States Consider Taxes To Help Fund Medicaid

Georgia, Iowa, Tennessee and Wisconsin are considering taxing hospitals to help pay for Medicaid. Those extra funds can also generate more money from Washington.

Georgia Gov. Sonny Perdue, wrestling with a massive hole in the state's Medicaid budget, has proposed a new tax on hospitals and managed care plans. In addition, hospitals in Iowa and Tennessee, as well as in rural Wisconsin, are calling for higher taxes – on themselves.

As the recession demolishes their budgets, states are increasingly turning to taxes on hospitals and other health care providers to help pay for their beleaguered Medicaid programs.

For state governments, the taxes offer an added benefit: By coming up with more money for Medicaid, they can get more funds from Washington for the joint federal-state health care program for the poor and disabled. In addition, some, but not all, hospitals will get more money in Medicaid payments than they'll pay in increased taxes.

Critics, including Robert Helms of the American Enterprise Institute, are wary of such financing approaches, calling them gimmicks to leverage unwarranted increases in Medicaid funding from the federal government.

Taxing hospitals and other medical providers is not new. Twenty-two states have "significant health provider or hospital taxes," according to the Web site of the Tax Foundation, a nonpartisan tax research group based in Washington that advocates for lower taxes. The Kaiser Commission on Medicaid and the Uninsured says 44 states in all have some type of provider tax.

But with the recession battering state budgets, some states in the past three years have increased taxes already in place or approved new ones on hospitals, nursing homes or managed care plans.

The states then use the funds to increase the federal spending on their Medicaid programs. The federal match is based on a complicated formula that varies by state. Overall, the federal government pays about 57 percent of the nation's Medicaid bill.

An additional incentive to raise taxes, hospital groups say, is the federal stimulus law enacted last year that provided an extra $87 billion to Medicaid to help states temporarily weather the economic downturn. With that money, Washington raised its percentage nationwide of the Medicaid funding formula to more than 63 percent, although the percentages to individual states vary, according to figures provided by the federal Centers for Medicare and Medicaid Services (CMS).

States that have adopted provider taxes in recent years include Alabama, Arkansas, Colorado and Kansas.

The federal government for years has eyed suspiciously maneuvers by states to increase Medicaid payments from Washington. In several reports, the Government Accountability Office has urged tighter controls to thwart state efforts to secure "excessive" federal funds.? Rule changes have attempted to close some loopholes.

But Helms said the problems continue with the new wave of hospital and provider taxes. "It's more of a scam," he said. "I view it as states' using it as an accounting scheme to draw down more federal money."

Other Medicaid experts see such taxes as a necessary step to fill state budget holes. "Every state has a Medicaid shortfall," said Sara Rosenbaum, chairwoman of the Department of Health Policy at George Washington University. "How else will states get money for Medicaid? There's a better argument for (provider taxes) than other taxes that don't hit the health care industry."

Congress doesn't appear eager to block the taxes, said Stephen Zuckerman, a health economist at the Urban Institute in Washington. "Who's at fault here?" he asked. "The federal government knows it's going on and allows it."

CMS officials acknowledged an increase in provider taxes, but argued that the stimulus legislation isn't responsible for the trend. They blamed a dearth of state resources for Medicaid programs.

In Georgia, lawmakers, who are generally opposed to increases in taxes, have been wary of Perdue's plan. The Republican governor is trying to help shore up a $500 million-plus shortfall in the state Medicaid budget by imposing a 1.6 percent tax on hospitals' revenue and a similar levy on managed care company premiums. Budget officials say the taxes would produce $324 million?next year, which could be used to generate roughly $1 billion in federal funds for the Medicaid program based on the enhanced stimulus formula that raises the federal contribution in that state to more than 75 percent.

The proposed tax is opposed by the hospital industry, whose officials say that if the tax were approved, the effect on local hospitals would vary dramatically, depending generally on the number of Medicaid patients they serve.

For example, Atlanta's Piedmont Hospital, which historically treats few Medicaid patients, would take a projected annual hit of $8 million from the tax. But Grady Memorial Hospital, the state's largest public hospital and a key safety-net facility for Atlanta's poor and uninsured, would gain an estimated $2 million.

The tax proposals usually tend to gain support from the hospital industry when hospitals receive more collectively than their total tax levy – which was the case in Kansas, and is?projected in Colorado, Arkansas and Alabama.

Kansas adopted its hospital tax four years ago. A 1.83 percent tax on hospital revenues typically raises about $33 million annually. Under the temporary stimulus legislation, the deal is even better from the state's point of view; the federal government pays 70 percent of the program's cost, up from 60 percent. ?That means that the state's hospital tax brings in $77 million in federal money. The state uses the money to increase payment rates for hospitals and physicians.

But in Ohio, hospitals' collective tax burden exceeds the rate increase they'll get in Medicaid reimbursements. A new tax in that state will collect $718 million, with hospitals receiving?$575 million in Medicaid pay increases, said Mary Yost, a vice president of the Ohio Hospital Association.

"What we're hearing from members is that it's a pretty tough pill to swallow," she added.

This story was produced through collaboration between NPR and Kaiser Health News (KHN), an editorially independent program of the Henry J. Kaiser Family Foundation, a nonpartisan health-care policy research organization. The Kaiser Family Foundation is not affiliated with Kaiser Permanente. Copyright 2010 Kaiser Health News. To see more, visit http://www.kaiserhealthnews.org/.

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