The Bush Administration is preparing regulations to cut federal Medicaid funding to states by about $6 billion.

In the President’s budget for FY 2007, the Bush Administration proposed a series of Medicaid budget cuts. Most of these would require legislation and the House and Senate have shown no desire to cut federal Medicaid spending in advance of the November election. However, Administration officials have signaled their intention to proceed with several billion dollars of Medicaid cuts that can be implemented by regulation.

Specifically, the Bush Administration is eager to (1) restrict state use of provider taxes and (2) cap Medicaid reimbursement to publicly owned hospitals and nursing homes. Together, these changes would reduce federal funding to state Medicaid programs by about $6 billion – perhaps more – over the next five years.

Currently, many states use provider taxes to help fund Medicaid costs. Revenues received from these assessments – usually on nursing facilities or hospitals – can then be matched with federal funds and used to pay providers. Depending on the state’s federal matching rate (which range from 50% to nearly 80% based on the state’s per capita income), each dollar of provider tax revenue can in turn generate another $1 to $4 in federal dollars for use in Medicaid.

Since 1991, federal law has limited state use of provider taxes. Most notably, Medicaid provider tax programs must be broad based, applied uniformly across all health care providers in the same class, and not hold providers harmless for tax payments. (For specific federal requirements, see section 1903[w] of the federal Social Security Act and 42 CFR 433.68.)

Federal rules also say that taxes imposed on providers may not exceed six percent of a provider’s total revenues. The Bush Administration wants to phase down the allowable provider tax rate from 6 percent to 3 percent. This would reduce federal Medicaid funding to states by about $2.1 billion over five years. Because it would also end up to half of state provider assessment revenues, the fiscal hit on states and Medicaid would be magnified by a billion dollars or more.

The feds are also eager to refine rules to cap Medicaid payments to government-owned providers to no more than the cost of providing services to Medicaid beneficiaries. Projected to cut federal Medicaid spending by $3.8 billion over five years, the change would hit many large public hospitals particularly hard. Federal officials believe that some states pay government owned providers more under Medicaid in order to cross subsidize other state and local costs. However, states and advocates counter by showing how Medicaid funding helps cover fiscal demands of the uninsured and keep key facilities operating.

Adding to state concerns, federal officials may implement the cuts by bypassing the traditional proposed rule process. In most cases of federal rulemaking, agencies start by publishing a proposed rule and reviewing comments before publishing a final rule. To implement the changes to provider taxes and payment of publicly provided facilities, the Centers for Medicare and Medicaid Services (CMS) wants to issue final rules with comment. While states and other interested parties could still send in comments, the cuts would take effect without further rules. From the federal perspective, the contemplated changes are “clarifications” of policy and therefore don’t warrant proposed rules.