The Biden administration is taking action against hospitals that engage in private arrangements to reimburse themselves for taxes that go towards funding coverage for low-income individuals. They argue that this practice violates federal law. The Centers for Medicare & Medicaid Services have released an enforcement plan stating that these arrangements divert Medicaid dollars away from facilities that serve the poorest patients and towards those that provide fewer or no Medicaid-covered services.
These arrangements are typically facilitated by lobbying groups representing hospitals at the state level and are often kept secret. The extent of their prevalence is unknown, although they are known to exist in states such as California and Missouri. A lawsuit in Texas could potentially block the federal government’s proposal.
Joshua Gordon, the director of health policy for the Committee for a Responsible Federal Budget, acknowledged that these associations have found a strange way to distribute the money, but without transparency, the full details are unclear. Previous efforts to prevent these payback arrangements have faced opposition from the health care industry and state health officials who fear that stricter regulations could result in reduced funding for Medicaid.
The proposed enforcement plan from the federal government would require states to monitor hospitals, nursing homes, and other healthcare providers to ensure they have not engaged in private agreements to redistribute Medicaid funds. Public and private hospitals argue that the Centers for Medicare & Medicaid Services lacks jurisdiction to regulate private transactions and has exceeded its legal authority. They warn that billions of federal dollars could be stripped from Medicaid, jeopardizing coverage for 94 million low-income individuals. Texas alone could lose $6 billion annually.
State health leaders and hospital association officials declined to comment or did not respond to inquiries from KFF Health News. While the federal government’s proposal is part of a larger Medicaid financing package, it renews previous efforts to control Medicaid spending, which has reached $734 billion in 2021. The focus this time is on provider taxes, which states impose on healthcare providers to fund their share of the Medicaid program.
California hospitals have been redistributing provider tax funds since 2009. Hospitals with a significant number of low-income patients receive more Medicaid funding than they pay in taxes, so they donate a small portion of their Medicaid funding to a charity run by the California Hospital Association. This charity awards grants to hospitals that treat a smaller share of low-income patients and do not receive as much funding back from Medicaid.
For example, Cedars-Sinai in Los Angeles, one of the wealthiest hospitals in the country, paid more in provider taxes than it received back in Medicaid dollars. However, it received additional funds from the hospital association’s charity. Conversely, Adventist Health, which serves a higher proportion of low-income individuals, paid taxes but received more in Medicaid funding than it paid. It then donated a portion of that funding to the charity.
Federal law establishes strict rules for provider taxes, including requirements for broad-based taxation and equal taxation rates for providers within a category. Taxes cannot be returned directly or indirectly to providers as part of a “hold harmless” agreement. It is the violation of this last clause that prompted the federal government to take action.
It is currently unclear how widespread these agreements are as hospitals do not disclose them. The Centers for Medicare & Medicaid Services has identified “instances” of Medicaid redistribution payments, but further details have not been provided. Some providers argue that these arrangements enable them to expand care networks and provide necessary incentives to ensure quality care for Medicaid beneficiaries.
Missouri operates a pooling arrangement where hospitals that receive more Medicaid funds than they paid in taxes can donate funds to hospitals that did not. The state claims that these agreements have been in place for decades with the knowledge and approval of the Centers for Medicare & Medicaid Services. Missouri received federal approval for its redistribution program in 2002 by pledging to use the funds for Medicaid services, unlike California.
The federal government’s plan would require states to ensure that healthcare providers do not participate in any agreements that violate federal law. State officials argue that this proposal is an impractical administrative burden that could discourage providers from participating in Medicaid.
Texas has sued the federal government over its attempt to regulate these arrangements and was successful in temporarily delaying the reporting requirement outlined in a separate letter from the Centers for Medicare & Medicaid Services. State health officials and hospital leaders believe that the government’s proposal to crack down on the redistribution of Medicaid funds is a controversial interpretation of the law.
It remains to be seen if and when federal regulators will implement the proposed plan.
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