Colorado has been approved to tap a well-known Medicaid financing tool that is expected to bring more than $450 million in additional federal dollars to hospitals.

The Centers for Medicare and Medicaid Services (CMS) approved Colorado’s state-directed payment plan in April, Colorado Department of Health Care Policy and Financing (HCPF) spokesperson Marc Williams confirmed in an email to The Denver Gazette.

HCPF oversees Medicaid in Colorado.

Hospitals could see the additional funding as early as September.

The program allows Colorado to use hospital fees and public dollars to draw down additional federal Medicaid matching funds, which are then distributed to hospitals through higher payments for care provided to Medicaid patients.

About $455 million in additional federal Medicaid funding is expected to support improved quality services through managed care.

Hospital officials have long complained that Medicaid reimbursement rates do not cover the full cost of providing care.

“In Colorado, Medicaid pays just $.67 for every $1 cost to provide care and the total Medicaid under-reimbursement in 2024 was $2 billion,” Cara Welch, a spokesperson for the Colorado Hospital Association, said in an email.

The additional payments are coming at a time when nearly seven out of 10 Colorado hospitals are struggling financially, Welch said.

In practice, the arrangement will allow Colorado to pay hospitals more for treating Medicaid patients — with the federal government covering a large share of the increase.

Colorado’s program is getting underway just before changes in federal law begin limiting how much states can pay hospitals through the state-directed payment program.

H.R. 1, the sweeping tax and spending law signed by President Donald Trump, lowers the payment cap for future state-directed payment programs and phases down payments for some existing programs.

The heavier lift for Medicaid begins in 2027, when some enrollees will face new work requirements and eligibility redeterminations twice a year. State-directed payments are expected to begin declining by about 10% in 2028.

“The Medicaid population is going to shrink,” said Donna Lynne, CEO of Denver Health.

Lynne added: “We’re trying to keep our Medicaid patients enrolled.”

‘It is still possible to find these opportunities.

For safety-net hospitals such as Denver Health, losing Medicaid enrollment does not mean patients stop needing care.

“Uninsured people do get sick,” she said. “When an uninsured person gets sick, they’re often sicker than a person with insurance.”

More than three dozen states already participate in the financing strategy, which became available a decade ago.

Historically, most Medicaid services were paid through a fee-for-service system in which the government paid providers for individual services, according to Alice Burns, an associate director with KFF’s Program on Medicaid and the Uninsured.

KFF is among the nation’s leading health policy organizations. 

Hospitals also received supplemental payments to help offset low Medicaid reimbursement rates.

As states increasingly moved Medicaid patients into managed care, private health plans began paying claims. That shift left states without the same mechanism to make supplemental payments directly to hospitals.

State-directed payments created another mechanism for states to increase provider payments through managed care organizations. Forty-one states now use the financing tool, Burns said.

“I think one of the takeaways when you’re talking about health care and big programs like Medicaid is that it is still possible to find these opportunities,” said Annie Lee, a member of the Colorado State Directed Payment work group.

The work group was tasked with helping the state design and implement a state-directed payment structure within Colorado’s Medicaid managed care system.

Medicaid is jointly funded by the federal government and states. The program provides coverage to eligible low-income adults and families, children, pregnant women, older adults and people with disabilities.

In Colorado, Medicaid covers one in four residents — about 1.3 million people.

Nearly half the patients Denver Health serves receive Medicaid.

“If you’re not getting fairly reimbursed for half your population, you’re very dependent on supplemental income,” Lynne said.

Denver Health is the region’s health care safety net. The hospital has an annual budget of about $1.6 billion.

Lynne estimated the hospital would receive about $30 million annually through state-directed payments.

“Even though $30 million is a pretty significant number, it’s 2% of our budget,” Lynne said.

‘Unsustainable’

Colorado was relatively late to adopt the financing strategy, in part because the state had already built a hospital financing system through the Colorado Healthcare Affordability and Sustainability Enterprise or CHASE.

The program generates, on average, $450 million annually and has helped increase Medicaid hospital reimbursement from 54 cents to 79 cents for every dollar of care provided, according to a state report.

Adding state-directed payments required Colorado to rework parts of its system, including how hospitals are assessed fees and how supplemental payments are distributed.

Scrutiny from the Trump administration and Congress made it “vital” for Colorado to pursue the state-directed payment program “with all possible speed,” the report said.

The influx of federal money comes as Colorado’s Medicaid program faces growing scrutiny over its spending and management.

Colorado’s program has nabbed headlines with allegations of a fraudulent billing ring, improper payments for dead people on Medicaid and exploding costs in a relatively new program meant to provide health care to pregnant women and children illegally staying in the U.S.

Medicaid costs have skyrocketed to levels lawmakers have described as “unsustainable.”

That pressure is already showing up in the state budget. Lawmakers added $68 million in state General Fund money to cover higher-than-expected Medicaid costs in the current fiscal year.

Medicaid is the single-largest expense for the state, far exceeding spending by any other agency. Roughly $1 out of every $3 in the state budget is spent on Medicaid.

Officials have blamed rising health care costs — along with new federal requirements that could increase administrative demands — for driving up spending.

‘An enormous regulatory burden’

By law, states must cover Medicaid costs.

Rising pharmacy, behavioral health and long-term care costs are among the drivers of rising costs — despite enrollment dropping after the “unwind,” when pandemic-era coverage protections ended.

The debate over Medicaid spending has increasingly turned to whether the rising costs are driven solely by health care expenses or, in part, by policy decisions made by state lawmakers.

An analysis by the Common Sense Institute attributed about $858 million in annual Medicaid costs to more than 180 health care bills enacted since 2019.

“It’s an enormous regulatory burden,” said Greg D’Argonne, who authored the report.

The report recommended reconsidering some of those legislative decisions, including Medicaid coverage for therapy using equine movement.

In 2022, Colorado lawmakers passed a bill allowing Medicaid reimbursement for the use of equine movement when treatment is provided by a physical therapist, occupational therapist or speech pathologist.

Adam Daurio, director of the Temple Grandin Equine Center in Fort Collins, was among those who pushed for the legislative change.

What Colorado’s law did, Daurio said, was recognize that equine movement is not a standalone therapy but rather a treatment tool in much the same way bands, balls or other equipment are used in clinical settings.

“At the core of this, it was never an additional therapy; it just removed an exclusion,” Daurio said.

State budget writers offered a different view, saying HCPF believed allowing horses as part of therapy results in patients receiving additional units of therapy rather than simply substituting one treatment tool for another. The state’s budget package includes legislation to repeal Medicaid reimbursement for therapy using equine movement.

For Tegan Motschall, 28, who has cerebral palsy, epilepsy and chronic headaches, the debate over Medicaid spending is personal.

The equine therapy Motschall receives at Hearts & Horses Therapeutic Riding Center in Loveland doesn’t just help with her posture on top of BaeBae, a 7-year-old Fjord. It also gives her confidence in a world that can make her feel small, her mother has said.

Liz Ampe, a licensed occupational therapist who works with Motschall, worries about what pressure to contain Medicaid spending could mean for patients.

“I think it would be too bad if the state decided what form of therapy is appropriate in their eyes,” Ampe said.