AFI Health Committee Information Alert

HCFA Poised To Collect Penalties From States for State Matching Funds Raised Through "Impermissible State Taxes"

In Brief

Six states (Hawaii, Illinois, Louisiana, Maine, Missouri and Tennessee) have received correspondence from the Health Care Financing Administration (HCFA) notifying them that HCFA believes the state is not in compliance with the "holdharmless" provision of the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 (P.L. 102-234). If through further investigation, HCFA confirms its belief, an audit would be conducted to determine the amount of federal matching funds associated with the non-complying provision were paid in error. HCFA would then withhold a portion of future payments to the state until the payments in error are recouped. Additional states (Alabama, Connecticut, Florida, Massachusetts, Nevada, New Hampshire, and Utah) will be notified in the near future regarding non-compliance with a provision of the Act that requires permissible taxes to be "broadbased and uniform." Two states, Louisiana and Tennessee are on both lists.

Background

On December 12, 1991, the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 was signed into law (P.L. 102-234). In general, the provisions of the law became effective January 1, 1992. Under the provisions of the law, the Health Care Financing Administration (HCFA) was authorized to deduct from a state's Medicaid expenditures, before calculating the federal payment, funds raised from provider-specific taxes or donations deemed impermissible by the Act. Interim final regulations with a 60 day comment period were published in the November 24, 2992 Federal Register. The final rule was published in the August 13, 1993 Federal Register.

Briefly, a permissible tax must be: (1) broad-based - apply to all providers; and (2) uniform - applied to all providers on the same basis and at the same rate. States are prohibited from establishing programs that would have the effect of offsetting or reduce the impact of the tax on providers or taxpayers. This prohibition is called the "holdharmless" provision.

In December 1994, several State Medicaid Directors received correspondence from HCFA notifying them that their state had one or more "impermissible taxes" and was in danger of having their Medicaid allotment reduced. These letters listed the impermissible taxes HCFA had identified and asked the Medicaid director to provide information to support the permissibility of the identified taxes. Each Director was asked to respond within 30 days. HCFA said that they would send an audit team to the state during the first quarter of 1995 to audit state records to determine the specific amounts of any disallowance.

There has been minimal formal follow-up to the December 1994 letters.

Current Status

HCFA has now decided to move forward on this issue. Six states have received letters informing them that HCFA has concluded the state has currently (Louisiana, Tennessee) or had between 1993 and the present (Illinois, Hawaii, Maine, and Missouri) a program that violates "holdharmless" provision. These states can expect additional contact from HCFA over the next several weeks.

A second group of states (Alabama, Connecticut, Florida, Hawaii, Massachusetts, Nevada, New Hampshire, Tennessee, and Utah) can expect correspondence in the next few weeks from HCFA notifying them that HCFA has determined that the state has currently or had between 1993 and the present, taxes that violate the provision of the Act that requires that a permissible tax be "broad-based and uniform." If the tax is not broad-based and uniform, the state may request a waiver under certain circumstances.

If you are from Louisiana, Tennessee, Illinois, Hawaii, Maine or Missouri and would like a copy of the letter sent to your state, e-mail Joy Johnson Wilson and be sure to include your fax number. I will fax it to you. Over the next week, I will be putting additional background information on the Medicaid provider tax issue on the AFI Health Committee website.

Please call Joy Johnson Wilson at 202/624-8689 or Marla Rothouse at 202/624-3578 if we can be of additional assistance to you.