Medicaid funds shouldn’t be used to subsidize state taxes on health care

Congress has decided to stop forcing federal taxpayers to subsidize people who live under state governments intent on levying excessive income taxes. Now, how about ending federal subsidies rewarding states that tax the heck out of health care?

When the federal government matches state payments for health services covered by Medicaid, it also matches state taxes on physicians, managed care companies, hospitals, outpatient care, nursing homes, and intermediate care facilities. The higher the taxes, the higher the matching funds. Paying states to increase health care costs is such transparently bad policy even Joe Biden called it “a scam.”

Suppose a Medicaid patient covered under the ObamaCare Medicaid expansion needs outpatient surgery and the surgery center bill is $2,000. The current federal Medicaid matching rate for this patient is 95 percent of the total bill. The state pays $100 for the patient’s care. The federal government pays $1,900.

{mosads}If the state follows West Virginia’s lead and imposes a 2.5 percent tax on outpatient hospital services the total bill rises to $2,050. The state pays $102.50. The federal government pays $1,947.50. As the outpatient facility must remit all the taxes it collects from the state to the state, the state gets its extra payment of $2.50 back while enjoying the extra $47.50 in federal Medicaid matching funds its health care tax generates.

The extra money to pay that tax must come from somewhere. In the real world, customers almost always end up paying for taxes on service providers. An outpatient provider tax raises costs for everyone who uses any outpatient services. Costs go up for the privately insured, raising premiums. They increase for patients covered by self-financed employer plans, lowering wages. They rise for patients who pay cash for the service. They also increase Medicare costs.

In 2014, the Government Accountability Office (GAO) estimated state Medicaid provider tax collections had risen to $18.7 billion in 2012, up from $9.7 billion in 2008. The Medicaid and CHIP Payment and Access Commission (MACPAC) estimated that the federal provider tax match increased the federal share of net Medicaid provider payments by almost 5 percent in 2012. With Medicaid outlays for medical assistance payments equaling about $233.8 billion in 2012, this means provider taxes raised federal Medicaid spending by about $11.5 billion, enough to pay for almost the entire 2012 budget of the federal Department of Commerce or all of Texas’ 2013 state spending on Medicaid. In 2012, the GAO found that 505 hospitals in 39 states had received total Medicaid payments that were $2.7 billion higher than their total cost of providing Medicaid services, with some running Medicaid surpluses in the “tens of millions of dollars.”

Although provider taxes are big business, the money they raise doesn’t necessarily help patients. Providers receive reimbursements, payments for actual services performed for a patient at a rate determined by each state. Providers may also receive supplemental payments, grants from states that are funded out of state and local funds generated by provider taxes and other revenues.

The federal government does not track how supplemental revenues are used, so it is easy for state Medicaid bureaucracies to use provider tax revenues to finance pet projects and reward favored suppliers. A GAO report looking at supplemental payments in four states found they were used to fund everything from operating poison control centers, to building new medical office buildings, purchasing helicopters, and opening clinics in homeless shelters. In Colorado, federal matching funds derived from provider tax revenues have been used as “quality payments” to encourage hospitals to enforce dangerously low Cesarean section rates.

The provider tax scam is just the latest wrinkle in the Medicaid payments mess. Once states realized that they could substitute federally subsidized Medicaid for the more efficient state programs they formerly funded to help the medically indigent, “If it moves, Medicaid it” became the new state rallying cry. The problem, as Brian Blaise of the Mercatus Center explained in a report on provider taxes, is that federal Medicaid financing rules encourage states to focus on “creatively manipulating complex rules and regulations to maximize federal funding” rather than on “improving the value enrollees receive from Medicaid.”

Medicaid patients are the losers. Studies suggest that higher Medicaid reimbursements are associated with better care, and that Medicaid patients are more likely to be treated by lower quality hospitals and less highly trained physicians. Recent studies also suggest that the health reforms favored by state and federal governments have done little to improve quality or reduce costs. To lower costs for everyone, the federal government should end the practice of paying states to tax health care, limit matching payments for the actual cost of services rendered to enrolled Medicaid patients, and encourage states to focus on paying adequate reimbursement rates for care that Medicaid clients value.

Linda Gorman is director of the Health Care Policy Center at the Independence Institute (@i2idotorg), a free market think tank in Denver.