Medicaid managed care taxes scrutinized

States' taxing of Medicaid managed care organizations to raise revenue for state-share Medicaid payments may be illegal, according to the HHS Inspector General. If so, this raises serious questions that could shake up financing models.

In 2004, Pennsylvania implemented a tax on the income of Medicaid managed care organizations. Five years later, when that type of income tax was prohibited by the federal Deficit Reduction Act, the state started levying a 5.9 percent gross revenue tax on MCOs.

Now, Medicaid’s watchdog, the Department of Health and Human Services Inspector General, is questioning whether that’s actually allowed under federal policy, suspecting that the tax was designed as a way to obtain more federal funding and reduce the state’s share of Medicaid payments.

Between the 2010 and 2012 fiscal years, Pennsylvania collected gross receipts tax revenues of $1.8 billion from its Medicaid MCOs, directing the funding to its share of Medicaid managed care costs. According to the HHS Inspector General, Pennsylvania also covered most of the tax for MCOs, about $1.6 billion, through supplemental payments in capitated rates.

That type of arrangement seems to be a “healthcare-related tax that is impermissible for Medicaid funding,” since MCOs are “held harmless,” or reimbursed for the tax, the OIG wrote in a recent audit.

According to Medicaid regulations, “revenues from an impermissible healthcare-related tax may not be used to finance the State's share of Medicaid expenditures,” OIG staff argued.

Between 2010 and 2012, the feds paid $981 million for the supplemental payments. By using revenues from gross receipt tax, auditors wrote, Pennsylvania effectively “lowered its share of MCO capitation payments and increased the federal share.”

The OIG is recommending that the Centers for Medicare & Medicaid Services take a hard look at Pennsylvania’s scheme and determine whether it is allowable — lest other states start getting ideas to garner more federal funding. “A proliferation of such tax programs could have a harmful impact on the Medicaid program,” the OIG wrote.

The OIG also suggested that CMS consider trying to recoup some the payments made to Pennsylvania, whose Medicaid program covers 2.2 million residents at an annual cost of about $24 billion.

CMS does agree that Pennsylvania's gross receipts tax on Medicaid MCOs "may be considered a healthcare-related tax” that is is not permitted and that guidance is needed. But the agency doesn’t believe it will offset any extra federal funding by adjusting future payments to the state. If the tax does turn out to be impermissible, the agency says it will work with Pennsylvania to develop a legal tax structure.

Unresolved tax issues

The issue of taxing Medicaid managed care organizations is a complicated one — and bound to become even more so under the Affordable Care Act’s insurance fee.

States are allowed to tax healthcare services and direct the funds to their Medicaid budgets, but only within limits that Pennsylvania’s tax seems to exceed, according to the OIG. The taxes have to be broad-based and uniform, applying to all services within one of 19 classes, and cannot be returned directly or indirectly to the taxpayers, in this case the MCOs.

There are also two safe harbors for the tax, neither of which Pennsylvania meets, the OIG argues. One is a requirement that the tax be less than 5.5 percent of the organization’s revenue — Pennsylvania’s is 5.9 percent. The other, if the tax does exceed 5.5 percent of revenue, is that no more than 75 percent of the tax can be refunded — and Pennsylvania has returned more than 85 percent of the tax to MCOs.

Responding to the OIG, Pennsylvania Medicaid director Leesa Allen challenged the interpretation of the tax as out of compliance with the Deficit Reduction Act’s Medicaid regulations. She maintained that the “hold harmless” rules barring refunds of the tax to healthcare organizations do not prohibit reimbursements for expenditures.

Allen also noted that CMS “affirmatively approved Pennsylvania's managed care contracts and payment structure recognizing and reimbursing the (gross receipts tax) as an allowable cost for federal claiming purposes.”