LTC Bullet: Medicaid Money Manipulation Harms Long-Term Care

Friday, October 10, 2025

Seattle--

LTC Comment: State Medicaid programs, Medicaid planners, and the federal government manipulate money mischievously in different, but complementary ways to the detriment of the program’s mission. We explain after the ***news.***

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LTC BULLET: MEDICAID MONEY MANIPULATION HARMS LONG-TERM CARE

LTC Comment: State Medicaid programs employ provider taxes, intergovernmental transfers and other creative financing methods to transfer costs from their general funds onto federal taxpayers. Medicaid planners manipulate Medicaid financial eligibility rules to qualify their affluent clients artificially for Medicaid’s best care to the exclusion of the poor. The state and federal governments convert high private LTC revenue into less-than-cost Medicaid reimbursements to the detriment of care access and quality for the poor and vulnerable the program is supposed to serve. This concatenation of poor public policies got under my skin. I wrote the following essay to tease out their meaning and consequences.

“Medicaid Money Manipulation Harms Long-Term Care”
by
Stephen A. Moses

The Medicaid program is big and growing rapidly. States administer Medicaid; the federal government oversees their programs; both share the cost. States contribute a payment that their federal partner matches by a formula varying from 50% (one-to-one) to 83% of the total cost. States manipulate this system with various creative financing techniques. For example, nearly all states (49) tax health care providers to generate extra revenues they use to boost their federal financial match without drawing on their general funds. The Paragon Health Institute calls this and other similar methods to maximize federal expenditures at minimal state cost, often diverting them to unauthorized purposes, “legalized money laundering.”[1]

The largest laundered sums involve hospitals and managed care insurers, but states also tax nursing homes and other long-term care (LTC) providers for the same purpose. Less understood is a related form of money laundering. Non-poor people routinely qualify for Medicaid LTC benefits. Medicaid converts their potentially higher private-pay revenue into below-cost payments to LTC providers with serious negative consequences for care access and quality. This paper discusses each of these Medicaid money manipulation methods and their results.

Long-Term Care

LTC consumes a disproportionate share of Medicaid. Only six percent of Medicaid recipients use LTC, but they consume 37 percent of program expenditures.[2] Although home and community-based services (HCBS) now consume nearly two-thirds (63.2 percent) of Medicaid LTC spending,[3] nursing homes remain a critical care venue, serving 24 percent of all Medicaid LTC recipients.[4]

Forty-nine states tax nursing homes, maximizing their federal match and laundering funds for expanded uses. Despite measures implemented to control this practice, the sums involved are very large. The Paragon Health Institute cites a particularly egregious example in Indiana.[5]

But more than just money is involved. New research indicates that the LTC provider tax gimmick may have far-reaching detrimental impacts on the access to and quality of care Medicaid recipients receive.

Creative LTC Financing

A recent NBER working paper, titled “Creative Financing and Public Moral Hazard:

Evidence from Medicaid and the Nursing Home Industry,”[6] argues that creative financing schemes like provider taxes have several negative secondary effects. The authors conclude that such schemes distort state incentives “discouraging increases in effective reimbursement rates retained by the providers, while encouraging expanded access to inpatient care.” (p. 35) They therefore exacerbate “the persistently low effective Medicaid reimbursement rates that contribute to the systematic quality shortfalls in the nursing home industry.” (p. 36) Simultaneously, “the schemes incentivize higher inpatient care volume,” (p. 36) which the authors call “public moral hazard,” despite “widespread preferences among older adults to age at home.” (p. 36) Worst of all, they “show that creative financing leads to disproportionate increases in Medicaid funded care in the lowest-quality nursing facilities, with potentially harmful consequences for patients.” (p. 1) According to the authors, dementia patients in low quality facilities are disproportionately impacted.

Wholesale Medicaid Money Laundering

In summary, the new NBER paper finds that taxing LTC providers to increase federal matching funds incentivizes states to (1) expand nursing home care volume in preference to the HCBS that patients prefer, (2) channel funds disproportionately to lower quality nursing homes serving many dementia patients, and (3) capture some of the added federal funds for purposes other than LTC, thus reducing effective nursing home reimbursement rates and exacerbating related access and quality problems. Provider taxes operate as a kind of wholesale money laundering scheme to capture extra federal funds, redirect them from their intended use to other purposes, increase LTC use and expenditures, and transfer the cost from state to federal tax payers.

Retail Money Laundering

Provider taxes may also encourage money laundering at a retail level. The NBER paper observes that “States can influence care volume through capacity regulations, Medicaid eligibility, benefit design, and Home- and Community-Based Services (HCBS) waivers.”[7] (Emphasis added) How might states increase caseloads by manipulating Medicaid financial eligibility rules for the purpose of gaining more federal matching funds? States have wide discretion to set and enforce rules governing eligibility for Medicaid LTC benefits. They decide, for example, how much countable wealth to allow recipients to retain; which kinds of assets are exempt and in what amounts; to what extent they enforce restrictions on asset transfers, irrevocable trusts and compliant annuities to qualify; the level of effort they extend to track and collect estate recoveries; and many others. Could it be that the incentive to increase Medicaid LTC caseloads created by the provider tax scheme contributes to the indifference many states show toward setting and enforcing strict financial eligibility controls?

