NCPA - National Center for Policy Analysis

State Tax Trend No. 9: State Abuse of Medicaid Matching Funds

June 18, 2012

When states set aside money to be spent on Medicaid, they receive matching funds from the federal government.  These matching funds are made available according to a formula known as the Federal Medical Assistance Percentages (FMAP), based on the state's level of poverty and unemployment, says Joseph Henchman, an attorney and policy analyst at the Tax Foundation.

  • In fiscal year 2012, Mississippi had the highest FMAP (74.18 percent), meaning that the federal government contributes 74.18 cents for every $1 in total Medicaid spending in a state.
  • Put another way, for every $1.00 the state of Mississippi spends on Medicaid, the federal government kicks in $2.87.
  • Fourteen states tie for the lowest FMAP (50 percent), which means that for every $1.00 they spend on Medicaid, the federal government kicks in another $1.00.

Regardless of a state's FMAP, however, the opportunity for budgetary exploitation exists.  The open-ended nature of the Medicaid payment system, wherein federal matching funds are unlimited as long as states are willing to ante up, is the enabler of this opportunistic behavior.

  • States raise additional taxes through hospital and physician taxes, the revenue from which is spent on state Medicaid purposes.
  • By federal law, this spending compels the government to supply FMAP-determined matching funds.
  • Once the state procures the federal funding, it compensates the originally taxed health care providers by increasing Medicaid payments.
  • Indeed, health care providers that benefit from increased Medicaid reimbursements often support these taxes if the returns exceed the tax payments.

The scale of this scheme is incredible, especially when it is noted that the Government Accountability Office pointed out the opportunity for this exploitation back in 2004.

  • These hospital taxes or doctors' taxes exist in 46 states and the District of Columbia.
  • During the recent economic downturn, 20 states increased health provider taxes to take advantage of federal matching funds.
  • This system led to a sharp jump in federal Medicaid expenditures, from $201 billion in 2008 to $250 billion in 2009.

Furthermore, it bears mention that those states that were most likely to abuse Medicaid matching funds are those states that have been most irresponsible with managing their state budget.

Source: Joseph Henchman, "Trend #9: State Abuse of Medicaid Matching Funds," Tax Foundation, June 5, 2012.

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