Trend #9: State Abuse of Medicaid Matching Funds

When states set aside money to be spent on Medicaid, the federal-state program providing health care to low-income Americans, they receive matching funds from the federal government. These matching funds are made available according to a formula known as the Federal Medical Assistance Percentages (FMAP), based on the state’s level of poverty and unemployment.[1]

For example, in Fiscal Year 2012, Mississippi has the highest FMAP (74.18 percent), meaning that for every $1.00 Mississippi spends on Medicaid, the federal government kicks in $2.87. Fourteen states tie for the lowest FMAP (50 percent), which means that for every $1.00 they spend on Medicaid, the federal government kicks in another $1.00. (See Table for complete list.)

Table: Federal Medicaid Matching Fund Rates and States with Health Provider Taxes

State
Federal Medicaid Matching Fund Rate, FY 2012
Federal Contribution for Every Spent State Medicaid Dollar
Rank
Increased Health Provider Tax in 2009 or 2010
Alabama68.62%$2.199X
Alaska50.00%$1.0037
Arizona67.30%$2.0610
Arkansas70.71%$2.415
California50.00%$1.0037
Colorado50.00%$1.0037X
Connecticut50.00%$1.0037
Delaware54.17%$1.1834
Florida56.04%$1.2731X
Georgia66.16%$1.9613X
Hawaii50.48%$1.0236
Idaho70.23%$2.367X
Illinois50.00%$1.0037
Indiana66.96%$2.0311X
Iowa60.71%$1.5523X
Kansas56.91%$1.3228X
Kentucky71.18%$2.473
Louisiana61.09%$1.5722
Maine63.27%$1.7220X
Maryland50.00%$1.0037
Massachusetts50.00%$1.0037
Michigan66.14%$1.9514
Minnesota50.00%$1.0037
Mississippi74.18%$2.871X
Missouri63.45%$1.7419
Montana66.11%$1.9515
Nebraska56.64%$1.3129
Nevada56.20%$1.2830
New Hampshire50.00%$1.0037
New Jersey50.00%$1.0037X
New Mexico69.36%$2.268
New York50.00%$1.0037X
North Carolina65.28%$1.8816
North Dakota55.40%$1.2432
Ohio64.15%$1.7917X
Oklahoma63.88%$1.7718
Oregon62.91%$1.7021X
Pennsylvania55.07%$1.2333X
Rhode Island52.12%$1.0935X
South Carolina70.24%$2.366
South Dakota59.13%$1.4525
Tennessee66.36%$1.9712X
Texas58.22%$1.3926
Utah70.99%$2.454X
Vermont57.58%$1.3627
Virginia50.00%$1.0037
Washington50.00%$1.0037X
West Virginia72.62%$2.652
Wisconsin60.53%$1.5324X
Wyoming50.00%$1.0037
District of Columbia70.00%$2.33(8)

Because Medicaid’s federal matching is open-ended, states can abuse it to bridge budget gaps. In 2004, the U.S. government’s General Accounting Office (GAO, now the Government Accountability Office) warned that the design of Medicaid matching funds enabled states to funnel Medicaid money into state general coffers. During the recent downturn, many states did exactly that.[2] They do so by taxing health care providers, using the collected revenue to qualify for federal matching funds, and then using the federal dollars to compensate Medicaid providers.

MedicaidThese hospital taxes or doctors’ taxes exist in 46 states and the District of Columbia.[3] During the recent economic downturn, 20 states increased health provider taxes to take advantage of federal matching funds, particularly because the 2009 stimulus bill temporarily made FMAP federal matching fund rates more generous. (In 2009, FMAP matching fund rates ranged from 56.2 percent to 83.6 percent.) States’ use of the matching funds to backfill general state spending led to a sharp jump in federal Medicaid expenditures, from $201 billion in 2008 to $250 billion in 2009.[4] As states receive more federal funds for Medicaid, the federal government must tax or borrow to pay for this spending increase.

As one example of a flurry of new state medical taxes, in 2009, Wisconsin Governor Jim Doyle (D) pushed through a 20 percent increase in the state’s health provider tax. The tax increase led to an increase of federal matching funds received by the state from $635 million to $796 million, with an estimated $292 million of the money being diverted for non-Medicaid uses.[5] Health care providers that benefit from increased Medicaid reimbursements often support these taxes if the returns exceed the tax payments.[6] The actual purpose of these taxes is to obtain additional federal funds.

Those states that were most likely to abuse Medicaid matching funds are those states that have been most irresponsible with managing their state budget. Their use of Medicaid funds to backfill other state programs is at odds with the purpose of the Medicaid program, but the open-ended nature of federal matching encourages this practice. While using health provider taxes and abusing Medicaid matching funds can temporarily patch a state budget, these solutions rely on the continued dysfunction of the Medicaid matching fund system.

Note: This publication is part of our “Top 10 State Tax Trends in Recession and Recovery” series.

[1] See Department of Health & Human Services, Federal Financial Participation in State Assistance Expenditures; Federal Matching Shares for Medicaid, the Children’s Health Insurance Program, and Aid to Needy Aged, Blind, or Disabled Persons for FY 2012, 75 Fed. Reg. 217 (Nov. 10, 2010), http://aspe.hhs.gov/health/fmap12.shtml.

[2] See Justin Higginbottom, State Hospital and Medical Provider Taxes: Not What the Doctor Should Order, Tax Foundation Fiscal Fact No. 203 (Dec. 9, 2009), http://www.taxfoundation.org/news/show/25599.html.

[3] National Conference of State Legislatures, Health Care Providers and Industry Taxes/Fees (Feb. 2012), http://www.ncsl.org/issues-research/health/health-provider-and-industry-state-taxes-and-fees.aspx.

[4] U.S. Office of Management & Budget, The President’s Budget for Fiscal Year 2013: Historical Tables (2012), http://www.whitehouse.gov/omb/budget/Historicals.

[5] See Brien Farley, Wisconsin Seeks More Medicaid Money to Heal Sick State Budget, Heartland Budget & Tax News (Nov. 3, 2009), http://news.heartland.org/newspaper-article/2009/11/03/wisconsin-seeks-more-medicaid-money-heal-sick-state-budget.

[6] In one state, a hospital association opposed the hospital assessment, concluding that the state planned to siphon so much money that they would not be fully reimbursed from higher Medicaid payments. See Ohio Hospital Association, New State Hospital Tax: Extra Burden in a Failing Economy (Nov. 2009), http://ohanet.org/SiteObjects/57AEE3CFB2585F16682EF98E1BBE3B48/State%20Budget%20Survey%20Report.pdf.