This report from the Center for Health Care Strategies explores the laws that dictate Medicaid payment practices, focusing on how these practices may change in context of health care reform.

From the report:  

As Medicaid transitions from a welfare program to the nation's largest health insurer, it is critical that payment policies support high-quality, cost-effective care. This policy brief examines the requirements of federal law that govern Medicaid payment practices and reflects on the implications of federal health reform. 

This review of the laws, regulations, and court cases demonstrates the complexity that states face in implementing sound payment strategies.  The three requirements for Medicaid payment rates found in the Social Security Act are compelling, requiring states to adopt payment methods and procedures that: (a) safeguard against unnecessary utilization; (b) are consistent with efficiency, economy, and quality of care; and (c) are sufficient to ensure that Medicaid beneficiaries have access to care that is comparable to others in the geographic area.  To date, however, the Centers for Medicare & Medicaid Services has provided limited additional guidance, leaving states, and in some instances the courts, with the task of developing the standards or methodologies that give meaning to the statutory requirements.

Full Report: Medicaid Payment Reform: What Policymakers Need to Know About Federal Law (PDF | 167 KB)

Center for Health Care Strategies. (2010). Medicaid payment reform: what policymakers need to know about federal law. Bachrach, D.