Report: States raise taxes for federal matching funds on Medicaid

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In response to budget strains and high Medicaid demand, many states are raising taxes with healthcare providers in the crosshairs because revenue raised from those taxes can be used to obtain a larger amount of federal matching funds, according to the Tax Foundation.

Out of 22 states with significant health providers or hospital taxes, six states have enacted or expanded those taxes within the last year, the educational organization reported, while enactments or expansions from Arkansas, Michigan, Vermont and Washington are still pending.

“When states raise money they plan to spend on Medicaid, they receive matching funds from the federal government depending on the state’s level of poverty and unemployment,” the foundation reported. As an example, the state of Mississippi, during the federal fiscal year 2009, had the highest federal matching fund rate (Federal Medical Assistance Percentages) and received $5.10 for each dollar the state spent on Medicaid, according to the Washington, D.C.,-based Tax Foundation.

In 2009, Wisconsin Gov. Jim Doyle signed into law a state budget including a 20 percent increase in the health provider tax that would result in federal Medicaid matching funds increasing from $635 million to $796 million, the organization reported. “It is estimated that $292 million of that amount will be used for non-Medicaid purposes.”

Because Medicaid is an entitlement program, federal matching is open-ended if states meet eligibility criteria. “As state get more federal funds for Medicaid, the federal government must tax or borrow to pay the spending increase,” stated the organization.

However, some providers that offer few Medicaid services must pay the tax without much reimbursement. According to the organization, the Ohio Hospital Association noted they will not be fully reimbursed from Ohio's $718 million 2009 hospital tax and that most hospitals have had to cut expense to break even.

According to the Tax Foundation, the American Recovery and Reinvestment Act of 2009 provides increased matching rates for Medicaid during the period Oct. 1, 2008 through Dec. 31, 2010, totaling an additional $87 billion in federal funding.