Gaming Medicaid

By Katherine Restrepo, Forbes, September 30, 2014.

As North Carolina lawmakers recognize that funding a problem does not solve a problem, the legislature has vetoed Obamacare’s optional Medicaid expansion. Rather, fixing Medicaid’s broken system – one that is plagued with cost overruns, hemorrhages tax dollars, and fails to improve patient health outcomes – ranks much higher on the Tar Heel State’s legislative to-do-list.

Ongoing efforts to rein in spending and better coordinate patient care are all well and good. But Medicaid’s overarching flaw is that the state and federal government jointly fund it. Because the feds historically fund more than two-thirds of North Carolina’s $14 billion Medicaid program, the national portion of the tab increases at an exponential pace. And because most state Medicaid expenditures trigger federal funds, legislators and health systems have devised clever strategies that ease the use of state funds while maximizing federal money.

A specific example is provider assessments – a cozy deal initiated by hospitals and many states in the mid 1980s. Medicaid providers volunteered to be assessed, or taxed, by the state. In return, the state would use this revenue and shell out enhanced reimbursement rates, knowing that this would generate federal payments. Not only did healthcare entities and providers benefit, but this scheme also freed up money in state budgets that could then be used for purposes not limited to Medicaid.

It took some time for federal regulators to recognize this shell game, but in 1991, the Medicaid Voluntary Contribution and Provider-Specific Tax Amendment placed restrictions on states that prevented them from running up Medicaid’s bottom line. Today, if states place assessments on health care entities to help pay for Medicaid programs, the fee must not exceed 6 percent of net patient revenues. Furthermore, they must be “broad based” and “uniform,” meaning that the tax leveraged has to fall across an entire specified class of providers. Other restrictions require that providers cannot be “held harmless,” or guaranteed that they will see a return of the taxed amount.

Such provisions explain why the Centers for Medicare and Medicaid Services (CMS) recently rejected North Carolina’s proposed assessment on the managed care organizations (MCOs) that deliver care to those with mental health, substance abuse, and developmental disability needs. A tax of $30 million was to be levied on the state’s ten MCOs. Once the $30 million was distributed back to these entities, the state would trigger a total federal match of $90 million, leaving the state with $60 million worth of federal taxpayer money supposedly to be used for Medicaid. Confusion could have resulted from the fact that Medicaid managed care organizations were once considered their own provider class. However, the 2005 Deficit Reduction Act shifted the Medicaid managed care class into a class consisting of all types of managed care.

This funding scheme, though ultimately unsuccessful, illustrates the incentives states still choose to game the Medicaid system.

Despite the federal crackdown on assessment sprees in the early 90s, past and present North Carolina legislatures enjoyed benefits from provider taxes on hospitals, intermediate care facilities for the intellectually disabled, and nursing facilities. In 2011, the state passed the Hospital Provider Assessment Act under former Governor Beverly Perdue’s administration. An upper payment limit tax was imposed to offset private and public hospitals’ losses when treating Medicaid and uninsured patients. Once the state collects a percentage of inpatient and outpatient costs from these hospitals, enhanced reimbursements are then distributed with matching federal funds. Enhanced reimbursements usually equate to the maximum amount Medicaid services can be billed for – typically Medicare rates.

In addition, an equity tax was also levied to make reimbursement payments for the state’s private hospitals commensurate with the state’s public hospitals. According to the North Carolina Hospital Association, hospitals are reimbursed by Medicaid at 63 percent of the cost for inpatient and outpatient services combined.

The chart below outlines how the upper payment limit and equity assessments bring in more federal dollars.  For inpatient and outpatient services totaling $215 million for Fiscal Year 2011-12, North Carolina would hold onto $43 million. Meanwhile, the remaining $172 million would be given back to the taxed health systems in order to bring in federal matching funds to offset the losses hospitals endured providing care to those on Medicaid. This scheme also provides North Carolina a hefty supply of federal cash that can be used for any budgetary purpose. If the state decided to use the $43 million for Medicaid, an additional $86 million from the feds would funnel into the General Fund.

Usually provider assessments benefit hospitals, but not always. In North Carolina’s budget for fiscal year 2014-15, the General Assembly plans to keep an increased portion of the tax, reducing the total amount of enhanced reimbursements to hospitals and other providers.

Can one really blame nonprofit hospitals for playing this assessment game? It may seem that rural hospitals largely dependent on Medicare and Medicaid funds really have no choice but to be active players, as public health insurance pays well under commercial payer rates. Or maybe this rigmarole undermines those hospitals’ advocacy for the federal health law’s Medicaid expansion dollars.

Yet the assessment game paired with the federal match rate represents just two of many reasons why we spend almost half a trillion dollars on Medicaid nationwide every year. According to the CBO, program expenditures will most likely double each decade at the federal level – regardless of whether states decide to expand their medical assistance eligibility roles. Medicaid needs some serious fiscal reconstruction. State lawmakers should ultimately shoulder greater financial responsibility that will allow them to exercise increased control over their programs and hopefully implement more efficient management practices.

http://www.forbes.com/sites/katherinerestrepo/2014/09/30/gaming-the-medicaid-system/