Ever Increasing Tax Hikes Won’t Save Medicaid

Ambulance at Emergency Entrance(A version of this Health Alert was published by the Orange County Register.)

After more than a year, California’s politicians and health insurers have finally agreed to and passed last month what California Healthline calls a “tax hike in name only” to finance Medi-Cal, California’s Medicaid program. If only it were that simple.

Funded jointly by the state and federal governments, Medicaid is the subject of perverse political incentives to hike taxes and spend more money on this welfare program, impoverishing treasuries. California and the nation need a new way to finance Medicaid.

Gov. Jerry Brown first proposed a new Managed Care Organization tax back in January 2015. It would replace a similar tax that would no longer be acceptable to the federal government by July 31. The current tax is a 3.9 percent levy on all revenues earned by Medi-Cal Managed Care Organizations, which are operated by private insurers. It raised $1.2 billion in fiscal year 2015-16. That seems straightforward enough. So why does the Obama administration disapprove of this tax?

Medicaid has a horrible financing mechanism: Federal transfers to states are not based on the number of poor people, or any other reasonable calculation. Instead, they depend on the amount of its own taxpayers’ money a state spends. Traditionally, when California spent $1 on Medi-Cal, the federal government kicked in $1. After Obamacare passed in March 2010, more people became eligible for Medi-Cal because California agreed to accept the federal funds and expand its Medi-Cal program. For the newly eligible, the federal government pays the entire cost through 2017, sliding down to 90 percent in 2020.

So, state politicians hike taxes and spending on their own citizens in order to get as much funding as possible from people in other states (via the feds). Hospitals and Medicaid MCOs maximize this by agreeing to a state tax on themselves, which the state uses to ratchet up the federal funding. After multiplication, the money goes right back to these providers.

The Obama administration – which bears the greatest responsibility for fueling this “race to the bottom” by expanding Medicaid via Obamacare – has tried to clamp down on the abuse. In 2014, it notified the state of California that revenue from the current MCO tax would no longer be allowed in the game after this fiscal year.

The reason given is that the tax is levied only on Medicaid MCOs, and is, therefore, obviously only for the purpose of ratcheting up federal dollars transferred to the state. California’s politicians and MCOs set about gaming the system by conjuring up another MCO tax that applies to allMCOs, not just Medicaid MCOs. Obviously, non-Medicaid MCOs rebelled. So, over the past year, they have rigged up a convoluted, Rube Goldberg tax with four “tiers” of taxation (plus one just for Kaiser Permanente) and rebates of corporate and gross premium taxes to compensate the non-Medicaid MCOs.

Gross revenues from the new MCO tax for FY 2016-17 will be $2.38 billion. $740 million will go to transfers between the Medicaid MCOs to compensate for moving from a simple, flat rate to a confusing system of three tiers. $371 million will cover the reduced funding from the corporate and gross premiums tax cuts. Net, that leaves $1.27 billion for Medi-Cal funding, which is about what the current MCO tax would have yielded next year.

A “tax in name only”? More like a game of whack-a-mole. Whatever the MCO tax looks like, it always grows: In two earlier fiscal years, 2010-11 and 2011-12, the total haul was just $422 million. For the last two fiscal years, 2014-15 and 2015-2016, the total was $3.2 billion. It is a prime culprit in out of control Medi-Cal spending growth.

Stopping this wild spending growth requires fundamental reform to Medicaid’s financing. Congressional Republicans have proposed “block grants,” whereby states would get federal Medicaid transfers based on their population of poor residents, not how much they gouge out of their own people. California’s politicians and health plans should encourage such reform, instead of wasting time and energy gaming the current system.

Comments (6)

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  1. Devon Herrick says:

    The state and federal government should arrive at a negotiated program, whereby states are on the hook for all costs over the agreed upon amounts. I agree that the federal contribution should be based on the number of poor people in the population. If a state wants to cover people with higher incomes (say, 100% to 133%), the federal contribution should be lower than for those earning 50% to 100% of poverty. The federal government should not allow any kind of tax on MCOs to fund its share if the primary vehicle for providing Medicaid is MCOs.

  2. Barry Carol says:

    The medical costs incurred by the Medicaid population vary enormously. The elderly needing long term custodial care in a nursing home or home healthcare or with serious conditions like congestive heart failure and mental illness are extremely expensive to cover while children and able bodied relatively healthy male adults are pretty cheap. Women who need maternity coverage are in between. Some states are considerably wealthier than others so the ability of each state to cover its share of costs also varies a lot. There is a basic set of mandated benefits and then there are optional benefits which some states choose to provide and some don’t. Finally, with the costs split between the feds and the states, nobody has sufficient incentive to root out fraud aggressively so efforts along those lines are sub-optimal.

