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The Misinformed Attack on Medicaid Provider Taxes

With the “fiscal cliff” approaching and policy decisions pending on a wide array of budgetary fronts, the risk is growing that policymakers could adopt changes that affect millions of people based on limited understanding, or even misunderstanding, of the proposals’ impacts — especially on people at the bottom of the economic scale or otherwise vulnerable or frail.

One example involves proposals to limit or eliminate states’ ability to levy taxes on health care providers (such as hospitals and nursing facilities) and managed care plans to help finance their Medicaid programs.  A recent Washington Post editorial portrayed these “provider taxes” as a way that states manipulate Medicaid financing:  they levy a tax on providers, use the revenue to qualify for federal matching funds, and then return the taxes to the providers in the form of higher Medicaid reimbursements.

Sharply restricting or ending states’ ability to raise these revenues, the Post suggested, would secure federal savings without adversely affecting low-income patients.  States could merely “enact efficiencies that the provider tax enabled them to avoid,” the editorial opined.

In reality, provider taxes don’t work as the editorial portrayed them.  Federal laws enacted in 1991 and in 2006 have reined in the manipulative practices that the editorial describes.

And, restricting or ending states’ ability to use these revenues almost certainly would have serious consequences on low-income people and likely cause several million poor people to remain uninsured.  That’s why the Obama Administration, which once proposed restrictions in this area, no longer supports them.

Let’s start by dispelling some misunderstanding.  To be sure, provider taxes used to be a source of abuse, with states designing them and their Medicaid reimbursements so the tax payments were indeed returned to the providers that paid them.  But the federal government clamped down on such practices, which are now illegal.

Any state that wants to impose a tax on various types of providers and use the revenues to help finance Medicaid must impose the tax on all providers in a given category (e.g.., all hospitals or all nursing homes) and on a uniform basis, regardless of whether the providers serve many, few, or no Medicaid patients.  States may not structure provider taxes so that the providers paying the taxes are made whole.

As the Kaiser Commission on Medicaid and the Uninsured has written, federal rules are now “designed to ensure that provider taxes are, in fact, taxes generating revenue for a state rather than a mechanism for drawing down federal Medicaid matching funds without a state contribution.”  Kaiser also notes that “[p]rovider taxes must be broad-based, uniformly imposed, and the tax must not hold providers harmless.”

Policymakers should not rely on simplistic descriptions of provider taxes that are now circulating on Capitol Hill (from Tennessee Senator Bob Corker, among others) and that portray the taxes as working in ways that the law no longer allows.

Moreover, whatever one thinks of provider taxes, it’s critical to examine the impacts on low-income people of denying states the ability to use this financing source.

Let’s start with why barring or sharply restricting states’ use of provider taxes would produce federal savings.  If states could simply provide other financing to replace the revenues from provider taxes, federal Medicaid spending (which covers a specified share of state Medicaid costs) would remain unchanged.  But the Congressional Budget Office (CBO) predicts that barring or sharply restricting states from using provider taxes would produce federal savings — because CBO expects that states would not be able to replace all the lost revenue and would cut their Medicaid programs to offset the loss of funds.

Indeed, for each federal dollar saved by denying states access to this funding source, state Medicaid programs would shrink by about $2.  (The federal government pays a little over half of Medicaid costs, so state Medicaid programs must be reduced by about $2 for the federal government to realize $1 in savings.)

Where would these Medicaid cuts come from?  That’s where the Post editorial, with its blithe assertion that states could simply “enact efficiencies that the provider tax enabled them to avoid,” is most disappointing.

Over the past few years, as states have had to meet balanced-budget requirements despite plummeting revenues and growing Medicaid rolls that the recession caused, they’ve relentlessly scoured Medicaid for savings — to the point where many states have imposed painful cuts that affect large numbers of low-income individuals.

The cuts include eliminating dental or vision care for many beneficiaries, limiting coverage of essential medical equipment and restricting personal care for people who are frail or have disabilities, and restricting access to nursing homes and other long-term services and supports.

States have also cut provider payments, which already are far below what private insurance and Medicare pay.

Medicaid is lean to begin with; it spends 27 percent less, on average, per child than the cost of private insurance for children of similar health status and 20 percent less per adult.  That’s due largely to its rock-bottom provider payment rates — many states say they have trouble attracting enough providers to serve Medicaid beneficiaries — and its much lower administrative costs.

What, then, are the readily available “efficiencies” that the Post says states have avoided?  The editorial doesn’t identify a single one.

Finally, there is another, even more serious problem with sharply restricting or barring states from assessing provider taxes:  the likely effect on the number of poor Americans who are uninsured.

Health reform — i.e., the Affordable Care Act (ACA) — was designed to address perhaps the single most glaring hole in the U.S. safety net:  the fact that we, alone among Western democracies, allow tens of millions of poor citizens to go without health insurance because they can’t afford it.  Health reform sought to expand Medicaid to cover everyone up to 133 percent of the poverty line.  But, the Supreme Court subsequently made the expansion optional for states.

To date, only about 15 states have said they will adopt the Medicaid expansion.  Most of the rest haven’t yet decided.  While the federal government will pick up nearly all of the cost, many undecided governors have said their greatest concern is that the federal government will alter the federal-state Medicaid financing rules to help reduce federal deficits — and will reduce federal Medicaid costs by shifting costs and financing burdens to states.  The provider tax proposals are one of the governors’ biggest worries.

Federal action to bar or sharply restrict state provider taxes almost certainly would induce significantly more states to reject the Medicaid expansion, by limiting states’ ability to pay their share of Medicaid costs.  As a result, many more poor Americans would remain uninsured.  That’s why the Obama Administration no longer supports changes in this area.

When considering major policy changes that would affect millions of vulnerable people, policymakers and commentators should make sure to understand a proposal’s effects on vulnerable people before reaching judgments.  Policymaking — and policy advice — from 10,000 feet, of which the Post editorial is an unfortunate example, won’t do.