Last week, the Oklahoma Senate passed House Bill 1381, which would establish the Supplemental Hospital Offset Payment Program (SHOPP) and would assess a two-percent “provider fee” on certain hospitals that serve Medicaid patients. The revenue from the “fee” would then be used to match federal funds to increase reimbursements to hospitals that treat Medicaid patients. Estimates suggest the fee would generate approximately $118 million in fee revenue and $208.3 million in federal funds.

Supporters of the “fee” tout several factors in favor of the bill: (1) It prohibits the cost of the fee from being passed on to consumers; (2) the fee is not a tax because the reimbursement to providers will far exceed fees paid by providers; (3) the fee will save hospitals from closing or being forced to turn away Medicaid patients; (4) the fee would return federal tax dollars to the state; and (5) the fee will sunset on January 1, 2014. Number one is technically true, but cannot possibly be enforced. Number two is mere spin. Numbers three and four are simply false. And number five is highly unlikely.

Here are some facts for policymakers to bear in mind:

• In Oklahoma, Medicaid already reimburses providers and hospitals at a higher rate (128 percent of national average Medicaid reimbursement rates) than almost every other state in the nation.
• Americans For Tax Reform (ATR), in a letter sent recently to Oklahoma legislators, stated its opposition to the “fee” because it is actually a tax.
• Oklahoma Gov. Mary Fallin and 33 state legislators were early signers of ATR’s “Taxpayer Protection Pledge” to oppose all new tax increases.
• President Barack Obama’s own National Commission on Fiscal Responsibility (of which U.S. Sen. Tom Coburn was a member) recommended in December 2010 that the 46 states that currently have a “provider fee” in place eliminate state gaming of this “Medicaid tax gimmick.” The commission noted that “many states finance a portion of their Medicaid spending by imposing taxes on the very same health care providers who are paid by the Medicaid program, increasing payments to those providers by the same amount and then using that additional ‘spending’ to increase their federal match.” The reasoning behind the Commission’s recommendation is that “provider fees” essentially use federal funds to match federal funds. Generally, when states are caught using federal funds to match federal funds, it results in unfavorable audits and recoupment by the federal government of misused funds. But since the federal government has a higher priority of expanding welfare programs such as Medicaid, it has turned a blind eye to this scheme.

Unsustainable Growth

The answer to Medicaid’s litany of inefficiencies that lead to poor health outcomes is not more schemes that harm consumers and taxpayers. What’s needed is real reform. The problem is not that there is too little money for Medicaid; the problem is there are too many people on Medicaid—and those members are driving program expenditures beyond sustainable limits.

According to the Oklahoma Health Care Authority’s FY-2010 annual report, in FY-2005 there were nearly 630,000 Medicaid enrollees and total (state and federal) expenditures of $2.81 billion. By FY-2010, the number of Medicaid enrollees had ballooned to 881,220 (about 24 percent of the state’s population) and expenditures had skyrocketed to $4.33 billion—an increase of 54 percent in just five years. In Federal Fiscal Year 2000, total (state and federal) Medicaid spending in Oklahoma was $1.64 billion. But by Federal Fiscal Year 2010, total Medicaid spending in Oklahoma was $4.35 billion—a 165 percent increase in just 10 years. For Federal Fiscal Year 2000, total state share/appropriations for Medicaid were $435.9 million, and for Federal Fiscal Year 2010, total state share/appropriations for Medicaid were $1.1 billion—a 169 percent increase in just 10 years. And this does not even take into account the massive expansion of Medicaid programs set to occur under Obamacare in 2014.

In 2010, approximately 562,000 children under the age of 21 were covered by Medicaid. In addition, approximately 67 percent of all Oklahoma children under the age of five have been covered by Medicaid at some point in their lives. Of Oklahoma’s 77 counties, 38 counties have 25 percent or more of the population enrolled in Medicaid and 18 counties have 30 percent or more of the population enrolled in Medicaid.

