Capitol Perspectives: Medicaid’s financial history

There is a fascinating history to Missouri’s recent special session to fix the legislature’s failure to continue one of the state’s most important financial mechanisms that assures adequate funding for Medicaid health coverage.

The mechanism goes back to 1990, when Missouri accepted voluntary contributions from the Missouri Hospital Association to provide higher Medicaid reimbursements for hospitals.

It was a win-win for hospitals, because not only did they get back the contributions, but the additional state spending generated extra federal Medicaid dollars. For about every $1 of state funds spent, the feds provided the state an extra $2 for Medicaid costs.

But in 1991, Congress messed up Missouri’s approach by requiring that state funds for Medicaid reimbursement had to come from an actual tax without a guarantee that providers would be “refunded” for “voluntary contributions.”

That led to passage of the Federal Reimbursement Allowance tax on health care providers, or the FRA, to provide the extra funds for the federal Medicaid match.

“The Senate Appropriations Committee was warned earlier this year by a nursing home association official that failure to renew the FRA tax would create a ‘tidal wave’ of nursing home closings across the state.”

Medical associations and providers generally support the tax because health-care providers get the tax back from expanded state funds for Medicaid health care, both from their FRA state tax, but also from the increased Medicaid matching funds.

Legislative staff have estimated that of $1.4 billion that will be raised by the FRA tax during the next budget year that begins July 1, 2022, $3.1 billion will be matched by the federal government for Medicaid.

The Senate Appropriations Committee was warned earlier this year by a nursing home association official that failure to renew the FRA tax would create a “tidal wave” of nursing home closings across the state.

Until the Planned Parenthood pregnancy coverage controversy arose in this year’s legislative session, annual renewal of the FRA was guaranteed because it was so critical for Missouri’s budget, Medicaid recipients, health facilities and health care providers.

For years, the FRA tax required renewal every year. I’ve been told it was because hospitals wanted the reserve opportunity to end the tax. But in later years, legislators told me it was to use the FRA as leverage to force administration changes in order to pass a critical budget measure.

This year, the legislature’s insistence on the annual renewal requirement came back to haunt the General Assembly when the Senate grid locked over restrictions on Medicaid coverage for birth control and Planned Parenthood blocked renewal of the one-year FRA during the closing hours of the legislature’s regular session.

Ultimately, this year’s special legislative session extended the FRA for three years rather than just one year. Maybe an indication of a lesson learned.

Another interesting financial aspect about Medicaid funding is the degree to which the state effectively has made Medicaid health care providers into lending facilities for the state.

It has arisen when the state faced cash-flow problems to cover costs before the end of a budget year.

To understand this problem, you need to understand that how much the state collects in any one month may not match actual spending requirements for that month.

To cover these immediate cash-flow problems, the administration has delayed state Medicaid payments to doctors, hospitals and other medical providers.

It provided an easy mechanism for managing a short-term cash shortage.

Ultimately, the health care providers would get their Medicaid reimbursements. But it amounts to “borrowed cash” from medical providers to guarantee prompt funding for other state services.

That approach is understandable since delaying funds for school teacher salaries, foster parents or covering the costs of state prisons raise a host of obvious problems.

It’s something akin to a “Faustian bargain” in which health-care providers must accept delays in state reimbursement for their services to continue coverage by Medicaid.