States Benefit From Threat To Close Medicaid Loophole

A compromise with the federal government will let several states continue to reap hundreds of millions in extra funds from a federal Medicaid account despite attempts by some members of Congess to stop the flow of money.

Several states, particularly New York and Illinois, had cried foul over a Clinton administration plan to close a bookkeeping loophole in the Medicaid program.

Since 1991, a number of states have used an accounting stratagem to elicit more money from Medicaid than they otherwise would receive.

“This practice appears to be creating rapid increases in federal Medicaid spending, with no commensurate increase in Medicaid coverage, quality or amount of services provided,” Timothy Westmoreland of the federal Health Care Financing Administration (HCFA) told the Senate Finance Committee in September.

Medicaid, which HCFA oversees, is a -billion, federal-state program that provides care for 40 million poor, disabled and elderly. The states administer Medicaid, but the federal government pays most of its cost.

In general terms, the scheme works like this: States increase the federal government’s share of Medicaid by claiming to spend more of their own money on the program than they actually do. The supposed increase in the state contribution triggers a corresponding match from Washington.

The states then use the extra funds from Washington as they wish. Most have used it to fund health care programs, but some, like Pennsylvania, have plowed it back into their general funds. One state, Kansas, announced plans to spend it on education.

According to HCFA, the cost to the federal government is now $1.9 billion a year and growing. Auditors in the Congressional Budget Office (CBO) have estimated that — unchecked — it could cost $127 billion over ten years.

Before Congress adjourns, it is poised to modify Medicaid’s rules. The changes will shrink the loophole, but will not close it entirely.

As the new rules phase in, Congress will increase its contribution to local public hospitals, helping a number of states make up for funds lost to the changes.

For New York, the deal means that, for four more years, it will keep $475 million in Medicaid money it was slated to give up. Illinois will have up to six years to replace the $500 million a year it had gained through the loophole.

Together, New York and Illinois account for half the money HCFA says was lost last year through the accounting gimmick.

The compromise is a big victory for New York Rep. Rick Lazio, a Republican, and Senators Daniel Patrick Moynihan and Charles Schumer, both Democrats, and the Republican House Speaker J. Dennis Hastert of Illinois.

Not surprisingly, Govs. George Pataki of New York and George Ryan of Illinois hailed the Congressional compromise.

Until recently, HCFA claimed it had no authority to close the loophole. For years, it tacitly approved state plans to use the accounting method, arguing it had no power to stop them. Illinois says its applications for extra funds were approved 22 times in nine years.

“I never heard the word loophole until this became an issue last spring,” said Ann Patla, Director of the Illinois Department of Public Aid.

Illinois became particularly enraged by the proposed change because it says it uses most of the extra money to support public hospitals in the state’s most deprived areas, one of Medicaid’s key roles. Illinois was also one of the first states to employ the practice.

As the scheme grew in popularity, however, press reports across the country began to detail the gimmick and how the states could profit from it.

Last spring, the New Orleans Times-Picayune reported on the efforts of a health care consulting firm from Pennsylvania, S.R. Wojdak and Associates, to persuade lawmakers in Baton Rouge to adopt the accounting practice.

“Every time I hear about it I feel like I’m a drug dealer or something,” Mark Drennen, Gov. Mike Foster’s chief budget officer, told the Times-Picayune. Louisiana is not one of the states now receiving the extra money.

Other state officials spoke openly of their intent to use the federal funds for programs other than health care. In New Jersey, the president of the state senate called for spending the loophole dollars on a tax cut or to pay off the state debt.

When Kansas Gov. Bill Graves announced last winter his plan to seek the funds for the first time, he said 25 percent of the money would go to fund special education.

“The bottom line is that money is Medicaid money that’s supposed to be used for the Medicaid program,” said Ginny Flynn, spokesman for Senator William Roth, the Republican Chairman of the Senate Finance Committee.

Roth, whose home state of Delaware has not taken advantage of the accounting maneuver, had taken a hard line on the loophole and had introduced legislation on Capitol Hill to shut it down completely within two years.

“I am disappointed in the provision in this package because it does not go far enough, and it makes too many special accommodations to those states that have abused the system,” Roth said in a press release. “However, at least we are taking initial steps to contain the magnitude of the abuse.”

Roth estimates the rules will save the federal government approximately $80 billion over 10 years, reducing the cost of the loophole by 63 percent.

The 20 states which now use the loophole are: Alabama, California, Illinois, Indiana, Iowa, Kansas, Massachusetts, Michigan, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Oregon, Pennsylvania, South Carolina, Tennessee and Washington.