FQHCs and RHCs operate under separate programs, both of which were established to increase access to care for low-income people in medically underserved areas. FQHCs are required to provide a comprehensive set of primary care services to any individual, regardless of ability to pay. In addition, a distinguishing feature of FQHCs is that they provide enabling services that help patients gain access to health care, such as outreach, translation, and transportation. FQHCs include community health centers, migrant health centers, public housing programs, health care for the homeless, and other centers and clinics. FQHCs vary considerably based on their location, size of their uninsured and Medicaid populations, revenue mix, market competition, and managed care penetration in the surrounding area. For instance, an FQHC may be located in an urban area with a large uninsured or Medicaid population and high capitated Medicaid managed care penetration, or in a rural area, where it serves as the only source of primary health care for several communities. Currently, there are over 1,200 FQHCs operating over 3,000 delivery sites that provide services to about 11 million people each year. Unlike FQHCs, RHCs are not required to provide services to all individuals; however, they are required to operate in areas that are designated as underserved. RHCs can operate either independently or as parts of larger organizations, such as hospitals, skilled nursing facilities, or home health agencies. RHCs can serve as specialty clinics, focusing their services on particular populations or specialties such as pediatrics or obstetrics and gynecology. There are now approximately 3,500 RHCs. FQHCs and RHCs receive, on average, one-quarter to one-third of their revenues from Medicaid, a joint federal-state program that annually finances health care for more than 40 million low-income Americans. (See fig. 1.) FQHCs primarily rely on Medicaid reimbursement and HRSA grant funds as sources of revenue. From 1996 through 1999, Medicaid dollars per Medicaid patient increased from $348 to $383, while HRSA grant dollars per uninsured FQHC patient declined from $228 to $219. FQHCs also receive revenue from state, local, and private grants; Medicare and other public insurance; and self-pay and commercial insurance. In contrast, RHCs receive a smaller proportion of revenue from Medicaid and a much higher proportion of Medicare, commercial insurance, and self-pay revenue. Prior to BBA, federal law required state Medicaid programs to pay FQHCs and RHCs on a cost-related basis. In determining payments, states required FQHCs and RHCs to submit cost reports. States reviewed these cost reports to determine which reported costs were allowable (related to providing services to Medicaid beneficiaries) and reasonable (not an excessive amount for a type of cost or service). For purposes of reimbursing FQHCs and RHCs for services, the Medicaid statute directs states to follow the Medicare statute and regulations. The Medicare regulations provide guidance on the types of allowable costs, citing activities such as compensation for physicians and other staff, supplies, administrative overhead, and other items. With regard to reasonableness of cost, states may set limits, or in the case of RHCs, may rely on Medicare limits on the cost of providing a service. These limits can include a ceiling on recognized costs per service, such as a medical visit, or a limit on a type of cost, such as administrative costs. Since regulations require payments to be based on actual costs—which could only be reported after the close of an FQHC’s or RHC’s fiscal year— states generally made interim payments to FQHCs and RHCs throughout the year and subsequently adjusted these payments after actual cost reports were filed. The regulations state that these interim payments to FQHCs and RHCs are subject to reconciliation, which generally occurred after the submission of a cost report. During reconciliation, the total amount of reasonable costs was determined and compared to the interim payments that the FQHCs or RHCs received, and the state Medicaid program either paid any shortfall or recouped any overage. BBA gave states the option of phasing out cost-based reimbursement by percentage reductions in reasonable costs reimbursed—to 95 percent of an FQHC’s or RHC’s reasonable costs in 2000, 90 percent in 2001, 85 percent in 2002, and 70 percent in 2003—and discontinuing the cost-based reimbursement requirement after 2003. States were simultaneously required to make supplemental payments to FQHCs and RHCs that served capitated Medicaid managed care plan enrollees. Under BBA, states were required to compare the aggregate managed care plans’ payments to the amount that an FQHC or RHC would receive under the cost-based reimbursement methodology. In the event that total managed care payments were less, states were expected to provide supplemental payments to FQHCs and RHCs to make up the difference. BBRA slowed the phase out of cost-based