Financing Medicaid by new tax
on health facilities

The elaborate political dance at the end of every legislative session suddenly this year became like the dramatic moment in Cinderella. Everything turned sour at midnight. The legislature had failed to pass a hospital and nursing home tax proposed by Gov. Jim Edgar to bolster the Illinois Medicaid program providing health services for the poor. After the June 30 deadline, Edgar issued the magic order returning the Medicaid program, at least briefly, to its tattered former self.

Without the $735 million in revenue from the new tax and its doubling by a federal government matching contribution, the gap between expected Medicaid costs and revenues was so wide that Edgar said he had no choice but to slash reimbursement rates an average of 30 percent for nursing homes and up to 40 percent for hospitals. He announced the rate cuts at an early morning July 1 news briefing, and just a few hours later his Department of Public Aid started faxing out notices warning of the impending cuts.

The tactic helped. Some of the same nursing home administrators who had been urging their legislators to vote against the tax plan started telephoning requests for them to vote yes. "It was like blackmail," says George Maroney, administrator of Memorial Hospital of Carbondale, who never wavered in his opposition to the tax plan even though his hospital stands to gain higher reimbursements under it. Legislative opposition was further softened by an agreement to create a grant program for nursing home residents not on Medicaid. The program was primarily aimed at lessening the potential political explosion from those newly taxed elderly people.

Less than two days later, the metaphorical glass slipper had been placed on the correct foot, and everything fell into place. The tax plan was passed. Edgar signed it (HB 2758/PA87-0861) into law in less than a week, and the Illinois Medicaid system will get enough money to avoid catastrophe for another year.

It would be a mistake to report, however, that everyone is living happily ever after. The ending is good only for a year. Within months the legislature and governor will be back where they started, caught between the need to pay for billions of dollars in health care for those with no way to pay for it themselves and no one wanting to pay any more taxes.

To the very institutions that get direct benefits — hospitals and nursing homes — the Medicaid financing scheme is more like a nightmare than a fairy tale. And if enough people start feeling direct pain caused by the tax, there is potential for great public discontent.

The tax plan itself is fairly straightforward. The tax is applied to hospitals, nursing homes and residential facilities for the developmentally disabled. Hospitals are taxed 2.5 percent of 1991 net patient revenue. Net patient revenue is the money actually collected for services to patients, not the amount billed by the hospitals. (Exempt from the tax are 48 rural hospitals designated as sole community providers. If the federal government grants the state's request for a waiver, they would not pay the state though they would benefit from the higher reimbursements created with the new pool of money from the tax and federal match.)

Nursing homes are taxed $6.30 a day ($2,300 a year) for each occupied bed. They may pass that tax on to their paying customers, though they are prohibited from passing on another new tax of $1 a day on each occupied bed. Facilities serving the developmentally disabled are taxed at a 13 percent rate. For those centers that serve the mentally retarded, the system is similar to last year's: So much of their revenue comes from government payments that they basically will get back all the money they pay in taxes plus federal matching funds.

Excluding the daily $1 per bed nursing home tax, the package is designed to raise $735 million from Illinois health care institutions, which is matched by the federal government to create a $1.47 billion pot of money for the Illinois Medicaid program. The money will flow back to the hospitals and nursing homes as reimbursement for services they provide to the needy or elderly under Medicaid. The total allocated for Medicaid bills in this fiscal year will hit $3.9 billion, topping the $3.5 billion allocated in fiscal 1992.

No one disputes that the system needs the money. Medical costs have increased significantly faster than overall inflation for years, while state revenue growth barely keeps up with inflation. Through Medicaid, 1.36 million poor people in Illinois, mostly women, children and the elderly, receive health care. It pays for one in three baby

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By the time Edgar took office in January 1991, the general state budget was in disarray. The Medicaid payment system was falling apart and under legal challenge from the hospital and nursing home industries. These providers of Medicaid service had mixed results in court, but even budget-cutters agreed that Illinois, which ranked at or near the bottom of various lists of states in its medical reimbursement rates, needed to do better.

So last year Illinois joined a growing number of states imposing a special kind of tax on hospitals and nursing homes, promising that each facility would get back in the form of Medicaid reimbursements at least the amount it paid in taxes. The benefit to Illinois was gaining $640 million from the federal government to match the $640 million paid by Illinois hospitals and nursing homes.

