Medicaid Provider Taxes

Alison Mitchell
Analyst in Health Care Financing

States are able to use revenues from health care provider taxes to help finance the state share of Medicaid expenditures. Federal statute and regulations define a provider tax as a health carerelated fee, assessment, or other mandatory payment for which at least 85% of the burden of the tax revenue falls on health care providers. In order for states to be able to draw down federal Medicaid matching funds, the provider tax must be both broad-based (i.e., imposed on all providers within a specified class of providers) and uniform (i.e., the same tax for all providers within a specified class of providers). Also, states are not allowed to hold the providers harmless for the cost of the provider tax (i.e., they can not guarantee that providers receive their money back).

A vast majority of states use at least one provider tax to help finance Medicaid. Many of these states use the provider tax revenue to increase Medicaid payment rates for the class of providers, such as hospitals, responsible for paying the provider tax. This financing strategy allows states to fund increases to Medicaid payment rates without the use of state funds because the increased Medicaid payment rates are funded with provider tax revenue and federal Medicaid matching funds. States also use provider tax revenues to fund other Medicaid or non-Medicaid purposes.

States first began using health care provider taxes to help finance the state’s share of Medicaid expenditures in the mid-1980s. Some states were particularly aggressive in their use of provider taxes. As a result, in the early 1990s, the federal government imposed statutory and regulatory limitations on states’ use of health care provider tax revenue to finance Medicaid.

While federal requirements allow states to impose provider taxes on 19 classes of health care providers, the classes of providers that are most often taxed include nursing facilities, hospitals, intermediate care facilities for individuals with mental retardation or developmental disabilities (ICF-MR/DD), and managed care organizations. During the most recent recession, a number of states took action to generate additional provider tax revenue, and these actions mainly involved hospital and nursing facility taxes.

Even with the statutory and regulatory limitations, provider taxes continue to cause tension between the federal government and the states. As a result, some deficit reduction proposals include a recommendation to limit states’ ability to use provider taxes to finance the state share of Medicaid expenditures. This limitation would decrease federal Medicaid payments to states.

This report provides background regarding states’ use of provider taxes in the 1980s and describes the relevant federal statutes and regulations, which were mostly established in the early 1990s. The report explains how states use provider taxes to help finance Medicaid and provides information regarding the extent to which states currently use such taxes. The report ends with a discussion of the provider tax provisions in various deficit reduction proposals.

Date of Report: March 15, 2012
Number of Pages: 17
Order Number: RS22843
Price: $29.95

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The Independent Payment Advisory Board

Jim Hahn
Specialist in Health Care Financing

Christopher M. Davis
Analyst on Congress and the Legislative Process

In response, in part, to overall growth in Medicare program expenditures and growth in expenditures per Medicare beneficiary, the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148, as amended) created the Independent Payment Advisory Board (IPAB, or the Board) and charged the Board with developing proposals to “reduce the per capita rate of growth in Medicare spending.” The Secretary of Health and Human Services (the Secretary) is directed to implement the Board’s proposals automatically unless Congress affirmatively acts to alter the Board’s proposals or to discontinue the automatic implementation of such proposals.

The annual IPAB sequence of events begins each year, starting April 30, 2013, with the Chief Actuary of the Centers for Medicare & Medicaid Services calculating a Medicare per capita growth rate and a Medicare per capita target growth rate. If the Chief Actuary determines that the Medicare per capita growth rate exceeds the Medicare per capita target growth rate, the Chief Actuary would establish an applicable savings target—the amount by which the Board must reduce future spending. This determination by the Chief Actuary also triggers a requirement that the Board prepare a proposal to reduce the growth in the Medicare per capita growth rate by the applicable savings target. The Board cannot ration care, raise premiums, increase cost sharing, or otherwise restrict benefits or modify eligibility. In generating its proposals, the Board is directed to consider, among other things, Medicare solvency, quality and access to care, the effects of changes in payments to providers, and those dually eligible for Medicare and Medicaid. If the Board fails to act, the Secretary is directed to prepare a proposal.

