Budget & Tax, Health Care

Hospital tax may not cover Medicaid expansion costs

February 26, 2020

Ray Carter

Gov. Kevin Stitt has endorsed Medicaid expansion, a key component of the federal Affordable Care Act, better known as “Obamacare.” To pay for Medicaid expansion in Oklahoma, Stitt has urged lawmakers to enact a de facto tax increase. A related measure addressing funding was placed on a joint House-Senate committee agenda, but the committee did not meet as scheduled at 11 a.m. on Feb. 26.

The reasons for the delay were not immediately revealed, but challenges continue to surround the tax-increase proposal, ranging from the fact that it will not generate enough revenue to cover the state cost of Medicaid expansion to suggestions the proposal may be illegal under recently proposed federal regulations.

The Supplemental Hospital Offset Payment Program (SHOPP) is a state “fee” assessed on hospitals’ net patient revenue that operates much like a traditional income tax. It has been touted as a way to fund Oklahoma’s state share of Medicaid-expansion costs.

The SHOPP fee was first enacted in 2011. The legislation creating the hospital assessment stated, “The assessment rate until December 31, 2012, shall be fixed at two and one-half percent (2.5%). At no time in subsequent years shall the assessment rate exceed four percent (4%).”

The program has since been extended in 2013, 2016, and 2019. Under existing law, the SHOPP fee varies from year to year and the Oklahoma Health Care Authority is responsible for setting the rate based on an analysis of Medicaid claims data, the difference between Medicare and Medicaid payments, and other factors.

Last year’s SHOPP fee was 2.8 percent. The rate for this year is 2.3 percent. Stitt wants to nearly double the fee/tax.

In his State of the State address, Stitt discussed his plan for Medicaid expansion and told lawmakers the federal government “needs to see the support from the Oklahoma State Legislature to feel confident that this plan is on solid financial footing. Today, I call on the House and the Senate to send to my desk legislation to give certainty that the Oklahoma Health Care Authority can use the full 4 percent of the SHOPP assessment …”

Senate Bill 1046, which would designate SHOPP “fee” revenue to Medicaid expansion, was placed on the agenda for the Joint Committee on Appropriations and Budget, but the hearing did not occur as announced and the 11 a.m. meeting was postponed.

Hospital officials, who oppose the legislation, said the bill would force hospitals to pay the state $75 million more annually.

That amount is far short of what is needed to cover the state cost of Medicaid expansion. Prior estimates have shown Oklahoma’s expansion population could include up to 628,000 able-bodied adults. Based on current Medicaid expenses, that translates into a state cost of up to $374 million annually.

However, in his State of the State address, Stitt indicated he expects just 180,000 people to sign up for Medicaid-expansion coverage, less than one-third of those potentially eligible, and said that will require $150 million in new state funding.

But even if Stitt’s low-ball estimate proves correct, that means SHOPP would cover only half of the costs.

Other states’ experience suggests Stitt is dramatically underestimating Medicaid-expansion expenses. In 2018, the Foundation for Government Accountability found that states that expanded Medicaid signed up more than twice as many able-bodied adults as predicted and experienced cost overruns of 157 percent.

That fact was recently stressed by Senate Majority Floor Leader Kim David, R-Porter.

“Trying to look at it realistically and looking at it historically on what’s happened to other states, they’ve underestimated the population that’s come in,” David recently told a Senate committee. “They’ve underestimated the number of people that jump off the exchange that are now eligible or would be eligible for the free health care. So those numbers will continue to grow, and in every instance, every state has underestimated that.”

David has authored Senate Joint Resolution 27, which would use 75 percent of the annual payments Oklahoma receives from tobacco companies to support Medicaid. But even that bill would provide only $35 million to $45 million annually.

Even if the SHOPP fee is increased and tobacco settlement funds are used for Medicaid expansion, the combined revenue may still fall short of covering the $150 million annual cost estimated by Stitt, let alone the higher cost of up to $374 million.

“Even if you go to 4 (percent), you can’t exclusively fund it with SHOPP, and so we’re looking at funding options.” -- Senate President Pro Tempore Greg Treat, R-Oklahoma City

Earlier this week, Senate President Pro Tempore Greg Treat, R-Oklahoma City, warned that lawmakers may have to resort to additional measures to cover the cost of Medicaid expansion.

“Even if you go to 4 (percent), you can’t exclusively fund it with SHOPP, and so we’re looking at funding options,” Treat said.

Treat did not say what those other options are or if they include additional, broader tax increases. But he did suggest lawmakers should not raise SHOPP to the full 4 percent. He said “you don’t ever want to go up all the way up to the 4-percent cap that’s currently in statutes” because that taxing power may be needed to make up for future reductions in federal matching funds for the traditional Medicaid population. Oklahoma experienced several years of cuts in federal matching funds that coincided with the recent state recession.

Should lawmakers advance an increase in the SHOPP fee, Senate Democratic Leader Kay Floyd of Oklahoma City, a critic of Stitt’s plan, has noted the SHOPP fee is ultimately passed onto patients with private insurance.

“It’s raised premiums for people,” Floyd said during the legislative session’s first week. “The cost is passed on. It’s affected benefits for pharmaceuticals and for drugs. There are a lot of possible ramifications with tinkering with SHOPP, so as I say, we need to really take a deep look at it, a very hard look at it, before we make those kinds of changes.”

At the same time lawmakers are struggling with the price tag for Stitt’s Medicaid-expansion plan, a memo issued by the Opportunity Solutions Project indicates the legislation may be illegal under federal regulations addressing the use of “provider fees” for Medicaid matching funds.

That memo noted the Trump administration’s Centers for Medicare and Medicaid Services (CMS) “has recently published a rule that will likely prevent states from abusing these schemes going forward,” referencing a November 2019 report from Healthcare Finance. That site quotes CMS Administrator Seema Verma as saying, “We have seen a proliferation of payment arrangements that mask or circumvent the rules where shady recycling schemes drive up taxpayer costs and pervert the system. Today's rule proposal will shine a light on these practices, allowing CMS to better protect taxpayer dollars and ensure that Medicaid spending is directed toward high-value services that benefit patient needs.”

“The practice of taxing hospitals and using that revenue to draw down more Medicaid match from the federal government is highly questionable and has come under intense legal and regulatory scrutiny by watchdog groups, Congress, and past and current administrations alike,” the Opportunity Solutions Project memo states.

The Opportunity Solutions Project memo concludes, “Any Medicaid expansion that relies on this funding scheme will be on unstable, and perhaps illegal, footing going forward.”