NCPA - National Center for Policy Analysis

States Siphoned Billions From Medicaid

November 1, 1995

A loophole in federal regulations led many states in the last decade to adopt elaborate schemes for the sole purpose of converting billions of federal Medicaid dollars into unrestricted funds for state use. In 1990, this shell game added one-half billion dollars to federal Medicaid costs, but by 1992, it was inflating federal Medicaid payments by $11 billion annually.

It began in 1985 when the federal Health Care Financing Administration (HCFA), which oversees Medicaid, ruled that state governments could accept donations (taxes) from health care providers for their Medicaid programs. The money could then be lumped with other state funds matched by the federal government.

States began enacting provider taxes on hospitals and using the tax money to qualify for additional federal funds. When the federal checks arrived, they used part of the money to reimburse hospitals for the tax paid, often in the form of reimbursements for treating a "disproportionate" number of the poor and uninsured.

Thus, the hospitals paid no net tax, and since there were no limits on how states used their matching federal funds, the states ended up with extra cash. In wealthier states, the federal match is one to one, but in poorer states, Washington provides as much as three dollars for every dollar the state puts up.

  • Louisiana, for example, was able to raise enough in provider donations to quadruple its federal Medicaid dollars between 1988 and 1994.
  • In 1993, Louisiana received federal "tax-and-match" funds of $1,499 per uninsured person, while Texas received $417 per person, Mississippi received $302 and Arkansas received $6.

Congress recognized the unintended raid on the treasury, and passed legislation in 1991 setting limits on the "recompensation" hospitals receive for taxes paid. The new ground rules didn't become effective until 1995, and they don't completely bar the gate.

Of course, this costly game will become impossible if Medicaid is converted into block-grants to the states.

Source: Penelope Lemov, "The End of the Hospital Tax Charade," Governing, November 1995.


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