The Centers for Medicare and Medicaid Services has issued a proposed rule to close a Medicaid tax loophole it said is exploited by some states to benefit illegal immigrants.
States inflate the federal payments and use the money to free up funds for non-Medicaid purposes, according to CMS.
"Some states have exploited these tax loopholes to take money from federal taxpayers and then simultaneously spent 'state' money on new benefits for illegal immigrants," CMS said.
The CMS proposed rule would prohibit states from taxing Medicaid business at higher rates than non-Medicaid business; bar the use of vague language to disguise Medicaid-specific taxes; maintain statistical testing while adding safeguards to prevent system gaming; and provide a transition timeline based on the age of existing waivers.
Public comments on the proposed rule will be taken until July 14.
WHY THIS MATTERS
CMS said the move is projected to save taxpayers more than $30 billion over five years.
"States are gaming the system – creating complex tax schemes that shift their responsibility to invest in Medicaid and rob federal taxpayers," said CMS Administrator Dr. Mehmet Oz. "This proposed rule stops the shell game and ensures federal Medicaid dollars go where they're needed most – to pay for healthcare for vulnerable Americans who rely on this program, not to plug state budget holes or bankroll benefits for noncitizens."
THE LARGER TREND
Under the law, states can tax stakeholders and use that as part of their state share for Medicaid, as long as those taxes are uniform and broad-based.
The tax loophole taxes entities to get a higher federal match and redistributes these federal dollars back to the very same entities that were taxed – that's what most Americans call money laundering, CMS said.
Specifically, certain states are imposing taxes on all managed care organizations (MCOs), yet structuring the tax so that it only affects Medicaid business within those MCOs – the ones that will benefit from the federal match in the form of payments from the state back, according to CMS.
In California, Medicaid business in certain cases is taxed at $274 per member/per month, while non-Medicaid business is taxed at just $2 per member/per month.
These arrangements allow states to benefit from a budget surplus to reinvest in unrelated programs, including the $8.5 billion program in California to cover more than 1.6 million illegal immigrants and other non-citizens, CMS said.
CMS claims that in its final year, the Biden administration approved four waivers that exploit this tax loophole, submitted by California, Michigan, Massachusetts and New York. Together, these four states are responsible for more than 95% of projected federal taxpayer losses under the loophole, CMS said.
ON THE RECORD
"This isn't just wasteful – it's wrong," said Drew Snyder, CMS deputy administrator and director of Medicaid & Children's Health Insurance Program (CHIP) Services. "Medicaid was designed to protect low-income seniors, pregnant women, children, and people with disabilities – not subsidize coverage schemes that displace our most vulnerable. We are restoring Medicaid to its original purpose and ensuring the intent of the law is followed."
Email the writer: SMorse@himss.org