The 109th Congress ended in the early morning hours on Saturday, with both houses passing by comfortable margins the Tax Relief and Health Care Act of 2006. With Democrats taking control of both the House and Senate when the 110th Congress begins the first week of January, GOP leaders were anxious to resolve some key policy items before Democrats take the helm.

The final legislation, which President Bush is expected to sign, includes an array of changes in tax laws, Medicare, and health savings accounts (HSAs), along with technical corrections to drafting errors in the Medicare Modernization Act (MMA) and the Deficit Reduction Act (DRA). Today, I’ll walk you through the Medicaid-related changes of importance to states and Medicaid health plans and providers.

Medicaid Legislative Changes:

As I reported earlier, the White House had been signaling its intention to issue a rule to cut Medicaid provider tax rates from a maximum of 6 percent – the ceiling that’s been in place since 1993 – to 3 percent. The effect would have been to reduce federal funds to state Medicaid programs by $6 billion or more. Members of both parties were anxious to enact legislation to stop the Bush Administration’s planned rule to restrict state use of provider taxes. States, provider groups, and beneficiary advocates were lobbying hard to stop the controversial rule change.

In Section 403 of the Tax Relief and Health Care Act, Congress codifies the maximum provider tax rate at 6 percent. From January 1, 2008 through September 30, 2011, the rate will be temporarily reduced to 5.5 percent. On October 1, 2011, the cap on tax rates goes back to 6 percent.

Implications for States and Providers:

What%20Medicaid%20Changes%20Mean.jpgAh, the joys of Medicaid complexity. In a nutshell, here’s what this means:

1. The planned CMS rule to drop the maximum provider tax rates to 3% is now moot. If the President signs the bill, the section will become law and negate the planned rule change.

2. The legislated change from 6 percent – which is what’s now set in rule – to 5.5 percent is expected to cause few, if any, problems for most states that now use provider taxes to leverage federal match to help finance Medicaid. States not in compliance with the new 5.5 percent cap have a year to either modify their assessment program or make likely modest changes to how the resulting funds are distributed within Medicaid.

3. The fiscal effect on states is relatively small, especially when compared to the $6 billion hit states were looking if the rule was issued. Specifically, the Congressional Budget Office (CBO) projects the half percent change will only save the feds $200 million over the next five years. As federal budget estimating goes, that’s barely above a rounding error.

The federal requirements governing Medicaid provider taxes are complex, with many moving parts. In general, federal law requires that health care-related assessments are uniform, broad-based, and do not hold providers harmless. The percentage cap is part of how the feds determine whether a state provider tax is compliant with the hold harmless requirement. States needing to revise their policies should consult an experienced Medicaid financing specialist. I recommend Sellers Feinberg, the leading advisors on Medicaid financing and reform.

Other Federal Medicaid Changes:

Other%20Medicaid%20Changes.jpgWhile most of the other Medicaid-related changes were technical corrections, the legislation made a couple other substantive changes of note.

One deals with Transitional Medical Assistance (TMA). TMA is the continuation of Medicaid benefits for up to one year for certain low-income families who would otherwise lose Medicaid coverage because of changes in their income, usually due to increased hours of work or child or spousal support. The legislation extends Transitional Medical Assistance for the first half of CY 2007 (two quarters of funding). Linked to TMA, Congress also provides funding for matching grants to states to provide abstinence education.

The new legislation also provides Tennessee with $131 million to help cover hospital uncompensated care. The $131 million represents a partial restoration of federal funding for Medicaid disproportionate share hospital (DSH) payments. As part of creation of the TennCare in 1994, Tennessee’s Medicaid DSH program was discontinued. This is a big win for retiring Senator Bill Frist.

State Children’s Health Insurance Program (SCHIP):

SCHIP%20Funding.jpgSome issues were left unresolved and deferred to the next Congress. Most notably, as part of the overall legislative package, Congressional leaders were hoping to address a federal funding shortfall for the highly popular State Children’s Health Insurance Program (SCHIP).

Unlike Medicaid, which has no federal funding cap, states are given state-specific SCHIP funding caps. Some 17 states will run out of federal SCHIP dollars in FY 2007. Nationally, the shortfall is projected at $920 million. Unless Congress reallocates funds or states decide to use 100% state funds to fill the gap, about 630,000 children are at risk of losing health coverage, at least temporarily.

The Senate Finance Committee wanted to fill the gap by reallocating unused federal SCHIP funds from 2004 and 2005. Unfortunately, this was dropped during negotiations with the House. With many in both parties eager to avoid cuts in kids’ health coverage, states hope to get the funding problem fixed in early 2007, either as part of an omnibus appropriations bill or SCHIP reauthorization.