How ObamaCare Overpays for Medicaid

Story Stream
recent articles

The number of individuals on Medicaid, the joint state-federal health care program for low-income families and individuals, is projected to increase by about 14 million as a result of expanded eligibility under the Affordable Care Act (ACA). Since the inception of the Medicaid program, each state has covered roughly one-quarter to half of the cost of its own Medicaid enrollees. Under the ACA, the federal government will bear 100 percent of the cost of expansion through 2016, working down to 90% by 2020 and thereafter. But in reality, a loophole known as the Medicaid provider tax, which allows states to artificially inflate Medicaid costs, will let states milk the federal government for up to 106 percent of the cost of new enrollees. This tax gimmick should be repealed.

In a recent article for Tax Notes, I described the mechanics of this tax in detail, but here is a simple example of how it works:

Suppose that a state imposes a tax on hospitals, causing the cost of a given service to increase from $100 to $106. The state collects $6 from the tax. Also assume that the state does the hospital a favor and increases Medicaid reimbursement rates from $100 to $110. If the patient receiving the service is newly on Medicaid thanks to the ACA expansion, the federal government will cover the $110 payment to the hospital. The hospital earns an extra $4 ($10 more in reimbursement minus $6 more in taxes), and the state wins $6 in additional tax revenue. It's a win-win for the state and the hospital. But, it's an additional $10 cost to federal taxpayers.

Although federal law generally limits Medicaid provider taxes to 6 percent, states continue to find these taxes extremely lucrative. Every state except Alaska imposes at least one provider tax. In fiscal year 2014, there were 138 provider tax rate increases and only 59 provider tax rate reductions among the states. One survey of state Medicaid programs revealed that in six states provider taxes represent more than 20 percent of non-federal Medicaid funding.
As states expand their Medicaid programs under the ACA, they can turn what was supposed to be a freebie into a moneymaker. Prior to Obamacare, Medicaid provider taxes cost the federal government billions of dollars annually. In the coming decade, they will cost billions more.

In the last few years, both Democrats and Republicans have offered proposals to further limit or prohibit Medicaid provider taxes. In 2013, Senators Bob Corker and Lamar Alexander introduced legislation to phase out the Medicaid provider tax. In 2012, Senator Dick Durbin called the tax "a bit of a charade." President Obama proposed restrictions on the scheme in 2011, and the Simpson-Bowles Commission recommended prohibiting the ‘‘Medicaid tax gimmick" In 2010.

The federal government could save tens of billions of dollars over a decade by phasing out the provider tax loophole. Although lawmakers have generally suggested using the savings for deficit reduction, the taxes should be abolished because they are bad policy, regardless of how the savings are used. The savings could be used to improve the financing of Medicaid for the poorest states or the most critical services or to offset the cost of repealing some of the foolish health care taxes (such as the medical device tax) imposed by the ACA.

Unfortunately, lawmakers have tabled this reform entirely. President Obama dropped his proposal from the budget in 2014 due to pressure from governors-the same governors who demanded that the federal government pick up the whole tab for Medicaid expansion. As Republican lawmakers adapt to the reality that the ACA will not be repealed or struck down by the courts, they should focus on changing the Act in ways that will save money, improve care, and empower states. Weening governors off of excessive federal Medicaid subsidies would be a good place to start.

Alex Brill is a research fellow at the American Enterprise Institute, served as an adviser on tax policy to the President's Fiscal Commission, and is a former senior adviser and chief economist to the House Ways and Means Committee.

Show commentsHide Comments

Related Articles