Why States Tax Medicaid Providers

Medicaid Provider Tax

State healthcare “provider taxes” are the target for reductions in Medicaid. Just how does a state taxing a healthcare provider end up increasing the costs of Medicaid?

Essentially, provider taxes help some states partially fund their Medicaid program. Instead of facing irate taxpayers with a tax increase, the tax is paid by hospitals and nursing homes. The logic, if there is any, is that healthcare providers benefit from Medicaid paying for patient care. As you will read, this turns out to be a punishment. This may eventually destroy the system where it is most needed.

Hospitals set rates based on what a person lacking insurance might be charged. This is the list price or retail price in most businesses.

Insurance companies annually negotiate lower rates for their customers. They do this to have competitive insurance premiums.

Medicare rates are generally one-third to one-fifth of the list rates.

Medicaid rates are generally two-thirds of the Medicare reimbursement rates.

The downside of taxing healthcare providers is that they must offset the tax by shifting costs to others using their services. Since States issue licenses to healthcare providers, the providers have little room for complaining.

Let’s use a grocery store as an example.

· Sylvia pays the list price of $250 for her groceries.

· Sally is charged $200 because she is part of a loyalty program.

· Herbert is over 65 and gets a senior discount down to $82. This represents what Medicare rates are for hospitals

· Buford is in a State welfare program that pays $55 in vouchers.

The grocery store has 1000 customers a week. 10% pay full price. 50% are in the loyalty program, 20% are seniors, and the remaining 20% are on the State voucher program.

Here is how much each group represents in grocery store revenue:

· Sylvia type: 100 X $250 = $25,000

· Sally type: 500 X $200 = $100,000

· Herbert type: 200 X $82 = $16,400

· Buford type: 200 X $55 = $11,000

· Total Income= $152,400

· Average Sale = $152

The grocery store must earn enough profit from its top two groups to offset the losses from serving the bottom two groups.

The grocer knows this is a consistent split and sets up the cost structure for the $152 average sale. He can squeeze 10% out, so his average cost is $136.80. If his customer mix is constant, he can make a living.

Let’s look at the profit per customer group.

· Sylvia’s margin = profit $113.20

· Sally’s margin = profit $63.20

· Herbert’s margin = loss of $54.80

· Buford’s margin = loss of $81.80

The grocer’s profit is $8 per customer.

At the end of the week, the grocer pays a 5% special “food provider” sales tax for the State government for the voucher program Buford is on.

This tax money is then used by the State to get the Federal government to increase funds for the State voucher program. This helps the State government increase the number of people enrolled. But it increases the number of people the “food providers” serve at a loss.

The system works for a while. The number of State voucher customers shopping at the grocery store grows. When it reaches 300, a 50% increase, the grocery store is serving more customers overall, but it is now losing money.

The grocer gives up and closes.

The big losers are the shoppers, who must now find another store. Depending on the community, the nearest store may be miles away. Some shoppers decide to buy groceries online. The online grocery stores do not pay the State “food provider” tax. This costs the State matching funds from the Feds.

Now, swap the grocery store for a hospital.

The State “provider tax” is used to increase the 90% matching the Federal Government does for Medicaid patients. This allows the State to add more people to the Medicaid rolls. Some States even use the funds to provide Medicaid to people who don’t pay taxes.

In our hospital example, Sylvia is a private-pay patient; Sally is fully insured by her company; Herbert is on Medicare; and Buford is on Medicaid.

Unlike the grocery store, the profitable hospital system manipulates charges and insurance rates to offset some of the influx of Medicaid patients. This is how healthcare costs get shifted.

It is a different situation for hospitals located in poor inner-city areas and rural towns. These hospitals already have an unmanageable number of Medicaid patients and lack the fully insured patients to offset this cost. The more people enrolling in Medicaid, the more money these hospitals lose. Just as with the grocery example, these hospitals and physicians cannot continue serving their patients indefinitely while losing money.

Our elected officials continue to fool around with the healthcare system. The system is bloated, broken, and corrupt.

Taxpayers should have reasonable access to healthcare at a reasonable cost. Everyone should be covered by some form of insurance. No family should ever file for bankruptcy over medical bills.

The Federal government should create a bipartisan panel to figure out how to transition to a system such as Canada’s. Our healthcare system costs 18% of Gross Domestic Product, while Canada and Britain are closer to 12%. Why should healthcare cost $15,000 per person here while in Canada it is $9,000? And Canadians live longer.

Instead of fooling around, let’s focus on creating one that works for all of us.

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