Given that information, we believe policymakers should ask some important questions:

(1) What is the source of federal tax dollars proponents are saying the “provider fee” would “return” to the state? Currently, Oklahoma does not operate such a program, so the federal government does not spend any extra funds on Oklahoma reimbursements. Since this will be new spending in Oklahoma, it results in new spending authorizations on the federal level. Contrary to what proponents would have you believe, these funds are not just sitting in a savings account marked “for Oklahoma” waiting to be drawn down. Due to the $1.6 trillion federal deficit, it is far more likely that by using this “Medicaid tax gimmick” Oklahoma is actually increasing the amount of money the federal government prints or borrows from China.
(2) Why would policymakers want to increase or solidify dependence and utilization of a welfare program that is growing over 165 percent every decade?
(3) Why would a state concerned with economic development and lowering the burden of government spending and regulation consider proposals that have the potential to place more costs on consumers and taxpayers?
(4) How does one “guarantee” that the provider fee is not passed on to consumers? Current “provider fee” proposals contain no audit or accountability mechanisms to ensure that assessments are not hidden by providers in other cost increases to consumers or insurers.
(5) Why isn’t Medicaid reform being discussed? What is troubling to taxpayers is that when funds are tight and spending is growing at an unsustainable level, rather than dealing with the problem politicians and interest groups resort to the same old solution—using gimmicks to raise more revenue.

Real Leadership, Not Gimmicks

Oklahoma voters decided to install a center-right government this year because they are looking for real leadership and real solutions. The governor, executive branch leaders, state legislators, and Oklahoma’s congressional delegation should lead an unrelenting effort to obtain waivers from the federal government that would allow Oklahoma to implement significant reforms to the Medicaid program. Preferably, the state should seek federal approval to convert Medicaid into a block grant program, which would give the state more control over how program dollars are spent.

Block grants hold the potential of restraining Medicaid growth because the state would know how much federal aid it will be receiving from year to year, as opposed to the current “as needed” funding scheme that incentivizes expansion by the promise of unlimited federal funds. A block grant program could be paired with a premium-support program, whereby the state provides low-income and disabled individuals a risk-adjusted credit or voucher to purchase coverage from among competing private plans. Under this model, an individual would own the plan and could opt to continue paying for the coverage out of pocket if he were to lose eligibility.

Until a block grant and premium assistance program can be implemented, state leaders should take advantage of all currently available options to find efficiencies in the existing program, including:

• Member Cost-Sharing: Is it unreasonable to ask welfare recipients to contribute in a small way to the free medical care they receive at taxpayer expense? With more than 800,000 Oklahomans receiving Medicaid benefits each year, a low monthly premium of $10 each month would return more than $80 million to the program annually. Another option is to charge low premiums on a sliding scale, where members with higher incomes would be charged a slightly higher premium than low-income members. Both of those options would require a federal waiver; however, the Deficit Reduction Act of 2005 (DRA) does give states flexibility to make reforms to their Medicaid programs, including allowing states to charge premiums and require cost-sharing (co-pays and deductibles) to certain enrollees. Legislators should ensure the state is requiring member cost sharing to maximum allowable limits.
• Long-Term Care Reform: In addition, the DRA permits states to “rebalance” long-term care services within their Medicaid programs away from institutional-based (nursing homes) care to community and home-based care. Because such a move creates a service people desire (home-based care versus nursing-home care), there will be a “woodwork” effect, whereby demand for the service greatly increases. Because of this increased demand, it is important for the state to make efforts to control eligibility in order to effectively rebalance long-term care services and restrain costs. In addition, the state should take measures to actively promote and/or incentivize participation within the Long-Term Care Partnership Program.
• Examining “Optional” Benefits: Most covered populations under Medicaid are “mandatory,” though states are allowed to cover “optional” populations beyond those. However, under Obamacare’s “maintenance of effort” clause, states are unable to cut optional eligibility populations until 2014. While states are prohibited from finding savings by cutting eligibility, no such prohibition exists with regard to benefits. Like eligibility, most benefits covered by Medicaid are “mandatory” and cannot be cut without federal approval; however, many benefits are “optional” and the state should determine whether cost savings could be achieved by eliminating some of those benefits.
• Insure Oklahoma: Legislators should allow the more than 13,000 current individual Insure Oklahoma members to obtain coverage through the private market rather than being forced onto Medicaid.
• Employer-Sponsored Insurance for Part-time Workers: Legislators should incentivize employer-sponsored insurance for employees (and their dependents) who work at least 24 hours each week, which current state law defines as “full time” employment.
• Medicaid Reform Task Force: Legislators should create a task force to begin studying Medicaid and options for reducing costs. While it would be prudent for members to explore the possibility of opting out of Medicaid completely and allow the state to focus revenues on providing health coverage exclusively to low-income and disabled groups, most policymakers admittedly would view this option as impractical because it involves the loss of significant federal matching funds. Nevertheless, the above proposals should be part of any task force that convenes to explore real reform efforts.

Our hope is that future discussions regarding Medicaid contain some or all of the above solutions. Otherwise, special-interest groups will continue to plead with lawmakers to bleed taxpayers for more revenue and to develop more gimmicks.