A taxing situation

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There are a couple of hot-button government rules that are churning up a lot of discussion in skilled nursing circles these days. These rules involve two funding mechanisms – provider taxes and intergovernmental transfers (IGTs) – that help states draw more federal Medicaid matching dollars.

As often happens in this Byzantine world of government funding, merely understanding the rules entails some serious sleuthing. Because they have similar purposes, these concepts, in particular, have left me scratching my head for more hours than I’d care to count.

To offer some perspective, the rule regarding provider taxes is set to take effect in April. It will cap the amount a state can tax healthcare providers at 5.5%, down from 6%, through fiscal year 2011.

The other rule is drawing more fire – and is a bit more complicated. This rule, which will limit intergovernmental transfers and cut Medicaid payments to public healthcare providers, is set to go into effect May 25, 2008. It will lift a congressional moratorium on the proposed Jan. 18, 2007, rule.

But, really, what are provider taxes and IGTs? At risk of being overly simplistic, here goes:

Basically, provider taxes are broad-based and uniform and apply to a class of providers, such as nursing homes. They can apply to beds or revenues. Essentially, they are ways for the state to tax healthcare entities, such as nursing homes, and then receive money to give back as general Medicaid payments. No one likes to be taxed, but this tax is popular with long-term care providers. The higher the tax, the better, as far as they are concerned.

One caveat of the tax, of course, is that states cannot employ “hold harmless” provisions, which would allow the state to guarantee Medicaid funds to providers that are equal to the amount of the tax.

IGTs, by contrast, are the process by which states transfer funds to governmental entities to collect what are known as nonfederal funds for their Medicaid coffers. These are funds that states derive as part of their matching funds. The federal government also contributes matching funds.

The government’s beef with IGTs is that public entities, such as county nursing homes, may receive federal and state funding and only retain a portion of the funding, giving the rest back to the state. The state, in this way, has taken federal funds above and beyond its rightful share, according to federal regulators.

But this rule does more than cut back on IGTs. It also restricts Medicaid dollars to public providers and more narrowly defines a “unit of government." That further limits the number of IGTs that can take place. The rule is expected to trim $5 billion from public and other safety net providers over five years.

Governors and healthcare providers are concerned about this rule, in large part because of the Medicaid cuts and because states rely on IGTs as a source of Medicaid funding.

This all is heady stuff, but seeing as it may affect the survival of some long-term care providers, it is more than worthy of a little explanation.

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Daily Editors' Notes

McKnight's Daily Editors' Notes features commentary on the latest in long-term care news and issues. Entries are written by Editorial Director John O'Connor, Editor James M. Berklan, Senior Editor Elizabeth Newman and Staff Writer Marty Stempniak.