LTC Bullet:  Medicaid Planning Writ Large

Friday, April 10, 2015


LTC Comment:  Elder lawyers put millionaires on Medicaid, but states take extra billions from the Feds by parallel means, a less well-known story after the ***news.*** [omitted]

*** LTC CLIPPINGS SUBSCRIBERS received the following notice early this morning.  We’ve posted the new Genworth cost of care survey in The Zone, the Center’s password-protected website, along with all past cost surveys by various sources for historical reference.  For Center membership, including access to The Zone, and for LTC Clippings subscriptions, contact Damon at 206-283-7036 or

4/9/2015, “Genworth 2015 Cost of Care Survey,” Genworth Financial

Quote:  “2015 Cost of Care Overview.  Use the information below to find out and compare the cost of care in your region. Go mobile with the Cost of Care app from iTunes.

LTC Comment:  Click through to the link above to access a clickable map for state data.  Find the full report here.  National highlights (annual costs):

Homemaker Services:   Up 2% to $44,616
Home Health Aide:   Up 1% to $45,760
Adult Day Health Care:     Up 3% to $17,904
Assisted Living Facility:          Up 2% to $43,200
Nursing Home (Semi-Private)   Up 4% to $80,300
Nursing Home (Private) Up 4% to $91,250 ***



LTC Comment:  Most people, and certainly all who read LTC Bullets, know that Medicaid planning attorneys can use sophisticated legal techniques to impoverish affluent clients artificially in order to qualify them for Medicaid’s expensive long-term care benefits.

While that’s a significant fiscal leak, it pales in comparison to the far bigger problem that Medicaid’s basic income and asset eligibility rules are so generous for long-term care that only the really wealthy even need to bother with fancy trusts, transfers or trades.  Most middle class folks qualify easily.

But here’s something perhaps even bigger that you possibly didn’t realize.   State Medicaid programs have done some pretty elaborate financial and legal sleight of hand themselves in order to draw down extra federal funds they would not otherwise be eligible to receive.

The Government Accountability Office (GAO) is not pleased with the states’ commonplace and growing practice of taxing Medicaid providers to generate funds they can then use to leverage up additional federal matching funds.  The watchdog agency published “Medicaid Financing:  States' Increased Reliance on Funds from Health Care Providers and Local Governments Warrants Improved CMS Data Collection” on July 29, 2014 and re-issued it with more state-level details on March 13, 2015.  Highlights here.

Here’s the nub of the matter in GAO’s words followed by our explanation:

GAO found, based on a questionnaire sent to state Medicaid agencies, that states financed 26 percent, or over $46 billion, of the nonfederal share of Medicaid expenditures with funds from health care providers and local governments in state fiscal year 2012. State funds were most of the remaining nonfederal share.


Nationally, states increasingly relied on funds from providers and local governments in recent years to finance the nonfederal share, based on GAO's analysis … . In the three selected states this increase resulted in cost shifts to the federal government. While the total amount of funds from all sources, including state funds, increased during state fiscal years 2008 through 2012, funds from providers and local governments increased as a percentage of the nonfederal share, while state funds decreased. GAO's review of selected financing arrangements in California, Illinois, and New York illustrates how the use of funds from providers and local governments can shift costs to the federal government. For example, in Illinois, a $220 million payment increase for nursing facilities funded by a tax on nursing facilities resulted in an estimated $110 million increase in federal matching funds and no increase in state general funds, and a net payment increase to the facilities, after paying the taxes, of $105 million.  [Emphasis added.]

LTC Comment:  Just in case that wasn’t crystal clear, let’s explain.  States put up part of the cost of their Medicaid programs.  The federal government matches each state’s contribution based on a formula intended to reward economically poorer states somewhat more generously than wealthier states. 

For example:  the minimum federal matching rate is 50%, which means no state gets less than $1 from the Feds for every dollar it contributes.  According to the Kaiser Family Foundation (KFF), the “Federal Medical Assistance Percentage (FMAP) for Medicaid” in Federal Fiscal Year 2016 (which begins October 1, 2015) will vary from 50% for wealthy states like AK, CA, CT, MA, MN, NH, NJ, NY, ND, VA, WA, and WY to 74.17% in Mississippi.

That means Mississippi receives almost three dollars from the federal Medicaid program for every dollar it contributes.  Ten states have FMAPs in excess of 66.6% which means they receive at least two dollars from the Feds for every dollar they put up.

Do you see why using provider taxes to generate extra federal matching funds is so lucrative?  Instead of taxing their citizens to generate revenue for their Medicaid programs, states tax their Medicaid providers, use the extra funds to get more federal money, and then kick back some of the windfall to repay the providers who paid the tax in the first place.

KFF published “Quick Take:  Medicaid Provider Taxes and Federal Deficit Reduction Efforts” on January 10, 2013.  It shows which states had how many provider taxes.  Fourteen states had four or more such taxes; only one state had none.  The federal government has attempted to curtail the use of provider taxes by limiting them to six percent of patient revenues.  According to the KFF report: 

Recent federal deficit reduction discussions have suggested gradually lowering the safe harbor threshold from 6.0 percent to 3.5 percent of net patient revenues. States have indicated that nearly 6 in 10 provider taxes currently in use by states are above that threshold. Forty-three states have at least one provider tax above this 3.5 percent threshold … ; over half of states reported at least two above this threshold.

Public policies have consequences.  Often they have unintended consequences.  Just as Medicaid planning rewards the well-to-do with inordinate amounts of public resources intended for the poor, Medicaid planning writ large by means of taxing providers to maximize federal matching funds has the unintended effect of diverting scarce federal resources to states with the wealthiest providers and the cleverest financial consultants.

But before you bewail and criticize this practice, recognize that it’s a fundamental source of funding for cash-strapped LTC providers dependent on meager Medicaid reimbursements.  Just recognize that the delicate balance of interests that tempt the affluent with Medicaid planning and reward Medicaid planning writ large by states maximizing provider taxes are all part of the same status quo that prevents substantive long-term care financing reform.

It may, and probably will, take a major economic downturn comparable to the Great Depression to blow up this stultifying balance of interests enabling a market-based solution without lucrative incentives to game the feckless federal government.