Concerned about the multibillion dollar national price tag of such schemes, the Bush administration sought to stop them. A deal with Congress allowed some temporary grandfathering, but new rules required more broad-based taxes to qualify for continued federal matching of the state share. The key change: No state could promise the taxpaying institutions that they would get back in extra Medicaid reimbursements at least the amount they paid in taxes.

Illinois was left with four options: doing nothing, which would have left a gaping hole in the Medicaid budget and forced massive cuts in reimbursements to nursing homes and hospitals; enacting a general tax increase on the whole public; slashing enough out of the rest of state government to come up with money for Medicaid; or enacting a tax on the providers that would pass muster with the federal government.

None of the choices seemed very good. As the reaction to Edgar's July 1 threat to slash reimbursement rates indicates, few really thought the state could deeply cut Medicaid payments since rates are arguably already too low to adequately cover the costs of care. Such cuts would almost certainly bankrupt some hospitals and nursing homes.

As for the second option, Edgar vowed during the 1990 election campaign not to allow an increase in taxes, and he demonstrated no willingness to embrace the kind of income or sales tax increase required to fund Medicaid. Besides, the legislature showed no willingness to approve the smaller tax increases on items like alcohol and tobacco that Edgar did propose in his fiscal 1993 budget.

The third option was out. No one argued that anything close to $735 million could be shaken loose from the rest of state government. The legislature and governor had a tough enough time balancing the state budget even with the Medicaid tax. They ended up cutting less than a fifth of what the new provider tax would generate in revenue.

Second nursing home tax to fund grants for some residents to cushion 'granny tax' The state imposed a second tax on nursing homes to fund $32 million in grants for residents to offset the increases in their bills when the homes charge them for the original "granny tax," as the new Medicaid tax on nursing homes was dubbed. Agreement on the new grant plan finally broke the legislative logjam that stalled passage of the hospital/nursing home taxes designed to bolster funding for the Medicaid system. To cushion what some legislators feared would be a public outcry from elderly constituents and their families when the $2,300 a year granny tax is added to nursing home bills, the second tax was devised to make quarterly $500-grants available to nursing home residents who qualify by income. Many felt it was unfair to tax elderly nursing home residents to pay for the care provided via Medicaid to poorer nursing home residents. Others warned that another $2,300 a year would more quickly deplete assets of private paying residents, increasing the number of people depending on Medicaid. Nursing homes will pay to fund the grant program with another $1 daily tax for each occupied bed, but it cannot be passed on to residents until their contracts come up for renewal. Qualifying for the new grants are nursing home residents whose adjusted gross income, after subtracting the amount of the nursing home bill, is less than 2.5 times the poverty level. The cutoff is $17,025 for an individual and $22,975 for a couple. For example, if a person's adjusted gross income is $45,000 and a year's nursing home bill is $28,000, the $17,000 remaining would qualify that person for a grant. The program applies whether a family member or the resident pays the nursing home bill. Theoretically the $32 million will cover those hurt most by the granny tax. Of the 115,000 nursing home beds in the state, 61,500 are occupied by people whose care is subsidized by the Medicaid program. Of the 53,500 remaining, most estimates suggest 16,000 will qualify for grants. Anthony Man

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That left the fourth option, some kind of tax on hospitals and nursing homes. Failure to enact such a tax "would have caused a health care crisis in Illinois like we've never seen and hopefully never will see," says the plan's sponsor. Sen. Howard W. Carroll (D-l, Chicago). The trick was to create a program that would raise a significant amount of money, create as many winners and as few losers as possible, and pass federal scrutiny. The big problem was the federal ban on guaranteeing the taxpaying institutions they would get back at least the amount they pay in taxes.

Philip C. Bradley, director of public aid, explains the dilemma. "The attitude of many of the rich hospitals was 'it's not my problem.' Well, if you go too far along that path of saying it's not my problem, you reach a point where the inner cities are in flames and where you have riots, and I think the lesson of Los Angeles this year is, 'It's everybody's problem.' It doesn't make any difference [where] you live ... the whole society is impacted by what happens to the lives of people living in the inner city," Bradley says. "It's hard to have sympathy for a hospital that serves almost no poor people, which pays its chief executive officer $200,000 a year and which claims that paying the assessment would harm the hospital. They charge $28 a box for Kleenex; [now] they have to charge $29 a box for Kleenex."