    While I would normally favor state experimentation, in the case of Medicaid, I think the feds should finance the entire program with one set of uniform benefits. The Social Security Administration could be expanded to handle applications, income verification, recertification and other administrative tasks.

    For the non-elderly and non-disabled population, private insurers could offer something similar to Medicare Advantage by developing risk scores for each individual beneficiary and let the insurers bid in each county to offer coverage and even offer additional benefits like gym memberships while using risk scores to adjust payments relative to the bids which are based on an average risk population.

    The feds would have to raise taxes, probably via a VAT, to cover the costs. The states would have to use any savings from no longer having to pay for Medicaid to eliminate their unfunded pension and retiree health insurance liabilities and pick up more of their infrastructure maintenance and repair expenses. If they have money left over, it should be returned to state and local taxpayers.

    • Ron Greiner says:

      Barry, what is your problem with age-based tax credits for the poor to purchase health insurance of their choice in a free and open market with competition to keep quality high and costs low?

      Health care is going to destroy this country as the Baby Boomers age and Medicare’s trillions in unfunded liabilities. You have only paid $210,000, your estimate, in Medicare tax and that will be gone in the blink of an eye. One surgery cost more than that for my son 2 years ago. Taking care of you and your wife, until she is 100 years old, could cost young taxpayers millions and millions. America’s Socialized Medicine for you and your wife, after 65-years-old, is a YUGE ponzi scheme bill for America’s young taxpayers and unborn. We need to find cheaper solutions to health care than your expensive welfare, waste and fraud. Barry, you can’t just dump all of these Socialist expenses onto the next generation.

      You central planners and your one-size-fits-all plans are always so good that you say we will save enough to fund infrastructure maintenance, come on.

      Government is not the answer – it’s the problem.

  3. Barry Carol says:

    “Barry, what is your problem with age-based tax credits for the poor to purchase health insurance of their choice in a free and open market with competition to keep quality high and costs low?”

    Two things. First, you don’t have a mechanism for covering people who can’t pass underwriting. High risk pools never worked very well and 15 states didn’t offer them at all in the pre-ACA days.

    Second, similar coverage can easily vary by 100% or more from one region to another or even from one part of the same state to another. So what happens to people, especially low income people, who don’t have the money to supplement the tax credit to pay for coverage? By definition, everyone on Medicaid has a low income.

  4. Ron Greiner says:

    Barry, I’m suggesting giving people more choices, more options, more freedom. 1st, the age based tax-credits are much much cheaper than your expensive managed care Medicaid and some would choose to save the taxpayers money. With age-based tax credits employers would be free from buying health insurance and instead offer tax-free HSAs to save on payroll tax and workers comp. I’m sure many poor people would prefer tax-free HSA deposits instead of your managed care with a gym membership. The doctors would prefer insurance over Medicaid too because many won’t take Medicaid.

    If some of the poor preferred expensive traditional Medicaid, they could choose that if they can’t pass medical underwriting.

    Still others who are uninsurable might prefer a high risk pool with HSA qualifying deductibles to take advantage of their employer’s HSA deposits.

    YOU remind me of Henry Ford who thought everybody only wanted black automobiles. People need choices and some would prefer to save the taxpayer money and save for their retirement health care expenses because Medicare is a ponzi scheme that won’t be there for them so they had better think about taking care of themselves.

    Barry, you say your $210,000 that you have paid in Medicare tax is enough for you and your wife if you only live to 80 years old. What happens if your wife lives to be 100 years old? You can’t predict how much her medical care will cost in 25 years because you have no idea what will be developed in treatments and what that cost will be. I just think that your low low cost, that you are paying now, should be raised because you can afford it and you don’t want to be a leach on the unborn do you?

    Maybe you would have to cut back on travel and entertainment if you paid your fair share.

  5. The big ham says:

    I spent he week moving my mother into a skilled nursing facility . I met with AZ Medicaid to see if we could get her qualified. I was amazed to find out how easy it was to get her and my dads finances and assets spent down and deferred to qualify her for AZ Medicaid long term care. It also made me realize we as a country are headed for a financial disaster .
    My parents are on the leading edge of the baby boomer population. The baby boomers are just starting to utilize long term care facilities. This is happening at the same time Obamacare qualifid millions of new enrollies into Medicaid. Millions of baby boomers plus millions of poor all Hitting the Medicaid rolls at the same time. 4 years from now we will look back and wish we were only 19 trillion in debt.