reimbursement, freezing allowed reductions at 95 percent for 2001 and 2002. It allowed states to resume reductions to 90 percent of costs in 2003, 85 percent of costs for 2004, and a complete phase out of the cost-based reimbursement requirement in 2005. BBRA also extended requirements for supplemental payments through 2004 for FQHCs and RHCs participating in capitated Medicaid managed care. BIPA specified a new nationwide PPS to reimburse FQHCs and RHCs for Medicaid visits. An FQHC’s or RHC’s PPS rate is the average of its own 1999 and 2000 reasonable costs per visit, effective for services provided beginning January 1, 2001. For future years’ payments, this amount will be adjusted annually for inflation. In addition to this annual adjustment, BIPA requires that payments to FQHCs and RHCs be adjusted in the event of any increase or decrease in the scope of services furnished. States also may receive approval from HCFA to use an alternative system if they can demonstrate that the alternative payment methodology used results in rates no lower than the prospective system’s minimum payment and if the FQHC or RHC agrees to its use. In fulfilling prior federal requirements to use cost-based reimbursement for FQHCs and RHCs, many states controlled payment rates by imposing limits on costs considered reasonable. States generally reported using three types of spending limits—setting overall caps, limiting administrative costs, or setting performance standards—in defining reasonable costs. As a result, not all costs incurred by FQHCs, RHCs, or both were reimbursed. A few states did not reconcile costs—that is, compare the total Medicaid reimbursement with the total amount of Medicaid payments for a reporting period and settle any over- or under-payments—as required by HCFA regulation. BBA contained two major provisions regarding Medicaid reimbursement for FQHCs and RHCs: allowing states to reduce the percentage of reasonable cost reimbursed and mandating that states make supplemental payments. With regard to the first provision, most states did not choose to modify their payment practices and reduce the percentage of reasonable costs reimbursed. With regard to the second provision, 38 states and the District of Columbia were subject to the BBA requirement to provide supplemental payments to FQHCs and RHCs that were contracting with capitated Medicaid managed care plans in the event that plan payments were less than what these FQHCs and RHCs would have received under cost-based reimbursement. Many states’ Medicaid programs reported imposing one or more limits in defining FQHCs’ and RHCs’ reasonable costs. These limits can significantly affect what FQHCs and RHCs are paid. While most states employed a retrospective system that reconciled reimbursement with actual reasonable costs, at least seven states based payments for FQHCs, RHCs, or both on a prior period’s reasonable costs, and most adjusted them for inflation without a reconciliation process—a practice that is inconsistent with HCFA reconciliation regulations. For FQHCs, states reported using three types of limits in defining reasonable costs: setting overall caps, setting performance standards, or limiting administrative costs. Twenty-four states reported limits on how much they reimbursed for a patient’s visit, sometimes by comparing FQHCs’ costs across the state to establish a cap. Alabama and Florida, for example, limited reasonable costs to the 80th percentile of FQHCs’ costs per visit, while Maryland limited reasonable costs by establishing an overall cap at 115 percent of the median cost per visit across FQHCs. Twelve states limited reasonable costs by setting performance or productivity standards. For instance, some states stipulated the number of visits per year that a full-time-equivalent physician should provide; similar guidelines were used for nurse practitioners and physician assistants. Similarly, New Jersey required a certain number of visits per hour for physicians and other medical personnel. Ten states reported limits on administrative costs, disallowing administrative costs exceeding 30 to 45 percent of total costs. For example, Maryland limited the amount of administrative costs reimbursed to one-third of total costs, while Wisconsin did not reimburse administrative costs in excess of 30 percent of the center’s total costs. With regard to RHCs, 32 of the 45 states with RHCs reported relying on Medicare’s payment methodology for determining reasonable costs. Medicare payment policies include both an overall cap and a performance or productivity standard. In 2000, the Medicare payment cap for RHCs was $61.85 per visit. As noted above, HCFA regulations provide that Medicaid interim payments to FQHCs and RHCs are subject to reconciliation based on actual reasonable costs. Most states reimbursed FQHCs and RHCs under a retrospective system that includes interim payments based on estimated costs and a year-end reconciliation process to account for differences in reimbursement and actual reasonable costs.