MEDICAID: Legal Loophole Generates Billions in Spending

      A "back-door financing scheme," made possible by a legal loophole, is driving up federal Medicaid spending by at least $2.5 billion per year, and efforts to stop the practice are meeting with resistance from states and health facilities concerned that funding for their programs will drop as a result, the Wall Street Journal reports. Pennsylvania, New York, Illinois and Nebraska are among the states conducting the complicated transactions, and another 11 states have told HCFA -- which will soon propose a rule to close the loophole -- that they intend to do the same. Although the disputed financial dealings take various forms, the Journal offers one example: A county-owned hospital borrows money from a bank to lend to the state, which then uses the money to secure matching federal Medicaid funds. The state then repays the hospital and uses the rest of the federal money as it sees fit, on health care or other unrelated projects such as transportation. Congress is prodding HCFA to close the loophole, calling it an "accounting gimmick" that "inappropriately circumvents" the matching relationship between state and federal funds. But a group of 12 governors wrote a letter to President Clinton last month arguing that such a measure would leave state Medicaid programs "greatly impaired," and states have enlisted lobbying firms to stop HCFA from closing the loophole. The HHS inspector general and the GAO are currently looking into the practice (McGinley, 7/25).