When nursing homes want to be taxed.

In May, more than 80 Republican congressmen signed a letter to Secretary of Health and Human Services (HHS) Mike Leavitt, complaining that the most recent administration efforts to transfer Medicaid costs to the states might be enacted without congressional oversight:

  ... access [to healthcare for Medicaid recipients] could be put at
  risk if you implement administratively President Bush's fiscal year
  (FY) 2007 budget proposals to reduce Medicaid expenditures by $12.2
  billion over five years. While in previous years, the President has
  called for legislation to alter Medicaid policies and spending, we are
  concerned that this year's budget would seek to enact these proposals
  without congressional review or consideration. The magnitude and scope
  of such proposals are such that input from Congress, states, health
  care providers and patient groups is essential in order to avoid
  serious, unintended consequences.

The legislators were especially upset about a White House proposal that HHS reduce the amount of money that states can collect through targeted provider taxes from 6% to 3% of the annual net revenue of each nursing home and healthcare facility. The Republican congressmen were later joined in their protests by a bipartisan group of U.S. senators, by the National Governors Association, and by the American Health Care Association (AHCA). According to AHCA, the situation is a taxpayer revolt in reverse, in which long-term care facilities want to continue paying higher taxes while the federal government insists that their taxes be reduced.

This bizarre state of affairs is a product of Medicaid's financing arrangements in which there is no fixed limit to the amount of money that the federal government contributes to each state's Medicaid program. Instead, federal largesse is governed by two factors: the value of the reimbursable healthcare provided and the amount of matching funds contributed by the state. States with large tax revenues often contribute a larger funding match and provide more generous Medicaid benefits than states with smaller tax revenues. The more generous states also receive larger federal payments and provide greater Medicaid revenue for willing and eligible healthcare providers, including nursing homes.

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This creates problems when legislators are elected with a mandate to hold the line on spending. A budget that trims $500,000 from state Medicaid expenditures will cause a loss of perhaps a $1.5 million in state revenue. It may also force the closure of small, rural facilities whose solvency depends on maintaining the current level of Medicaid reimbursements. Cost-conscious state governments are therefore faced with the paradox of how to hold the line on Medicaid expenditures while maintaining the revenue benefits of federal reimbursements.

Provider assessment fees are one solution to this dilemma. Essentially, provider assessments are a state tax levied solely on healthcare providers. The revenue from the tax can be used to fund part of the state share of Medicaid expenses and, therefore, increase federal reimbursement. In effect, provider assessment fees allow the states to force interest-free loans from the healthcare industry, the proceeds of which are returned to the industry in the form of higher levels of Medicaid reimbursements.

One example of this practice is the Illinois Provider Assessment Program. Implemented in 1991, the program resulted from a joint effort by the state government and the affected healthcare industries to provide critical institutional services to Illinois residents. As it operates today, Illinois SNFs are taxed at the rate of $1.50 per day per licensed bed, while the state's designated Intermediate Care Facilities for the cognitively impaired pay a 6% tax on annual adjusted gross revenue. During the first 10 years of the Provider Assessment Program, Illinois healthcare facilities paid $2.5 billion in state provider assessment taxes but received $4.8 billion in additional Medicaid reimbursements.

The popularity of provider assessment taxes increased rapidly among the states after 2000, when a brief recession cut sharply into state general tax revenues as Medicaid costs simultaneously skyrocketed. In early 2003, for example, New Jersey's Department of Health and Senior Services began developing a provider assessment that would apply to all nursing homes in the state. Initially, many New Jersey nursing homes opposed the plan because it would provide a net benefit only to SNFs that were willing to accept a large number of Medicaid residents but would tax all the facilities. As a result, the state government, healthcare providers, and CMS devoted two years to negotiating a program through which long-term providers pay an annual assessment to a state-operated Nursing Home Quality of Care Improvement Fund. Ironically, CMS rejected using the fund for grants for innovative patient care practices and improved staffing that could be used by facilities not funded by Medicaid. Instead, all of the money collected by the New Jersey provider assessment is used to maximize Medicaid reimbursements.

In Illinois, New Jersey, and many other states, the provider assessment "tax" has been adopted as a mechanism to generate maximum reimbursement from the federal treasury without requiring states to invest their own money. The provider "tax" thus bears parallels to the investment strategy known as the Ponzi scheme, which returns high profits to an initial group of investors derived from funds provided by subsequent investors. In its simplest form, a Ponzi scheme promises investors that if they send $2 to a given address, other investors will send $4 to them. Similarly, state governments promise nursing homes that their "investment" in a provider tax will yield double the return in additional Medicaid reimbursements. The big difference is that the federal government prosecutes private-sector Ponzi schemes as illegal scams, while provider assessments are specifically authorized by CMS. Returns for the "initial investors" are built in, automatic, and officially sanctioned.

As mentioned earlier, the White House wants CMS to continue to allow states to use provider assessments to circumvent the requirement that contributions from both the states and the federal government are used to fund Medicaid. But as a means of cost control, the federal budget scheduled to begin on October 1 proposes to replace the arbitrary cap on provider assessments of 6% of SNF annual revenue with an equally arbitrary cap of 3%. Because this change translates into federal budget savings of millions of dollars of lost federal Medicaid reimbursements, Congress is justified in demanding a serious discussion of its implications. Perhaps the discussion should consider the logic of a funding system that encourages state governments, CMS, and the long-term care industry to finance operations based on what looks a great deal like an illegal con game.

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