June 13, 2006
ADMINISTRATION MEDICAID RULE WOULD PUT PRESSURE ON STATES TO REDUCE BENEFITS OR ELIGIBILITY OR TO LOWER PAYMENTS TO PROVIDERS
REDUCE HEALTH CARE SPENDING
By Allison Orris and Andy Schneider
Medicaid, which provides health and long-term
care insurance to more than 50 million low-income Americans, is paid for jointly
by the federal government and the states. States have the option of raising
some of their share of Medicaid expenditures by using revenue from taxes on
hospitals, nursing homes, managed care organizations, and other health care
providers. To ensure program integrity, federal Medicaid regulations adopted by
the first Bush Administration contain detailed requirements for how these taxes
should be designed. Over two thirds of the states, working within these
guidelines, have established such taxes and rely on revenues from them to help
pay their share of the cost of their Medicaid programs.
One of the requirements that provider taxes must
meet is that they may not exceed 6 percent of a health facility’s gross
revenues. Last year, in its fiscal year 2006 budget, the Administration
proposed to reduce this requirement to 3 percent. Provider taxes equal to
between 3 percent and 6 percent of a facility’s gross revenues would no longer
count toward a state’s matching contribution.
In fashioning the Deficit Reduction Act of
2005 (the budget reconciliation bill enacted in February 2006), Congress
declined to adopt this proposal. Congress made other changes in that
legislation related to the Medicaid provider tax rules, but did not approve this
proposal. The Administration responded by proposing this change again in its
fiscal year 2007 budget, but declaring this time that it would bypass Congress
and make the change administratively through a change in regulations. In a
recent letter from HHS Secretary Leavitt to Governor Matt Blunt of Missouri, the
Administration confirmed its intention to issue a notice of proposed rulemaking
to implement this change.
The likely effect of the Administration’s
proposal is twofold:
- States that now rely on revenue from provider
taxes set at more than 3 percent of providers’ gross revenues will have to
find other sources of revenue to help fund their state share of Medicaid or
cut back eligibility, covered benefits, or provider payment rates.
- In addition, states with provider taxes set at
less than 3 percent of gross revenues will be foreclosed from obtaining
additional state revenue to meet growing Medicaid costs by raising those rates
above 3 percent. This also applies to states that do not currently raise
revenues through provider taxes.
Current Provider Tax
Regulations Were Issued by the First Bush Administration in 1992
Medicaid is financed jointly by the federal
government and the states, with the federal share of program costs averaging 57
percent. Under federal law, the state share of Medicaid costs must be
financed from state or local public funds.
In 1991, in response to abusive “creative
financing” mechanisms used by some states, the first Bush Administration sought,
and Congress enacted, reform legislation.
Among other things, this legislation amended the federal Medicaid statute to set
forth detailed criteria for when a state could use revenues from taxes on
hospitals, nursing facilities, managed care organizations (MCOs), and other
providers to help pay for the non-federal share of Medicaid costs.
Under these criteria, provider taxes must be “broad-based,” and there may not be
in effect a “hold harmless” provision — that is, there may not be a mechanism
under which the state directly or indirectly holds the providers paying the tax
harmless for any portion of the costs of this tax.
The first Bush Administration implemented
these statutory criteria through regulations issued in November 1992. In these
regulations, the Administration specified that a provider tax would not violate
the “hold harmless” test if the tax were applied at a rate that produced revenue
less than or equal to 6 percent of providers’ gross revenues.
The Administration explained it selected 6 percent for the hold harmless rate
because it considered 6 percent to be the average tax rate applied to
other goods and services in the states, and because it was concerned that states
might impose higher rates as part of an arrangement to hold some providers
harmless for some or all of the tax, in violation of the statute.
Over two thirds of the states have
relied upon these statutory and regulatory criteria to design and enact provider
taxes that generate revenues to help them pay for their Medicaid programs. For
example, Kentucky, Mississippi, New Hampshire, Ohio, Oklahoma, Pennsylvania, and
Tennessee all rely on revenue from taxes imposed on their nursing home
industries. Many of these and other states also rely on revenue from taxes paid
by hospitals or other classes of providers.
Administration Proposes to
Change the Regulations on Which These States Have Relied
In its fiscal year 2007 budget, the
Administration announced that it will “phase down the allowable provider tax
rate from six percent to three percent.”
The Administration intends to implement this change by regulation, rather than
by statute.
In its fiscal year 2006 budget a year
earlier, the Administration had proposed to “phase down the allowable tax rate
from six percent to three percent and to require that managed care organizations
be treated the same as other classes of health care providers with respect to
provider tax requirements.”
In the Deficit Reduction Act of 2005, Congress made the change sought by the
Administration with respect to the treatment of managed care organizations but
did not agree to the rest of the Administration’s proposal.
The Administration now seeks to accomplish this policy change without
Congressional approval.
