Most States Use Provider Tax for Medicaid

The pending proposed amendments to the stalled state budget bill, which almost broke the log jam earlier this week, did indeed include not one but two new provider assessments/fees/taxes (you pick the term) on Virginia private hospitals. When both chambers return next week with their “this time we’ll really do something” promises on the line, the fate of both should be determined.

The payments are interchangeably referred to as taxes, fees or assessments around the country. Virginia already imposes one on intermediate care facilities and only one state, Alaska, has avoided any use of this revenue method for Medicaid.

Based on my short research the federal government allows the states to use these “tax the provider to pay the provider” schemes on the whole range of providers, and most states do also tax nursing homes. Others tap pharmacies and managed care providers. There are good summaries here from the National Conference of State Legislatures and from Kaiser Family Foundation. The federal rules do limit just how much the state can tax and still pledge to recycle the money back, but these proposals stay under that limit.

The existing Virginia provider tax on intermediate care facilities raises about $13 million per year. The two new ones proposed for Virginia private hospitals would raise about $383 million in Fiscal Year 2020, the first full year of implementation.

Right between the two provider taxes in the list of proposed amendments there is another new provision calling on a joint legislative group to take another look at Virginia’s tobacco taxes, to see how to handle the new vape products and to see if changes should be made to the restrictions on local tobacco taxes. There is no reference to a health care funding angle as motivation for that. Perhaps there should be.

The provider tax approach to funding Medicaid has a long history. It was proposed and shot down under Governors Gerald Baliles and Douglas Wilder.  During this year’s debate I gave somebody my 26-year-old “No Sick Tax!” lapel pin.

The idea’s attraction is obvious. The hospital or other provider pays the state $1 dollar toward Medicaid expansion and the state uses that to draw down more than $9 from federal matching funds. The second $1 now proposed is collected for payment reimbursement rate increases, but that only draws down $1 additional from Washington’s coffers because that is under the cost share match formula for existing Medicaid programs.

Will those taxes, which appear to exceed 2 percent of gross patient revenue at the 70 hospitals involved, end up coming from individual patients or from their insurance carriers? Hospitals point out correctly that with the federal matching dollars they come out ahead, implying that there would be no need to pass on the cost. Hard guarantees are lacking. Clearly costs are being shifted around, but it seems unlikely they will shrink.

There is an interesting parallel with the proposal related to the Regional Greenhouse Gas Initiative, where people are being told to disregard the carbon tax which the power companies will pay and then get back. Won’t cost us a dime! One difference is the RGGI taxes don’t attract any match. Both ideas have me turning over walnut shells looking for the pea.

In 1992, when Wilder was pushing his own $68 million proposal, the Virginia hospitals led the opposition. “The health care groups say the Medicaid tax inevitably would get passed on to consumers through increased fees and insurance premiums,” was how John Harris of the Washington Post summarized their position. Wilder pushed back citing hospital profits and executive compensation.

The 1992 story also notes that Medicaid had grown from 5 percent to 13 percent of the General Fund budget in just five years. Where it is now and where it is going can be seen in this recent Senate Finance Committee staff slide. Another ten years and it is bumping up against 30 percent.

Call them an assessment or a tax these dollars will not be General Fund dollars and will not change that projection. That is another reason some legislators like the idea. The same Senate Finance Committee staff presentation stated as advantages of this approach:  “Eliminates need for GF support” and “Frees up all Medicaid expansion savings for investment in other budget areas.”

Hospitals are pushing hard for their adoption now. Julian Walker, Vice President of Communications for the Virginia Hospital and Healthcare Association, attributed the reversal to the following conditions, which grew out of a 2015 state working group:

  • Any money raised from hospitals is only spent for health care purposes;
  • Money raised will not be diverted elsewhere in the state budget;
  • Funds provided by the private sector should be controlled by the private sector;
  • State law will be updated to set up such a funding program, and it will specify that the program would end if its funds are used for non-health care purposes; and
  • Other than the resources necessary to address the hospital Medicaid payment shortfall, hospitals won’t be asked for funds unless and until the Commonwealth incurs net costs associated with coverage for the uninsured.

That fourth bullet would mean more  if this were being done in a bill as part of the Code of Virginia, and not as budget language with an automatic expiration date.

“A provider fee is considered a user fee instead of a tax because it is usually paired with payment increases,” stated the final report of that 2015 working group, which was ordered up by the General Assembly in the first place. Yeah, that will fit nicely on the rebuttal pieces during the upcoming primaries and generals. It is the same line peddled in support of raising the per-gallon “user fee” on gasoline. Everybody still calls it the gas tax.

But this tax is paid by the hospitals and then paid right back to them as the state’s share of expanding Medicaid to more people or paying up to an 88% reimbursement of costs. Virginia law has set a target reimbursement of 78% for years, but hits it rarely and is now at 71%.  The Medicare reimbursement is 88% and the goal here is to bring Medicaid up to that level.

At the time of the 2015 study, the maximum allowed tax was 6% and if all hospitals were paying that the state would reap $1 billion plus per year, just from the hospitals. See the last three pages of slides here. 

Based on what Walker told me, apparently only the hospitals and their affiliated practices will enjoy the higher 88% reimbursement rates if that tax passes. But with the other tax – for expansion – only the hospitals are being taxed but all Medicaid providers can accept newly-qualified paying patients. That might still be greatly to hospitals’ advantage if it slows the flow into their emergency departments.

Based on what is going on in other states, and knowing that the pressure of Medicaid on Virginia’s General Fund will only grow, this could be just a toe testing the water before Virginia jumps even deeper into provider taxes (assessments, fees – a distinction without much difference).

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4 responses to “Most States Use Provider Tax for Medicaid

  1. I want to congratulate and thank Steve for his excellent and informative , factual posts on an issue that is heavily demagogued by those who are opposed to the expansion – no matter the facts or realities.

    He summed it up perfectly: ” The hospital or other provider pays the state $1 dollar toward Medicaid expansion and the state uses that to draw down more than $9 from federal matching funds. ”

    The germane issue is that we already pay taxes for those who will be covered by the Expansion. We not only pay the Federal taxes that fund 9/10 of the expansion – but we pay in additional State taxes AND cost-shifting for people who use
    the ERs and can’t pay. That money already comes from us in a variety of ways – that are not efficient nor cost effective, in fact wasteful. Putting these dollars directly on managed care for the uninsured where they actually do get to see a primary care doc on a regular basis to manage diseases like diabetes – makes perfect fiscal sense – for taxpayers who are going to bear those costs anyhow.. why not earlier in the process to pay for Metformin rather than amputations and organ transplants?

  2. Well even better why not get them in with a decent primary care doc who explains to them, in time, if you keep eating like that you’ll get diabetes! You’ll ruin your arteries! That sugar-and carb-loaded s%#t will kill you! There has never been in the history of the world a country this obese and we scratch our heads about health care costs??

  3. Great reporting, Steve.

    The key issue, as I see it, is to what extent will hospitals pass on the cost of the tax to patients. The answer is unknowable because hospital accounting, as astonishing as it sounds, may be even more opaque than higher-ed accounting.

    One thing I’ll predict: Hospital charges will not go down. Either will hospital profits.

  4. Money from the Federal government is our tax money. The expansion of Medicaid will increase our taxes.

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