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Ongoing Medicaid reform initiatives seeking to rein in unnecessary spending and better coordinate patient care may improve North Carolina’s medical assistance program to a degree, and the special interests involved ostensibly have good intentions.  But the overarching fiscal flaw from which Medicaid suffers is that the state and federal governments jointly fund it.

Because the federal government typically covers at least 50 percent share of a state’s Medicaid bill (over 65 percent for the majority of medical services provided in North Carolina), the national tab increases at an excessive pace. And because most state Medicaid expenditures trigger federal funds, legislators and health systems have devised artful strategies that minimize the use of state funds while maximizing federal money.

A specific example is provider assessments, inside deals initiated by hospitals and states in the mid 1980s. Medicaid providers volunteered to be assessed, or taxed, by states. In return, those states would use the revenue to shell out enhanced reimbursement rates, knowing that this would trigger 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 Amendments placed restrictions on states that prevented them from running up Medicaid’s federal bottom line in this way. 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 levied 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 are 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 of federal taxpayer money to supposedly 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 organizations into a class consisting of all types of managed care. 

Regardless, North Carolina still enjoys benefits from provider taxes on hospitals, intermediate care facilities for the intellectually disabled (ICF-IDs), and nursing facilities. In 2011, the Hospital Provider Assessment Act was passed under former Governor Beverly Perdue’s administration. An upper payment limit (UPL) 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 will also be 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 UPL 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 channeled back to the taxed health systems that would bring in federal matching funds to offset the losses hospitals endure when providing care to those on medical assistance. This enacted law also provides North Carolina a hefty supply of federal cash for any desirable budgetary purpose. If the state decided to use the $43 million for Medicaid purposes, an additional $86 million from the feds would funnel into the General Fund. 

Usually provider assessments benefit the hospitals, but not always. With the enacted budget for fiscal year 2014-15, the General Assembly plans to hold onto an increased portion of the collected tax, reducing the total amount of enhanced reimbursements.

Can one really blame nonprofit hospitals from playing the 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 perhaps this rigmarole undermines hospitals’ advocacy for the federal health law’s Medicaid expansion dollars.   

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