California is an outlier in this regard, having totally eliminated its countable asset limit for a time, and leaving in effect its most generous limit in the country.[8] But few states successfully restrain access to Medicaid LTC benefits by people with assets they could use to pay privately for their care. Although Americans hold $97 trillion in retirement savings ($40T),[9] home equity ($35T),[10] and life insurance ($22T),[11] very little of that wealth goes to pay for their LTC. Only 6.5 percent of the $629 billion they spent on LTC in 2023 came from private savings. Medicaid (44 percent), Medicare (16 percent), private insurance (10 percent), other third party payers (17 percent), and private income of people already on Medicaid (6.5 percent) paid the rest. In essence, most potential private LTC spending is converted, or effectively laundered, to become public spending mainly through Medicaid and Medicare with serious consequences for LTC services and financing.

Combined LTC Money Laundering

States and the federal government are complicit in laundering private funds to convert them to public expenditures. Federal financial eligibility rules discourage states from controlling access to Medicaid LTC benefits by the middle class and affluent. Provider tax incentives predispose states not to exercise such control. The federal government requires that state Medicaid programs treat many large assets as exempt. Examples include home equity, side businesses, retirement savings, home furnishings, personal belongings and many more. But federal law and regulations place no restriction on spending down countable assets to purchase exempt resources effectively obviating the need for prosperous people to spend their own funds on care. “Medicaid’s $100+ Billion Leak” explains how this loophole works and its consequences.[12]

This policy of diverting private LTC spending into public expenditures has devastating consequences for LTC access and quality. It diverts hundreds of billions of dollars of LTC spending from coming to care providers at market rates. Channeling that spending through Medicaid causes providers to receive the funds at egregiously low reimbursement rates, less on average than the cost of providing the care.[13] This inadequate revenue is a primary cause of caregiver shortages that lead to widespread access and quality problems. Faced with unsustainably low reimbursements for nearly two-thirds of their residents,[14] nursing homes charge a dwindling supply of private payers rates above the market-based rates that would apply in Medicaid’s absence. This incentivizes the remaining private payers to find ways to qualify for Medicaid without spending down assets.

Medicaid’s Mission Redefined by LTC Money Laundering

Medicaid is supposed to be a safety net for people in need of LTC but unable to pay for it. But Medicaid LTC money laundering at the wholesale, retail and combined levels has made a mockery of that mission. States fleece the federal government with provider tax schemes. Federal eligibility laws and regulations enable the middle class and affluent to access LTC benefits without spending down assets. Savvy financial advisers direct prosperous clients to take full advantage of the loose financial eligibility rules. At the same time, Medicaid’s income and asset spend down rules quickly crush the poor, aged and vulnerable with high private pay outlays they have no way to avoid.

In recent years, the Affordable Care Act (ACA) further undermined Medicaid’s LTC safety net role by extending benefits to able-bodied, working-age recipients up to 138 percent of the poverty level. The 90 percent federal match for these “expansion” enrollees incentivized states to shift eligibility and spending to that group leaving the traditional poor and vulnerable caseload shortchanged.[15] In 2003, the aged and disabled were 25 percent of enrollees and they consumed 69 percent of total Medicaid expenditures.[16] By 2022, this needier group had declined to 20 percent, receiving only 51 percent of total spending.[17] The poorest of the poor, “dual eligibles” who qualify for both Medicaid and Medicare, were 14 percent of Medicaid enrollees in 2005 and accounted for 42 percent of total program expenditures.[18] By 2023 they remained 14 percent of enrollees but they garnered only 32 percent of spending.[19] These changes reflect the ACA’s redirecting Medicaid toward able-bodied, working-age recipients to the detriment of the more vulnerable aged and disabled.

Conclusion

Creative financing schemes used (1) by state Medicaid programs, such as provider taxes (wholesale); (2) by individual affluent recipients and their financial advisers, such as gaming Medicaid financial eligibility rules (retail), and (3) by both, such as diverting LTC funding from the private market sector to Medicaid funding (combined), increase federal Medicaid LTC expenditures excessively, divert federal funds to unintended and unauthorized purposes, and impair the access to and quality of care available to the public.

Congress should recapture control of Medicaid LTC financing by (1) ending the provider tax gimmick, (2) closing the financial eligibility loopholes that convert Medicaid LTC from a safety net for the needy to a hammock for the middle class, and (3) using the savings therefrom to ensure Medicaid pays LTC providers market-based rates for a much smaller caseload of genuinely needy recipients. Further savings will accrue as these changes work their way through the market incentivizing more aging Americans to take the risk and cost of LTC seriously, plan ahead, save, invest or insure for LTC, and stay off Medicaid.