Ending Provider Tax Medicaid Loophole Could Cost States Billions

Congressional Republicans are targeting a loophole that all states except Alaska have used for decades to pull in billions of dollars in extra Medicaid funds through a provider tax that allows them to collect higher matching fund payments from the federal government. 

It's estimated that ending the loophole could save the federal government about $600 billion over the next 10 years, which would be a large part of the $880 billion in Medicaid cuts that a House committee that oversees the federal healthcare program has been tasked to find, reported The New York Times on Tuesday. 

A recent analysis showed that some Republican-led states could be hit the hardest, as their budgets for Medicaid are often highly reliant on the medical provider tax strategy for bringing in money. 

The tax maneuver works by charging provider taxes to hospitals so that federal reimbursement rates are higher. For example, if the federal government pays 60% of a Medicaid patient's stay and the state 40%, if the state raises its payment to the hospital slightly, the federal government chips in more. 

And even when states fully reimburse hospitals for the amount of taxes charged, there is still money left over because the new federal amounts more than cover the difference. 

As Medicaid spends $870 billion a year, states can use the loophole to generate tens or even hundreds of millions of dollars through the strategy. 

In 1989, New Hampshire was one of the first states to adopt the plan. Then-Gov. Judd Gregg said his health secretary mentioned the maneuver to fill a budget hole with a plan that would force Washington to send the state millions more in extra funding. 

"At the time, I was happy to game the federal government because we were in crisis," Gregg, a Republican, told the Times. "I always assumed it would go away. It didn't. It continued, and became a fait accompli that has continued on and on and on."

Gregg was elected to the U.S. Senate from 1993 to 2011, where he chaired the Health and Budget committees. He says that he started viewing the payments differently once he was in Washington, but by that time, they were too hard to reform. 

And now, provider taxes and related payments are bringing in more than a third of the overall federal funding for some states.

The rules have become more complicated over the years, and the money has become more difficult to track, but the federal contributions have continued to grow. 

The government, meanwhile, said it doesn't know exactly how much money states have raised with the provider taxes.

Government agencies such as the Centers for Medicare and Medicaid Services, which pay the federal share for the program, don't track the revenue that is associated with the provider taxes. The Medicaid Payment Advisory Commission, created by Congress to analyze Medicaid spending, also doesn't track the revenue. 

The federal government allows states to have provider taxes as long as they don't go above a certain percentage, allowing 19 different types of healthcare providers to be taxed and reimbursed, including dentists and chiropractors. 

There are proposals circulating on Capitol Hill to ban the taxes, but they do not include ways to replace lost dollars, leaving states with gaping holes in their Medicaid budgets. 

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