Last week, Governor Rick Snyder vetoed a package of bills—Senate Bills (SB) 987-990—that had aimed to once again restructure the state’s Medicaid financing system. In his veto letter to the Senate, Snyder said the bills placed federal funding for “critical state health programs” at risk if the Centers for Medicare & Medicaid Services (CMS) rejected these changes, leaving the “state budget out of balance.” Implicit in this veto is the assessment that the tax restructuring of this package did not meet the established criteria of broadly based and uniformly imposed that are federally required for health care provider and industry related taxes intended to bolster state Medicaid funding.
The House Fiscal Agency estimated that, if the plan had been enacted and then disapproved by the federal government, it would have reduced net state resources by $258 million in FY2019 and $263 million in FY2020.  The Senate Fiscal Agency estimated similar revenue shortfalls for a scenario wherein the federal government would not recognize this change in tax structure as an eligible Medicaid matching fund source.
Provider taxes are a longstanding, integral source of Medicaid financing for many states. These taxes are meant to be levied on all health care providers of a given type or class and allow states to increase Medicaid reimbursement rates, thereby creating an incentive for providers to accept Medicaid patients. Providers seeing the greatest numbers of Medicaid patients would enjoy revenue in excess of their tax liability—revenue that would be in part redistributed from providers not treating Medicaid patients. Due to the injection of additional federal funding, the provider community as a whole would enjoy (in gross terms) Medicaid reimbursement rate increases in excess of taxes paid.
A federal loophole created in the Balanced Budget act of 1997, however, allowed Michigan and other states to target a tax solely to “Medicaid Managed Care Organizations.” Michigan’s Quality Assurance Assessment Program [QAAP] on MCOs providing Medicaid services allowed Michigan to leverage federal funds to reimburse every Medicaid MCO in excess of their tax liability with no losers in the deal, save the federal budget.  The House Fiscal Agency reports that providers enjoyed a net benefit of $154 million in FY2008.
Because of federal changes making Medicaid-only MCO assessments impermissible, Michigan repealed its Medicaid MCO QAAP in 2008. To replace the lost revenue, the state instituted what appeared to be another form of a provider tax.  This time the state went into an existing state tax and subjected medical services provided by Medicaid MCOs to the 6 percent Use Tax. Expanding the Use Tax solely to Medicaid MCOs was an attempt by the state to skirt the requirement that provider taxes be broadly-based and uniformly imposed. By utilizing a similarly targeted tax, the state would generate additional Use Tax revenue to make up for the loss of revenue from repealing the QAAP. As with other Use Tax revenue, funds generated by taxing Medicaid MCOs are distributed to the state’s School Aid Fund (one-third per the state Constitution) and General Fund.  This expansion of the Use Tax allowed Michigan to maintain reimbursement levels to Medicaid MCOs that were comparable to those enjoyed with the Medicaid MCO QAAP without having to generate or re-appropriate new revenue from other sources.
Realizing that levying the Use Tax on Medicaid MCOs would most likely face the same federal disapproval as the QAAP, Governor Snyder proposed an alternative mechanism to generate funds for the Medicaid program through the Health Insurance Claims Assessment (HICA). The HICA was instituted on January 1^st, 2012, as Michigan’s Use Tax on Medicaid Managed Care Organizations (MCOs) came under federal scrutiny. The HICA applied a 1 percent tax to all health insurance claims in the state (with certain exemptions, namely the state’s inability to tax Federal programs like Medicare and Veterans’ Services).  After its implementation, the tax failed to generate projected revenue amounts, leading the state, with temporary federal permission, to reinstate the 6 percent Medicaid Use Tax in 2014 (and reduce the HICA by 0.25 percent points). As the governor had previously anticipated, CMS issued a letter informing the state that the policy of levying the Use Tax on Medicaid MCOs would need to be sunset for Michigan to remain in federal compliance and receive funding. CMS argued that, because General Fund revenues are fungible, the state had simply continued the same disallowed taxation on Medicaid MCOs.
In the newest and recently vetoed package of bills, a Health Services Fund was created to catch revenues from the Medicaid MCO Use Tax before they made it to the General Fund and then earmark them for non-Medicaid state health program costs, such as community mental health (CMH), the Federal Medicare Pharmaceutical Program, and the Safe Drinking Water Revolving Fund. A portion of income tax revenue currently available for General Fund appropriations would then be earmarked for deposit into the state’s Medicaid Benefits Trust Fund. This, in theory, would allow Michigan to again enact the ostensibly illegal tax on Medicaid MCOs, while at the same time phase out the unpopular HICA. The fact that any federal decision against the new tax structure could be appealed in the short term, and, thereby, temporarily allow the state legislature to continue barking up the same revenue tree is a truly convenient side-benefit in the age of term-limits.
The core problem with this bill package is that CMS has already disallowed Michigan’s taxes* on Medicaid MCOs as an eligible mechanism to leverage federal matching funds. Creating a non-fungible fund accounting mechanism to separate Medicaid-related tax revenues from Medicaid appropriations in an attempt to skirt federal program requirements represents the kind of shell game that obscures the use of public tax dollars from simple tests of transparency and accountability.
Medicaid is unlike other governmental services that are better suited to earmarking.  Whereas a direct connection exists between motor fuel tax revenue—a tax tied to vehicle use and size/weight—and the need for funding to repair roads, a much weaker connection exists between revenue collected by levying the Use Tax on Medicaid MCOs and the overall level of spending on Medicaid. Earmarking of the Use Tax on Medicaid MCOs to pay for non-Medicaid health programs (and schools) is a clear contrivance to draw additional federal revenue at little cost to the state; in other words, this tax was devised to achieve the very purpose for which CMS disallows such taxes. The state would be better served by ending this tax and subjecting Medicaid appropriations to the budgetary considerations that are a core responsibility of the legislature.
The benefits of state Medicaid programs are well documented. It is the core function of the legislature to evaluate these benefits against the costs of the program, and then either generate revenue or make cuts as deemed appropriate to maximize public benefit. Redirecting Medicaid-related revenue to schools and other non-Medicaid programs is certainly a creative solution to an ongoing problem, but direct, transparent, and long-term solutions should be the legislature’s ultimate goal. If overall revenues are not sufficient to fund Medicaid and other state government services, the legislature could consider a broad tax increase that would generate more General Fund tax revenue, straightforward Medicaid funding mechanisms that conform to federal requirements, Medicaid cost-saving reforms that reduce the need for additional revenue, and/or cuts to programs/services if the related benefits cannot justify the taxes needed to support their costs.
The Research Council applauds Governor Snyder on his appropriate use of veto power to ensure long-term budget balance. We likewise admonish the legislature to engage in the hard decision-making necessary for good governance and address the long-term funding issues related to Michigan’s Medicaid program.
 
* CMS has not only disallowed the Medicaid managed care QAAP, but also expressed strong concern that a Use Tax on managed care is merely an extension of the QAAP and informed states that it will no longer support this tax. If the Federal government officially disallowed utilization of the Use Tax retroactively to its 2009 implementation, it could potentially cost the state billions of dollars