Provider Tax Stalls in California

Cheryl Clark, for HealthLeaders Media , April 23, 2009

A controversial proposal to tax California hospitals in order to garner as much as $3.6 billion in additional federal Medicaid matching funds recently died because the hospital leaders couldn't agree on how much each facility should be assessed.

The California Hospital Association proposal would have imposed a so-called "provider fee" on most of its 450 member facilities based on patient bed days. As much as $1.8 billion generated would be sent to the state, which would use it to collect the matching funds. The money would in turn come back to the hospitals in the form of higher Medicaid payments.

But CHA officials say they are regrouping to consider other strategies that will be less divisive, echoing a trend among health providers in many other states who have adopted or are considering similar taxes because they are desperate to find more money for dwindling coffers.

Without such a tax, the federal match would be left "on the table," CHA President C. Duane Dauner says in an April 3 statement, because California's general fund doesn't have anywhere near enough money to put up the amounts required.

California officials said they have budgeted $40.5 billion in total funds for the Medi-Cal program (the Medicaid program in California), with $20 billion attributed to federal matching funds. The $40.5 billion is allocated for a variety of Medi-Cal services, from mental health to nursing care.

"We remain interested in increasing Medi-Cal reimbursement rates and recognize that provider fees are a means toward that end. We continue to be willing to work with hospitals and other providers to address Administration concerns and anticipated federal interests," says Department of Health Care Services Director David Maxwell-Jolly.

California hospitals have a critical need to get more money to take care of 6.5 million patients enrolled in Medi-Cal. In 2008 alone, hospitals "lost more than $3.8 billion in unpaid" Medicaid costs, Dauner says.

"This is the state's responsibility to come up with this money," adds Jan Emerson, spokeswoman for the CHA. "But that's not going to happen. And if we don't do this, look at all the money we're not going to get."

She points out "California is dead last in the country" in Medicaid payments per enrollee, spending a mere $847 per adult annually, according to Kaiser Family Foundation research. That's because for years, "the state has been unable or unwilling to put up all the federal money to get back what we're entitled to," she says.

Nationally, provider taxes are in place in 43 states to varying degrees and growing, despite initial reluctance to embrace them. They are imposed on hospitals in 22 states (up from 19 in 2008), on skilled nursing facilities in 34 states, on managed care organizations in 15 states, and on intermediate care facilities in 31 states.

Mary Kahn of the Center for Medicare and Medicaid Services says her agency must approve each state's plan to use that revenue as its state share of Medicaid costs, adding that Illinois, New York, Missouri, Kansas, Idaho, and Oregon are among those that have hospital-based taxes in place.

The crux of the issue in California, and many other states where provider tax plans have not succeeded, is the direction of the flow of money required by law. Federal rules specify that what each hospital contributes in taxes cannot dictate what they receive back in Medicaid payments. That means private hospitals with few Medicaid patients might contribute more than they eventually receive while public hospitals, such as the University of California system, would receive much more than they contribute.

In California, some hospitals would be "net contributors" or losers, while others would absorb what one hospital official called "windfall profits" amounting to tens of millions of dollars.

Distribution of funds is also a stumbling block in Pennsylvania, where the governor's provider tax proposal won support in the city of Philadelphia, where 16 hospitals treat large numbers of Medicaid patients. But the plan is heatedly opposed by the Hospital and Healthsystem Association of Pennsylvania, which represents nearly 200 hospitals throughout the state, many of which have low numbers of Medicaid patients.

"We oppose provider taxes on hospitals because the [matching funds they produce] are redistributed, and we don't believe it's the proper way to fund the Medicaid program," says Jim Redmond, the Pennsylvania association's senior vice president for legislative services.

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