Why Are Not-for-Profit Providers Lining Up To Be Taxed?

California hospitals are near final agreement on a self-imposed tax designed to boost federal matching funds for the state’s Medi-Cal program. The deal is years in the making and could affect billions of dollars in annual reimbursements.

While many innovative health care laws — from mandating nurse-to-patient ratios to putting chargemasters online — were pioneered in California, the state’s actually behind much of the nation this time.

Not-for-profit health care providers in more than 20 states currently are assessed some fee, despite their tax-exempt status, and there’s been a rush for similar assessments since the federal government’s stimulus legislation passed last year.

The clamor hinges on a key stimulus provision related to the Federal Medical Assistance Percentage, or the federal government’s share of Medicaid spending. The stimulus bill raised the FMAP from about 57% of Medicaid spending on average to 63%, and states responded by drawing down roughly $30 billion in added Medicaid funds in 2009. That was more than one-third of the federal spending distributed last year to help prop up state governments during the recession.

The provision is slated to expire at the end of 2010, although the jobs bill (HR 4213) that is under consideration on Capitol Hill could extend the FMAP hike through June 2011, pending the outcome of negotiations between the House and Senate.

Although the FMAP’s not widely understood or explicitly discussed in popular coverage, the measure has played a key role in the national health reform debate. Much-criticized deals to win the support of Sens. Ben Nelson (D-Neb.) and Mary Landrieu (D-La.) for Senate Democrats’ health reform legislation revolved around offering state-specific increases or changes to the FMAP. President Obama’s own framework for a health reform bill would do away with Nelson’s so-called Cornhusker Kickback, but keep Louisiana’s special FMAP protections.

Otherwise — with the White House aware of the FMAP controversy — Obama’s proposal explicitly calls for all states to “be treated equally and … not receive any special matching rates” under a plan to have the federal government cover most costs for newly eligible Medicaid enrollees in coming years.

However, the stimulus’ FMAP hike remains untouched, and providers in states like Iowa and Tennessee are pushing for new taxes in hopes of boosting total reimbursements. According to the Iowa Hospital Association, a self-imposed fee on member hospitals would annually generate $40 million in new taxes but result in $68 million in new Medicaid funds — a $28 million net gain that IHA has called a “win-win” for providers.

How each state structures the tax has been crucial to winning support. Georgia’s hospitals have fought a proposed 1.6% assessment on net patient revenue, saying it would ultimately harm organizations and boost health care costs.

For California hospitals and health systems, the proposed tax is tied to Medi-Cal volume, which appears to benefit most providers. Roughly 19% of the state’s hospitals would pay the fee but lose funds — Kaiser Permanente likely to be among them — based on low Medi-Cal volumes. The tax also appears to be gaining steam with the state’s growing uninsured population and the FMAP stimulus window closing.

Shaping the Debate

  • On March 15, Andy Stern, president of the Service Employees International Union, said that unions would support certain independent candidates this fall over House Democrats who vote against health reform, New York Times‘ “The Caucus” reports (Greenhouse, New York Times, 3/15).
  • House Democrats have begun enlisting the aid of top lobbyists for AARP and HCAN to promote health reform to seniors, Politico‘s “Live Pulse” reports.  On March 15, Rep. Frank Pallone (D-N.J.) invited members of the two groups to a strategy session to discuss messaging with the Democratic Message Group, which Pallone chairs (Hohmann, “Live Pulse,” Politico, 3/15).
  • On March 13, the Catholic Health Association split from other antiabortion groups and endorsed the Senate’s health care reform bill in a move that may improve the legislation’s prospects for passage in the House of Representatives, the AP/Philadelphia Inquirer reports (Alonso-Zaldivar, AP/Philadelphia Inquirer, 3/13).
  • On March 9, thousands of people from across the country descended on the streets of Washington, D.C., to rally against the health insurance industry and show support for Democrats’ proposals to overhaul the health care system, the Washington Post reports. The rally, organized by the labor and liberal group coalition Health Care for America Now, was scheduled to coincide with a policy conference involving insurance industry advocates (Norfleet, Washington Post, 3/10).
  • Liberal groups, drugmakers and various coalitions are attempting to counter advertisements against health reform legislation with their own ad campaigns, Roll Call reports. The ads are being run mostly in congressional districts of moderate and conservative Democrats (Roth, Roll Call, 3/16).

Related Topics

Road to Reform The Health Law