public-private arrangements also include provisions that the 
government entity will make an intergovernmental transfer (IGT) to the Medicaid agency, and 
the private providers that have signed, or otherwise entered into, an agreement would then 
become eligible for a Medicaid supplemental payment or special add-on to the base payment rate 
that may be funded by the IGT from the government entity under the same agreement.  In some 
cases, the IGT is derived from funds that the government entity previously would have spent on 
providing the services that are now being provided by the private entity.  These funds would not 
be available if not for the public-private partnership agreements.  As described in further detail 
below, this type of arrangement would not be considered a bona fide donation under Medicaid 
requirements.   
  Page 4  State Medicaid Director  
 
Many of the proposed partnerships that CMS examined focus on the delivery of non-Medicaid 
services to non-Medicaid eligible individuals.  One such proposed arrangement involved a 
government agency, a non-profit organization, and a private hospital.  Under the arrangement, a 
government entity (other than the Medicaid agency) contracted with a non-profit organization to 
provide employment training and transportation to places of employment for individuals with 
disabilities.  Under the terms of the proposed public-private partnership arrangement between the 
private hospital and a local government entity, the local government entity would terminate its 
existing contract with the non-profit organization.  The private hospital would then execute the 
same contract with the same non-profit organization.  The local government entity would send an 
IGT to the Medicaid agency, in an amount approximately equal to the amount that it would have 
spent on the now terminated contract, which would trigger a supplemental payment under the 
proposed SPA.  The supplemental payment would be directed to the private hospital that 
participates in public-private partnership arrangement.  Under these circumstances, there is a 
hold harmless arrangement in which the contract to provide services is a provider-related 
donation and the receipt of supplemental payments is the return of some, or all, of the donation.  
As discussed below, this arrangement results in a non-bona fide donation and will not be 
approved by CMS unless claims for Federal Medicaid funding are reduced by the amount or 
value of the donation. 
 
In another example, a private hospital would enter into an arrangement with a government entity 
to lease space at an amount above fair market value as determined by an independent third party 
assessment.  The lease payments from the private hospital would be used to fund the non-Federal 
share of Medicaid supplemental payments to a private hospital serving as the lessee of the 
government-owned space.  This illustration implies that there is a transfer of value that, while it 
has the form of a normal business transaction, is conditioned on the return of excess payments 
through higher Medicaid payments.  As discussed below, this arrangement results in a non-bona 
fide donation and cannot be approved by CMS unless claims for Federal Medicaid funding are 
reduced by the amount of the excess lease payments. 
 
Per section 1903(w) of the Act, provider donations that are part of hold harmless arrangements 
are not bona fide donations.  Regardless of the expressed intent of providers and governmental 
entities, when there is an effective return of some, or all, of the donation to the private provider 
through Medicaid supplemental payments, a hold harmless arrangement exists.  Any 
arrangement such as those described in this guidance that obligate a private hospital to either 
assume the programmatic responsibility of a unit of government or sign lease agreements at an 
amount that is greater than fair market value would be considered a hold harmless arrangement. 
The donation would not be considered bona fide when such arrangements are tied in any way, 
directly or indirectly, to Medicaid reimbursement under the Medicaid state plan.   
 
Additionally, supplemental payments or other forms of increased payments based on the  
arrangements described above raise concerns with the Medicaid programs requirement for 
payments to be consistent with economy, efficiency, and quality of care to the extent that the 
overall payment exceeds the amount payable to other providers of the same services.  There are 
also concerns when higher Medicaid payments to providers do not appear related to the purchase 
of more expensive or higher quality services for beneficiaries, but instead appear simply to 
alleviate burdens on public entities from funding a non-Medicaid activity.  As such, these  Page 5  State Medicaid Director  
 
payments are not consistent with section 1902(a)(30)(A) of the Act because they are not 
economical and efficient.  We distinguish these payments from those that simply recognize the 
higher cost structures of providers that consistently provide significant levels of uncompensated 
care.  CMS reviews these situations on a case-by-case basis.   
 
Conclusion 
 
Contracts and arrangements with private entities can be a valid way for a state to provide 
Medicaid services.  However, if a provider enters into a public-private partnership to provide 
non-Medicaid services, as described in this letter, and the provider receives as a direct result, 
additional Medicaid base or supplemental payment than might otherwise be received under the 
current approved state plan, CMS will consider this exchange in value of either cash or in-kind 
services by the private entity to the public entity to be a non-bona fide donation.  Therefore, 
CMS will not approve any SPAs or waivers that include such an arrangement.  If a SPA is, or 
has been, approved and an inappropriate funding arrangement is discovered post-approval, CMS 
may pursue corrective action to ensure that the state changes its practices, and may recover 
Federal Financial Participation (FFP) associated with these supplemental payments.  CMS will 
not interfere with state business or the states ability to engage in business transactions with 
private entities, except when such arrangements and business transactions include the promise of 
increased Medicaid payments contingent upon the signing of such agreements.  CMS is obligated 
to review financial arrangements and Medicaid payments for consistency with Section 1903(w) 
and Section 1902(a) of the Act. 
 
We hope this guidance will help clarify for states what is authorized under the law.  Our goal is 
to ensure that states have the information and support they need from CMS to promote flexibility 
while ensuring compliance with Federal statute and regulations.  We expect that further 
consultations with states will lead to additional discussion regarding the appropriate application 
of these policies. 
 
            Sincerely, 
 
            /s/ 
   
            Cindy Mann 
            Director 
 
CC:  
 
CMS Regional Administrators 
CMS Associate Regional Administrators 
Division of Medicaid and Childrens Health Operations 
 
Matt Salo 
President 
National Association of Medicaid Directors 
 
  Page 6  State Medicaid Director  
 
Alan R. Weil, J.D., M.P.P. 
Executive Director 
National Academy for State Health Policy 
 
Ronald Smith 
Director of Legislative Affairs 
American Public Human Services Association 
 
Joy Wilson 
Director 
Health Committee 
National Conference of State Legislatures 
 
William Garner 
Legislative Director 
Committee on Health and Human Services 
National Governors Association 
 
Debra Miller 
Director for Health Policy 
Council of State Governments 
 
Christopher Gould 
Director 
Government Relations 
Association of State and Territorial Health Officials