Some states are legally employing a financial gimmick that allows them to collect increased payments from Medicaid. More than 15 states are using the complex system and about a dozen more have notified the Health Care Financing Administration that they plan to take similar steps.

The practice reportedly drives up federal Medicaid spending by at least $2.5 billion a year.

The financing arrangement takes different forms. But one way it works is like this:

• A county-owned nursing home or hospital borrows money from a bank, then lends the money to the state.

• The state uses the money to draw down extra Medicaid funds under the federal government's matching funds requirement.

• The state then returns the money to the county facility to pay off the loans.

• While the facility may get some additional money, the bulk of the federal payment stays with the state to use as it wants -- even for spending unrelated to health.

Administration officials -- prodded by Senate Finance Committee Chairman William Roth of Delaware -- want to plug the leak. But the states are hiring Washington lobbyists to make sure no changes are made.

Currently, the federal government pays about 57 percent of the Medicaid programs costs -- with the states picking up the remainder. Sen. Roth says the new financing transactions allow the states to obtain federal Medicaid dollars "in a way that inappropriately circumvents the existing matching relationship between state and federal funds."

Source: Laurie McGinley, "Loophole Helps States Get More From Medicaid," Wall Street Journal, July 25, 2000.