In its simplest form, the tax maneuver works like this: When a Medicaid patient goes to the hospital, the federal government and state usually share the costs. The ratio varies from one state to another, depending on how poor the state is, but the federal government often pays around 60 percent of the bill.
States that use provider taxes to get more money usually start by paying the hospitals more. If the federal government is paying 60 percent and the state 40 percent, when a state bumps a payment to $1,030 from $1,000, the federal government chips in $618 instead of $600.
And then the state imposes, say, a $25 tax on the hospital. Net, the state pays $387 (the $1,030 payment minus $618 of federal reimbursement and $25 of tax) instead of $400, and the hospital gets $1,005 instead of $1,000. The federal government has chipped in an extra $18, and the state and the hospital have divided it up between them.
You can view this narrowly, as a trade between the state and the hospital. From that viewpoint it’s a great trade, an arbitrage, maybe a scam: Both sides get free money by putting one over on the federal government. “For years,” notes the Times, “the use of provider taxes in New Hampshire was openly described as ‘Mediscam’ by state officials.”
Source: Mark Levine at Bloomberg