States Recycling Medicaid Funds Face Federal Scrutiny

States are hoping to gain some slack in the tug-of-war with federal health officials over how to pay for their share of Medicaid, the jointly funded health safety net for more than 50 million poor and disabled Americans.

The federal government is threatening to crack down on cash-strapped states, which are increasingly using controversial accounting tricks to get the federal government to shoulder a great share of a state’s Medicaid costs.

Medicaid programs in 34 states may be improperly exploiting loopholes to yield more money from the federal government for health care programs, a federal official whose office is reviewing Medicaid programs state-by-state recently told a group of state policy analysts and governors’ staff. No list of states was released.

The tactic garnering the most attention involves intergovernmental transfers of money, in which states make it appear they are spending additional state dollars on publicly funded health care programs when some of the money actually is borrowed temporarily from or later returned to local governments. That, in turn, generates larger federal matching payments.

“States have worked really hard not to cut people off their (Medicaid) programs, and one of the ways they’ve done that is through alternative financing mechanisms,” said Trudi Matthews, a health policy expert at the Council of State Governments in Lexington, Ky.

Intergovernmental transfers are permitted under federal law, but federal officials are concerned some states are using them inappropriately and not paying their fair share of Medicaid, the second largest item in state budgets.

The General Accounting Office, Congress’ investigative arm, issued a report March 18 that said “states’ financing schemes undermine the federal-state partnership, as well as the program’s fiscal integrity,” because some states were receiving excessive matching funds and, in some cases, federal money intended for health care went to fund education and other state accounts.

“The problem is when states elicit funds from a provider, like a nursing home or a hospital, and they use those funds as state match and draw down federal dollars and then return those funds to the original provider or taxpayer,” said Mary Kahn, a spokeswoman for the Centers for Medicare and Medicaid Services (CMS), the federal agency that oversees Medicaid.

President Bush in his 2005 budget said he wanted to “curb” the use of transfers, but so far has provided few details. CMS is rigorously reviewing Medicaid programs for money-transfer abuses. In addition, the administration is drafting legislation to address the issue, but CMS would not provide further information. The prospect of federal legislation prohibiting transfers makes some states nervous.

CSG’s Matthews said: “States are afraid that entirely legitimate approaches … will be caught in the crosshairs and states could lose a lot of money.”

Faced with looming deficits and rising health care costs, some states that once resisted using transfers and other types of “Medicaid maximization” tools have reconsidered. The number of states employing them has grown in the past few years, policy analysts said.

For example, in fiscal 2004, 18 states imposed new provider fees on nursing homes, hospitals, pharmacies or intermediate care facilities to make state Medicaid costs look higher and thus generate a greater federal match, according to a September 2003 50-state survey by the Kaiser Commission on Medicaid and the Uninsured.

“When you’re a state and you’re in really difficult fiscal conditions and you look at the state next door to you and they’re drawing down additional federal funds with enhanced match, whatever moral obligation you felt not to engage in these arrangements tends to evaporate,” said Victoria Wachino, associate director of the Kaiser Commission.

Wachino said the federal government is engaged in a game of “gotcha” with the states. “They frequently don’t provide (states) enough guidance and then states do something and the feds come back and say, That’s not right.’ It makes it hard for the states,” she said.

New Mexico is one of several states awaiting federal approval of a new Medicaid provider fee. Gov. Bill Richardson (D) and the Legislature want to impose an $8.82 surcharge on nursing home beds. The fee would bump up New Mexico’s Medicaid spending by $22.5 million, qualifying the state for additional money from the federal government, said Betina McCracken, communications director for the New Mexico Human Services Department.

New Mexico’s lawmakers adjourned in February and have gone home. If the proposed surcharge doesn’t gain federal approval, New Mexico would have to scrounge to make up the additional money it’s counting on, McCracken said. That could prove difficult in a state that’s already planning to reduce benefits for eyeglass frames and hearing aids, to cut transportation costs for pharmacy deliveries by instituting mail-order services, and to start certifying Medicaid eligibility every six months instead of annually.

Alabama Gov. Bob Riley (R) recently lead a delegation of state leaders to Washington to plead the state’s case for a two-year renewable waiver that would allow the state to continue using transfers. “Nothing has been decided, but the governor felt (the meeting) did go well as far as opening up the lines of communication,” said John Matson, Riley’s deputy press secretary. “Obviously if we’re not able to meet our funding needs for Medicaid, we’ll have to cut programs and trim services and that’s something that none of us in state government want to see happen.”

Nebraska officials also are opposing any federal attacks on their use of transfers. “We’re just in a holding pattern, and it could go on for months,” said state Medicaid Director Bob Seiffert. The state could lose up to $9 million annually in federal funds if they are not permitted to continue making use of a loophole in Medicaid regulation. “I think the rule book needs to be written very clearly so that states know what they can and cannot do,” he said.

Good news came recently to Louisiana, which averted “a financial crisis that would have forced an eleventh-hour reshuffling of the state’s health care budget,” reported the New Orleans Times-Picayune. CMS approved the Bayou State’s financing plan, which takes advantage of a two-year federal program that allows hospitals that serve a large number of poor and uninsured patients to get reimbursed at a higher rate. Instead of channeling the extra revenue back to these charity hospitals, the Legislature in 2003 transferred the money to the state health department and it was used to generate more Medicaid dollars, Charles Castille, undersecretary for the Department of Health and Hospitals, told Stateline.org.

Kansas’ hospital reimbursements also are under federal watch. At the National Governors Association meeting in February, Gov. Kathleen Sebelius (D), who’s been very outspoken on Medicaid issues, said “states feel universally under siege” because of the escalated tensions over Medicaid.

Another wrinkle in state-federal relations over Medicaid financing is hostility over changes issued Jan. 7 in the Federal Register that would require states to prospectively budget for Medicaid. States balked at the surprise change that would have granted CMS the ability to withhold federal funds if financing tactics were deemed impermissible. Federal officials rescinded the rule and are gathering input from state Medicaid directors and governors’ staff. The rule is expected to be reissued this fall.