Board proposals must be submitted to the Secretary by September 1 of each year and to the President and Congress by January 15 of the following year. Board proposals are “fast-tracked” in Congress, and IPAB proposals go into force automatically unless Congress affirmatively acts to amend or block them within a stated period of time and under circumstances specified in the act. Section 3403(d) of the act establishes special “fast track” parliamentary procedures governing House and Senate committee consideration, and Senate floor consideration, of legislation implementing the Board or Secretary’s proposal. These procedures differ from the parliamentary mechanisms the chambers usually use to consider most legislation and are designed to ensure that Congress can act promptly on the implementing legislation should it choose to do so. PPACA also established a second “fast track” parliamentary mechanism for consideration of legislation discontinuing the automatic implementation process for the recommendations of the Board.

The Board’s charge is to develop proposals for the Secretary to implement that reduce the per capita growth in Medicare expenditures, not to reduce Medicare expenditures. Therefore, while the CBO projects that the cumulative impact of the Board’s recommendations from 2015 through 2019 will reduce total spending by $15.5 billion, during the same period, Medicare expenditures will total $3.9 trillion with average spending per beneficiary forecast to increase from $13,374 to $15,749. While the Board’s potential impact on total expenditures is likely to be relatively small compared to overall Medicare expenditures, its impact on particular Medicare providers or suppliers may be significant, particularly if the Board alters payment mechanisms.

The President’s FY2013 budget, as submitted to Congress on February 13, 2012, includes a proposal to strengthen the IPAB. H.R. 452, the Medicare Decisions Accountability Act of 2011, which would repeal the IPAB, was ordered to be reported out of the House Energy and Commerce Committee on March 6, 2012 and out of the House Committee on Ways and Means on March 8, 2012.


Date of Report: March 12, 2012
Number of Pages: 40
Order Number: R41511
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Medicaid: A Primer

Elicia J. Herz
Specialist in Health Care Financing

In existence for 47 years, Medicaid is a means-tested entitlement program that financed the delivery of primary and acute medical services as well as long-term care to more than 69 million people in FY2011. The estimated annual cost to the federal and state governments was roughly $404 billion in FY2010. In comparison, the Medicare program provided health care benefits to nearly 48 million seniors and certain persons with disabilities, and cost roughly $523 billion in FY2010.

In its report The Budget and Economic Outlook: An Update, August 2011, the Congressional Budget Office (CBO) projects that Medicaid outlays will rise an average annual rate of 9.0% during the 2013-2021 period due to both demographic changes and an increase in enrollment beginning in 2014 as a result of significant program changes under the recent Patient Protection and Affordable Care Act (ACA). That enrollment increase is estimated to be roughly 17 million individuals by 2021. This legislation also increased the federal share of Medicaid program costs for selected groups of beneficiaries and particular services in future years. Because Medicaid represents a large component of federal mandatory spending, Congress is likely to continue its oversight of Medicaid’s eligibility, benefits, and costs.

Understanding the complex statutory and regulatory rules that govern Medicaid is further complicated by the fact that each state designs and administers its own version of the program under broad federal rules. State variability is the rule rather than the exception in terms of eligibility levels, covered services, and how those services are reimbursed and delivered. The ACA makes both mandatory and optional changes to Medicaid along some of these dimensions.

This report describes the basic elements of Medicaid, focusing on the federal rules governing who is eligible, what services are covered, how the program is financed, and how beneficiaries share in the cost of care, how providers are paid, and the role of special waivers in expanding eligibility and modifying benefits. Examples of both mandatory and optional eligibility groups and benefits as defined in the federal statute are described. Basic program statistics are also provided. Finally, selected legislative changes at the federal level via the ACA that affect Medicaid in significant ways are also described.


Date of Report: March 5, 2012
Number of Pages: 18
Order Number: RL33202
Price: $29.95

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Medicare’s Skilled Nursing Facility Primer: Benefit Basics and Issues

Scott R. Talaga
Analyst in Health Care Financing

A Medicare skilled nursing facility (SNF) is an institution, or distinct part of an institution (e.g., building, floor, wing), that provides post-acute skilled nursing care and/or skilled rehabilitation services, has in effect a written agreement to transfer patients between one or more hospitals and the SNF, and is certified by Medicare. In general, “skilled” nursing and rehabilitative care are services ordered by a physician require the skills of professional personnel (i.e., registered nurse, physical therapist) and are provided under the supervision of such personnel.

The Medicare SNF benefit has drawn attention due to the rapid increase in SNF expenditures. In 2009, Medicare Parts A and B payments to SNF providers totaled $25.5 billion, having grown at an average annual rate of 10.2% since 2000. SNF payment reductions have been recommended by various deficit reduction groups. Some of the recommendations have included reducing the SNF reimbursement rate and reducing or eliminating Medicare bad debt reimbursement.

Given the beneficiary has met certain requirements, a Medicare beneficiary is entitled to 100 days of SNF care for each Medicare-covered SNF stay. To be eligible for SNF coverage, a Medicare beneficiary must have been an inpatient of a hospital for at least 3 consecutive calendar days and transferred to a participating SNF usually within 30 days after discharge from the hospital. Beneficiaries must also receive treatment at the SNF for a condition they were receiving treatment for during their qualifying hospital stay (or for an additional condition that arose while in the SNF). For the first 20 days of SNF coverage, Medicare beneficiaries have no copayment. Medicare beneficiaries have a daily SNF copayment for the 21st through the 100th day indexed annually at one-eighth (12.5 percent) of the current Part A deductible. For 2012, the daily copayment is $144.50.

SNFs are reimbursed under a prospective payment system (PPS), which began on July 1, 1998. The PPS reimbursement is a per diem “per day” amount that covers most costs of furnishing SNF services to Medicare beneficiaries. With the exception of certain high-cost ancillary services, the SNF PPS bundles covered-SNF services into a single per diem reimbursement rather than Medicare paying for each service individually.

This report describes the Medicare SNF benefit and the reimbursement system for SNF services. In addition, this report describes recent issues, as well as congressional and other proposals designed to slow the growth of Medicare SNF expenditures.


Date of Report: March 9, 2012
Number of Pages: 19
Order Number: R42401
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Medicare Advantage Risk Adjustment and Risk Adjustment Data Validation Audits

Paulette C. Morgan
Specialist in Health Care Financing

According to the American Academy of Actuaries, “[h]ealth risk adjustment is the process of adjusting payments to organizations (usually health insurance plans) based on differences in the risk characteristics of people enrolled in each plan.” By adjusting payments to compensate organizations for the relatively higher medical costs associated with an ill individual, plans should, all other things being equal, be indifferent between enrolling the sicker person or the relatively healthier one.

Medicare Advantage (MA) is an alternative way for Medicare beneficiaries to receive covered benefits. Under MA, private health plans are paid a per-person amount to provide all Medicarecovered benefits (except hospice) to beneficiaries who enroll in their plan. The Centers for Medicare & Medicaid Services (CMS) risk adjusts the payments to MA plans. The size of the adjustment depends on the demographic and health history of each plan enrollee. The payment adjustment takes into account the severity of a beneficiary’s illness, the accumulated effect of multiple diseases, as well as interactive effects—instances where having two or more specified diseases or characteristics results in expected health care expenditures that are larger than the simple sum of the effects. The payments are not adjusted for short-term illnesses because they are assumed to be poor predictors of future health spending.

MA plans provide information to CMS to justify the risk-adjusted payments; CMS therefore audits the plans to ensure that the risk-adjusted payments that the plans are claiming are in fact supported by the medical record. Based on the audit findings, plans may have to pay back money when the medical record does not provide evidence for the risk-adjusted payment they had received. Alternatively, the audit may reveal additional illnesses that had not previously been taken into account. Previously, MA plans were only required to pay back money (or receive money) based on the findings from the audited enrollee records. CMS has proposed extrapolating the audit findings to apply to all enrollees in the audited plan.

Some concerns have been raised about risk adjustment under Medicare Advantage and the MA plan audits. First, risk adjustment compensates plans for the average predicted cost of any particular diagnosis. To the extent that MA plans could enroll beneficiaries with below-average expenditures relative to the average for their disease, those plans would be over-compensated by risk adjustment. Second, according to the American Academy of Actuaries, the Medicare fee-forservice data used in the MA risk adjustment model were not audited for accuracy and may contain errors. The audits under MA, however, would apply the risk adjustment factors to data that were validated. The inconsistency of using audited data in one circumstance and non-audited data in another could create uncertainty; however, a for-for-service adjustment factor added by CMS in the final notice of payment methodology may remedy this concern. Third, some plans have expressed concern that recoveries from the audits may place them at substantial financial risk.

This report describes how CMS pays providers under Medicare Advantage and how these payments are risk adjusted. In addition, it describes how risk scores for individual Medicare Advantage enrollees are initially generated and change over time, and it discusses how CMS audits risk-adjusted MA payments. It concludes with a short discussion of several concerns raised with risk adjustment and the audit process.


Date of Report: March 5, 2012
Number of Pages: 30
Order Number: R42134
Price: $29.95

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Child Welfare: Health Care Needs of Children in Foster Care and Related Federal Issues

Evelyne P. Baumrucker
Analyst in Health Care Financing

Adrienne L. Fernandes-Alcantara
Specialist in Social Policy

Emilie Stoltzfus
Specialist in Social Policy

Bernadette Fernandez
Specialist in Health Care Financing

Approximately 662,000 children spend some time in foster care each year. Most enter care because they have experienced neglect or abuse by their parents. Between 35% and 60% of children entering foster care have at least one chronic or acute physical health condition that needs treatment. As many as one-half to three-fourths show behavioral or social competency problems that may warrant mental health services. Many health and mental health needs persist. A national survey of children adopted from foster care found that 54% had special health care needs and research on youth who aged out of foster care shows these young adults are more likely than their peers to report having a health condition that limits their daily activities and to participate in psychological and substance abuse counseling.

The Social Security Act addresses some of the health care needs of children in, or formerly in, foster care through provisions in the titles pertaining to child welfare (Titles IV-B and IV-E) and to the Medicaid program (Title XIX). Under child welfare law, state child welfare agencies are required to have a written plan for each child in foster care that includes, among other items, the child’s regularly reviewed and updated health-related records. In addition, state child welfare agencies, in cooperation with state Medicaid agencies, must develop a strategy that addresses the health care needs of each child in foster care. Upon aging out of foster care, youth must receive from the state child welfare agency a copy of their health record and information about health insurance options and designating other individuals to make health care decisions on their behalf if they are unable to do so on their own.

States are not permitted to use federal child welfare program funds to pay medical expenses of children in care or those who left foster care due to their age or placement in a new permanent family. However, states can (and do) receive reimbursement through Medicaid to pay a part of the medical expenses, including well-child visits and other benefits, for many of these children and youth. Most children in foster care are eligible for Medicaid under mandatory eligibility pathways, meaning that states must provide coverage because these children meet low-income and other eligibility criteria. Children in foster care who are not eligible under mandatory pathways generally qualify for Medicaid because the state has implemented one or more optional eligibility categories allowing coverage. Further, some children who leave foster care for legal guardianship remain eligible for Medicaid on a mandatory basis, as do most children with statedefined “special needs” who leave foster care for adoption. The income and resources of the child’s guardian or adoptive parent are not considered under this eligibility pathway. Separately, youth who age out of foster care may be eligible for Medicaid through one of the mandatory eligibility pathways that are available to adults generally. States also have the option of providing Medicaid to youth up to the age of 21 if they aged out of foster care. However, the Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as amended), requires that beginning on January 1, 2014, states must provide Medicaid to young people under the age of 26 who aged out. Unlike most other Medicaid pathways, coverage must be provided without regard to the income and assets of these young people. This new pathway parallels another requirement in ACA that generally directs health insurance companies to continue to provide coverage to children up to age 26 who are enrolled in their parents’ health care plans.

ACA made additional changes to assist adults in obtaining private health insurance, and young adults leaving foster care may benefit from these changes. ACA may also include new opportunities for providing health insurance to child welfare-involved children and their families, such as those children in foster care who are vulnerable to losing Medicaid upon returning home.


Date of Report: February 27, 2012
Number of Pages: 56
Order Number: R42378
Price: $29.95

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