Death to Taxes, IG Report Says…

Yes, the Hawks lost. But my playoff beard was overdue for a trim.

Yes, the Hawks lost. But my playoff beard was overdue for a trim.


Good morning, ProviderNation.

Dry your eyes. You needn’t send condolences. My playoff beard was getting a little unwieldy in any case. (Please note, though, that Nature Herself was clearly rooting for the ‘Hawks.)

But we move on, with quiet dignity and grace.

And it appears that we’re not the only ones having a rough week. Pennsylvania got a nasty-gram from the fine folks at the Department of Health and Human Services’ inspector general’s office. It seems that Pennsylvania’s gross receipts levy on its Medicaid managed care groups violates federal laws against taxes on health care.

“The tax appears to be an assessment on health care items or services, specifically the health care services provided by MCOs,” says the inspector general’s report, released Friday. “If the tax is determined to be health-care-related, it is impermissible because it is not broad-based (the Gross Receipts Tax does not apply to all MCOs) and because it holds the Medicaid MCOs harmless as taxpayers (the state agency includes the cost of the Gross Receipts Tax as a supplemental payment in its capitation payments to Medicaid MCOs).”

Worse: “Under Medicaid rules,” the report says, “revenue from an impermissible health-care-related tax may not be used to finance the state’s share of Medicaid expenditures. However, by using revenue from this tax, Pennsylvania lowered its share of MCO capitation payments and increased the federal share. During our audit period, the federal government paid $981,337,949 for supplemental capitation payments designated to hold the Medicaid MCOs harmless. The MCOs received $1,603,980,052 in supplemental capitation payments to reimburse them for the Gross Receipts Tax, and Pennsylvania retained $1,135,513,480 of Gross Receipts Tax revenue in its Medicaid MCO fund.”

For their part, Pennsylvania officials say they respectfully disagree with the IG’s findings. State officials argue that the managed care levy “is not a health-care-related tax because the taxes it collected from Medicaid MCOs did not constitute more than 85 percent of all Gross Receipts Tax revenue and because the Medicaid MCOs are not treated differently from other taxpayers,” Friday’s report says. Further, “although the Gross Receipts Tax on Medicaid revenue of MCOs was not a health-care-related tax, it would have been permissible because the hold-harmless provision does not prevent the use of the tax to reimburse health care providers for their expenditures. The state agency said that CMS had full knowledge that Pennsylvania extended its Gross Receipts Tax to Medicaid MCOs as a revenue source for the state share in claiming federal matching funds for its Medicaid program.”

Friday’s report isn’t, of course, the last word. The inspector general asks the fine folks at CMS to make a ruling on whether the tax is illegal. But if it is, the Quaker State could be dinged nearly $1.8 billion just to rectify the revenue violation and another uncalculated “offset” for having illegally subsidized state Medicaid.

That leaves the mess to the poor folks at CMS. They say the inspector raises an interesting point, and they’ll want to take a gander for themselves. “CMS said that, if it determines that the Gross Receipts Tax is an impermissible health-care-related tax, it will work with Pennsylvania to develop an approvable tax structure,” Friday’s report says. “However, because it has not issued sub-regulatory guidance to explain this position, CMS did not agree that a disallowance is warranted until the states have clear notice of its interpretation of the health-care-related tax requirements.”

(Bill Myers is Provider’s senior editor. Email him at Follow him on Twitter, @ProviderMyers.)


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