On Feb. 21, the Centers for Medicare & Medicaid Services (CMS) issued a final regulation, effective Apr. 22, 2008, that changes the Federal rules governing the health care-related taxes states may impose in order to receive Federal matching payments under the Medicaid program. State government officials across the country fear that the new rules will result in losses of hundreds of millions of dollars in Federal Medicaid funding. CMS estimates that the rule will save the Federal government $430 million in Medicaid spending over the next five years, though many state budget analysts believe the actual impact on state budgets will be much higher. Thus, it may be deemed necessary, once the rule is fully analyzed, to ask Congress to stop this rule along with the other Medicaid rules Congress has already placed, or is considering placing, under moratorium.

Federal Reimbursement Limits: Since the early 1990s, the Federal government has tried to limit states' ability to reimburse health care providers for state taxes the providers pay. This effort began after the Federal government alleged that some states were taxing providers, using the resulting revenue to draw down Federal Medicaid matching dollars, and then reimbursing providers directly for the cost of the tax. The Federal government contended that such arrangements allowed states to avoid putting up a true state share of Medicaid spending, thus inappropriately shifting the costs of the Medicaid program to the Federal government.     

In response, Congress (through law) and CMS (through regulation) established rules and principles to determine permissible provider taxes. In general, the Federal government defines "permissible classes" of providers that may be taxed (such as hospitals and skilled nursing facilities) and then requires that taxes be broad-based and uniform (for example, providers within a class are generally taxed at the same rate) and that individual providers are not "held harmless"—that is, reimbursed for the cost of the tax, through Medicaid or other state payments. The requirements that taxes be broad-based and uniform may be waived—a tax can exclude certain providers within a class, for instance—but only if the tax meets a complicated test to determine that it is generally redistributive and that the amount a provider pays is not directly correlated to Medicaid or other state payments the provider receives.

Final Rule: The final rule tightens the provider tax rules in potentially significant ways. First, responding to a provision in the Tax Relief and Health Care Act of 2006 (P.L. 109-432), the rule reduces the maximum permissible tax on net patient service revenues from 6% to 5.5% for the period Jan. 1, 2008, through Sept. 30, 2011—a reduction that was the result of a compromise, after major advocacy by GNYHA, the American Hospital Association, and others. That year, President Bush proposed reducing the maximum tax to 3%, which would have greatly reduced Federal Medicaid funding to states across the country.     

Second, and more significant, state government officials are concerned that the rule will result in more restrictive interpretations of what types of taxes are permissible and much tighter rules about what types of payments to providers, including non-Medicaid payments, may trigger an allegation that a state is holding a provider "harmless" from the cost of a tax and, in turn, trigger reductions in Federal Medicaid revenue. State officials also fear that the Federal government has replaced statistical tests, under which they could easily tell if a tax was permissible, in favor of more subjective judgments, making it difficult for states to enact taxes on providers with any certainty.      

GNYHA is working closely with the Spitzer Administration to determine the potential impact of the new final rule on NYS, and will work closely with the Governor and the New York delegation on solutions.