States Target Health Providers, Hospitals for Federal Medicaid Match

Published January 17, 2010

A second economic stimulus plan may soon be on the table, but a new Tax Foundation analysis shows several states are taking advantage of one provision of the first stimulus bill—increased federal matching rates for Medicaid—at the expense of health care providers in their own states and taxpayers in others.

Twenty-two states have significant health provider or hospital taxes, six of which were enacted or expanded in the last year. Another four enactments or expansions are pending.

“Taxes on health care providers are popular targets for states as they struggle to close budget gaps and meet increased Medicaid demands because the revenue raised from those taxes can be used to obtain a larger amount of federal matching funds,” said Tax Foundation Analyst Justin Higginbottom, author of Tax Foundation Fiscal Fact No. 203, “State Hospital and Medical Provider Taxes: Not What the Doctor Should Order.”

Shifting Revenues, Costs
“States are turning the federal match into a budget gimmick by shifting Medicaid revenues into their general funds and shifting Medicaid costs to the federal government,” Higginbottom said. “As states get more federal funds for Medicaid, the federal government must tax or borrow to pay for this spending increase.”

Medicaid is financed at both the federal and state levels, but the federal match varies based on the state’s poverty level and unemployment rate. The American Recovery and Reinvestment Act of 2009 increased Medicaid matching rates by an average of 8.7 percent from October 1, 2008 through December 31, 2010, totaling an additional $87 billion in federal funding, giving states an added incentive to tax hospitals and health care providers.

California, Colorado, Missouri, Ohio, Oregon, and Wisconsin enacted or expanded their health provider taxes within the last year. New or expanded health provider or hospital taxes are pending in Arkansas, Michigan, Vermont, and Washington.

In Wisconsin’s case, the 20 percent increase in health provider taxes would increase federal matching funds from $635 million to $796 million, more than a third of which ($292 million) is expected to be used for non-Medicaid purposes.

The practice of spending federal matching funds on programs other than Medicaid is not new. In 2004 the U.S. General Accounting Office (now the Government Accountability Office) reported intergovernmental transfers—transfers of funds from one government agency to another— enabled states to funnel Medicaid matching funds into state general coffers.

Medicaid Funding Disparities
In fiscal year 2009, Mississippi received the highest federal match—$5.10 for every dollar the state spent on Medicaid—and Wyoming received the lowest at $1.28 for every dollar the state spent. California, which receives $1.60 in federal funds for every dollar it spends on Medicaid, raised $2 billion from health provider taxes and received $2.3 billion in federal funds.

“These federal matching funds may seem like a boon for some states, especially those facing the most serious budget problems, but ultimately health provider taxes are a short-term fix that can harm health care providers and perpetuate the dysfunctional Medicaid fund-matching system,” Higginbottom said.

Though it may seem counterintuitive for doctors and hospitals to support these kinds of taxes, some health care providers actually could stand to benefit because states increase payments to providers of Medicaid services along with the tax. Thus although a hospital may pay a new tax to the state, it often receives an identical or larger amount in additional reimbursements for services provided.

Health care providers can be harmed by these taxes, however. Generally, when hospital taxes are reimbursed by greater state Medicaid support, the benefits depend on the quantity of Medicaid-covered services a doctor or hospital provides. Those that provide little in Medicaid services must pay the tax without much additional reimbursement.

Ohio Hospitals’ Opposition
The Ohio Hospital Association opposes the state’s 2009 hospital tax because its hospitals will not be fully reimbursed for the $718 million assessment that enables the state to draw down $1.8 billion in matching federal funds, according to association spokeswoman Tiffany Himmelreich.

“Hospitals are already facing increased charity care and bad debt expenses coupled with reduced government reimbursement for Medicaid and Medicare,” Himmelreich said. “Taxing hospitals during dire economic times is forcing them to make tough choices to lay off employees, reduce or eliminate services, and delay necessary facility modernizations.”

Natasha Altamirano ([email protected]) is manager of media relations for the Tax Foundation in Washington, D.C..

Internet Info

Tax Foundation Fiscal Fact No. 203, “State Hospital and Medical Provider Taxes: Not What the Doctor Should Order”: