The Upper Payment Limit (UPL) is UPL payments are lump-sum payments that are intended to fill in the difference between fee-for-service (FFS) base payments and the amount that Medicare would have paid for the same service.
In 1987, Congress imposed a law (42 CFR 447.271-272) which delineated that UPL payments, when combined with Medicaid FFS payments, cannot exceed what Medicare would pay for the same services.1
UPL payments create a cap for Medicaid spending on FFS hospital rates and are a response to budgetary constraints and pressure.
UPLs are not made on a claim-by-claim basis; regulations limit the aggregate amount of Medicaid payments that a state can make to a class of providers. In the aggregate for each class of providers, FFS and UPL payments for services cannot exceed the estimate of what would have been paid according to Medicare payment principles. Classes of providers are defined based on ownership (i.e., government, non-state government, and privately owned).2 States can use a variety of methods to estimate what Medicare would have paid. Estimates could be based on the hospital’s aggregate Medicare payments relative to its charges (i.e. payment method) or a hospital’s costs according to Medicare cost principles (i.e. cost method). States may also develop estimates with a price based method, what Medicare would have paid for specific diagnostic-related groups, or a per-diem method, an estimate of average Medicare payments per hospital day.3
Facilities subject to the UPL requirement are hospitals , nursing facilities, intermediate care facilities for persons with intellectual disabilities (ICFs/ID), and freestanding non-hospital clinics. UPL payments are based on a state's calculation of the difference between the UPL for services provided by a class of institutions and the aggregate amount Medicaid paid for those services under FFS. States then target the amount of the difference to a subgroup of institutions, allocating it based on state-defined criteria that can include: Medicaid days, visits, or discharges. There are no provider-specific limits; providers may receive more than their reported Medicaid costs as long as the aggregate payments to providers in their class do not exceed the aggregate UPL.2
UPL payments for inpatient and outpatient hospital services totaled $14.3 billion in FY 2019. The use of UPL payments varies widely by state: in FY 2019, UPL payments to hospitals were less than 1 percent of Medicaid benefit spending in 16 states and more than 10 percent of Medicaid benefit spending in 4 states.2
Some states also make supplemental payments to physicians at state university hospitals. In the absence of federal regulation on UPLs for these non-institutional providers, the Centers for Medicare & Medicaid Services (CMS) has indicated that Medicare rates and average commercial rates for physician services may be used as upper limits.4
Mann C, Bachrach D. Integrating Medicaid Supplemental Payments Into Value-Based Purchasing. The Commonwealth Fund; 2021. https://www.commonwealthfund.org/publications/fund-reports/2016/nov/integrating-medicaid-supplemental-payments-value-based#6. Accessed July 15, 2021.
Medicaid Base And Supplemental Payments To Hospitals. Washington DC: Medicaid and CHIP Payment and Access Commission; 2021. https://www.macpac.gov/wp-content/uploads/2020/03/Medicaid-Base-and-Supplemental-Payments-to-Hospitals.pdf. Accessed July 15, 2021.
Nelb R. Uses And Oversight Of Upper Payment Limit Supplemental Payments To Hospitals. Medicaid and CHIP Payment and Access Commission; 2018. https://www.macpac.gov/wp-content/uploads/2018/04/Uses-and-Oversight-of-Upper-Payment-Limit-Supplemental-Payments-to-Hospitals.pdf. Accessed July 15, 2021.
Supplemental payments : MACPAC. MACPAC. https://www.macpac.gov/subtopic/supplemental-payments/. Accessed July 15, 2021.