Medicaid is a federal state partnership with different pots of money for different classes of beneficiaries. I use the term partnership loosely. It often boils down to the state partner administering the program, while the federal partner pays most of the cost. That is not how it was supposed to work.
State Medicaid programs benefit from federal matching funds, with some states receiving higher match rates than others; and some classes of beneficiaries receiving higher matching rates than others. On average states can expect to receive an additional dollar of federal matching funds for every dollar of state Medicaid spending, but this varies from state to state. While California (and many other states) must contribute $0.50 cents for every $1 dollar of Medicaid spending, Mississippi only must contribute about $0.23 cents… except they don’t. States have found a novel way to shift more of the state’s share of the cost of Medicaid to the federal government. It is called provider taxes.
The way provider taxes often work is state Medicaid programs pay hospitals fees higher than necessary to entice participation, then taxes that bonus away to use for Medicaid spending. For example, let us assume the state pays hospitals $100 million more in fees than necessary. The state then taxes hospitals a similar amount. The state then gives the $100 million back to the hospitals in the form of payment for treating Medicaid patients. The state then reports to the federal government that the it spent $100 million on Medicaid and the feds now need to cover an equal amount of spending. The problem is that the state did not actually spend any of its own money in the process of caring for Medicaid patients. It was all a shell game. Hospitals support the shell game because it raises total Medicaid spending.
The Kaiser Family Foundation had this to say:
Republican efforts to restrict taxes on hospitals, health plans, and other providers that states use to help fund their Medicaid programs could strip them of tens of billions of dollars. The move could shrink access to health care for some of the nation’s poorest and most vulnerable people, warn analysts, patient advocates, and Democratic political leaders.
Recalling what I said about using taxes to pay higher fees? The following is an KFF Health News excerpt:
The proposals are also a threat to Proposition 35, a ballot initiative California voters approved last November to make permanent the tax on managed care organizations, or MCOs, and dedicate some of its proceeds to raise the pay of doctors and other providers who treat Medi-Cal patients.
Again, states tax providers and then pay them higher fees for which states are credited for treating Medicaid patients for the purpose of matching funds. It is a scam, a swindle, a fraud. This trick is so common that virtually all states use a version of it.
All states except Alaska have at least one provider tax on managed care plans, hospitals, nursing homes, emergency ground transportation, or other types of health care businesses. The federal government spends billions of dollars a year matching these taxes, which generally lead to more money for providers, helping them balance lower Medicaid reimbursement rates while allowing states to protect against economic downturns and budget constraints.
Dr. Oz, who runs the Centers for Medicare and Medicaid Services (CMS) put it aptly in a prepared statement when he said:
“This proposed rule stops the shell game and ensures federal Medicaid dollars go where they’re needed most — to pay for health care for vulnerable Americans who rely on this program, not to plug state budget holes or bankroll benefits for noncitizens,”
One solution (not that I am advocating), would be for the federal government to impose a provider tax of its own, then use that tax to fund the federal share of Medicaid spending. States would quickly argue that such a tax would be an unfair reduction in federal spending. Yet, these same states deny it is also an unfair reduction in state spending. Presidential administrations going back years (including Biden’s) have threatened to close the loophole. It is about time.
Read more at KFF Health News: Federal Proposals Threaten Provider Taxes, Key Source of Medicaid Funding for States