The Administration estimates that this regulatory
change will reduce federal Medicaid funds for the states by $2.1 billion over
five years and $5.5 billion over ten years. The Administration’s budget
documents do not identify which states would be affected or the amounts of
federal funds they would lose. Nor do the Administration’s budget
documents explain why the 6 percent test that was adopted by the first Bush
Administration and has been in place for the past 13 years is no longer
appropriate.
Proposed Change Would Make
It Harder For Many States to Pay Their Share of Medicaid Costs, Increasing
Pressure on Them to Cut Benefits, Eligibility, or Provider Payment Rates
The Administration’s proposed regulatory change
would reduce by up to half the amount of provider-paid revenues that a state
could use to help finance its Medicaid program. This would likely cause
the affected states to scale back their provider taxes so the taxes do not
amount to more than 3 percent of providers’ gross receipts. This would
reduce the revenue that states could receive from this source.
States need revenues to pay their share of
Medicaid costs. Those costs are driven by the number of low-income families and
elderly or disabled people enrolled in a state’s Medicaid program, their need
for health care or long-term care services, and the cost of purchasing those
services from hospitals, nursing homes, physicians, and other health care
providers. The Administration’s regulatory change would do nothing to lower
those costs.
By reducing a state’s revenue base without
reducing the costs it faces, the Administration’s proposal would place
additional fiscal pressures on states to cut back their Medicaid expenditures
through such means as lowering eligibility limits, reducing the health benefits
that are covered, and/or scaling back payment rates to providers. (States also
could cut back other state programs or raise taxes to make up for the loss of
federal Medicaid funds.) In states that opt to cut their Medicaid programs,
low-income families, people with disabilities, and seniors will be at risk.
Over more than a decade of policy stability, more
than two thirds of the states have come to rely on at least one type of provider
tax to help finance their Medicaid programs, and it is not uncommon for states
to impose provider taxes up to the first Bush administration’s 6 percent limit.
If the current Administration reduces this limit to 3 percent, many of these
states will encounter difficulty.
Facing rising health care
costs, states already have begun cutting their Medicaid programs. In
fiscal year 2005, 7 states restricted or reduced benefits, 8 imposed new
eligibility restrictions, 8 imposed new or higher beneficiary co-payments, 43
implemented new pharmacy cost controls, and 50 froze or reduced payment rates
for at least one group of providers.
Provider tax rate reductions that deprive states of an important source of
financing for their Medicaid programs could exacerbate these trends and diminish
access to important health-care services.
The effects of reductions in federal Medicaid
matching funds as a result of this regulatory change could be particularly
disruptive in states with high federal Medicaid matching rates. For example,
Kentucky’s federal matching rate is just over 69 percent this fiscal year. This
means that for each dollar that Kentucky loses in provider tax revenue as a
result of the Administration’s regulatory change (and is unable to replace from
another source), the federal government will reduce its Medicaid contributions
to the state by $2.25. A total of $3.25 thus would be removed from the state’s
Medicaid program. Faced with such revenue declines, a number of states would be
expected to institute significant cuts that adversely affect low-income
beneficiaries.
End Notes:
Letter from HHS Secretary Michael O. Leavitt to the Honorable Matt
Blunt, Governor of Missouri, May 22, 2006.
Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991
(P.L. 101-234).
Section 1903(w) of the Social Security Act, 42 U.S.C. 1396b(w).
57 Fed. Reg. 55118 (November 24, 1992), 42 CFR 433.68(f)(3)(i).
Center on Budget and Policy Priorities analysis of unpublished data
collected by the American Health Care Association and the American Hospital
Association.
Budget of the United States Government, Fiscal Year 2007, p. 126.
The Administration’s fiscal year 2007 budget includes net federal Medicaid
funding reductions equal to $14 billion over the next five years and $35.5
billion over ten years. Some $30.4 billion of these savings would come
through administrative action, including the issuance of regulations. These
reductions follow on the heels of federal Medicaid reductions ($4.9 billion
over five years and $26.5 billion over ten years) enacted as part of the
Deficit Reduction Act of 2005, which was signed into law earlier this year.
More than four-fifths of the Medicaid savings proposals in the
Administration’s new budget would reduce federal Medicaid expenditures by
shifting costs directly from the federal government to the states. See Andy
Schneider, Leighton Ku, and Judith Solomon, "The Administration's Medicaid
Proposals Would Shift Costs to States," Center on Budget and Policy
Priorities, February 14, 2006.
Budget of the United States Government, Fiscal Year 2006, pp.
143-144.
Section 6051 of P.L. 109-171.
In his May 22, 2006 letter to Governor Blunt, Secretary Leavitt wrote that
the purpose of the proposal is to “remove incentives for States to shift the
responsibility to fund their share of the Medicaid program to health care
providers.” This, Secretary Leavitt argues, will enable health care
providers to “remain focused on their mission of providing necessary care
and services to their patients.”
Kaiser Commission on Medicaid and the Uninsured, "State Fiscal Conditions
and Medicaid," November 2005.
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