Unlike last year, when no institution providing Medicaid services was a loser, this year there are plenty. The greatest winners are hospitals, particularly those in urban areas, and nursing homes with high Medicaid populations. Biggest losers are those with low Medicaid populations, most of them in the suburban areas around Chicago. Roughly 80 percent of the state's hospitals will receive more in reimbursements under the new Medicaid provider tax scheme than they would without the tax and the accompanying increases in reimbursement rates. But one in five hospitals is a loser.

Panel to review state of the state's health care system Tucked in at the end of the legislation establishing a tax on Illinois hospitals and nursing homes to help fund the Medicaid program is authorization for a committee to review the state of the state's health care system. The language is intentionally broad, allowing the governor great leeway in establishing the panel, determining its membership and charging it with a mission. "The immediate concern is how do you fund Medicaid, but I think there are many people who want to have broad discussions on the health care system," says Philip C. Bradley, Gov. Jim Edgar's public aid director. "We look at this as an exciting opportunity to examine the health care problem in the state of Illinois." Unlike the the 1989-1990 Chicago-Cook County Health Care Summit, the last grand and fizzled attempt at radical reform of the Illinois health system, Bradley says this one could work. First, he says, the Chicago-Cook County summit was largely health professionals talking to each other. More important perhaps, Bradley says, is that public interest is now much greater. He favors exploring topics as politically sensitive as requiring insurance companies to cover all applicants, even those with high risks, and to figure out how to provide coverage for the working poor. Bradley's own Medicaid program director, Theresa H. Stoica, thinks he may be too optimistic. Stoica predicts that the panel could easily become overwhelmed with the magnitude of the immediate question of funding the Medicaid program, making it difficult to resolve broader issues. "The timing with the provider tax is going to make everyone focus on Medicaid funding," she says. "The budget here overwhelms so much." Anthony Man

Carroll suggests, not facetiously he insists, that hospital administrators, concerned that their institutions are not getting back enough in Medicaid reimbursements compared to the new tax they pay, might want to open clinics to serve poor people so they can get more Medicaid money.

The administration said its original proposal would have created about the same ratio of nursing home winners and losers. Bradley says the ratio is lower because changes negotiated with industry lobbyists altered the way the money in the program will be spent. A special pool of money that would have gone to nursing homes with relatively few Medicaid patients was eliminated.

Even many of the hospitals and nursing homes that get back more in higher Medicaid reimbursements than they pay in the tax were opposed to the concept of taxing providers of health services to fund the Medicaid program. Industry groups and individual facility executives argued that the only correct policy to finance society's needs for health and long-term care of the poor is to tax the public at large. They insist the idea of an income tax increase was dropped too quickly. "It just comes down to what's right is right and what's wrong is wrong," says Marilyn Benedino, administrator of the Piatt County nursing home between Champaign and Decatur. She calls it immoral to tax the sick and elderly to fund Medicaid. Maroney, administrator of the Carbondale hospital, was more blunt: "As public policy, I think it stinks." Bradley does not disagree with the philosophical argument, but he says that the practical political reality of 1992 was that the legislature would not pass and the governor would not sign a general tax increase.

Carroll says the choice was obvious. While every provider group wanted to increase a general state tax, he says, "It wasn't going to happen. You can bury your head in the sand and say 'increase taxes' or you can say 'what do we do next?' " Sen. John W. Maitland Jr. (R-44, Bloomington) had a similar sessment. "It's lousy public policy. [But] the reality of the thing is we had to get more money into the system to capture more federal dollars."

Although the opponents never gave up on the policy argument, it was not their only tactic. Nursing homes enlisted the families of private pay residents who would bear the brunt of the $2,300 per year bed tax. Those residents and family members innundated legislators with complaints. Sen. Penny L. Severns (D-51, Decatur) says that even with the proposed budget cuts to state agencies and proposed tax increases on alcohol and tobacco, the nursing home tax generated more constituent mail

conclusion on page 23

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Ironically, the $2,300-a-year tax, which could have helped mobilize intense political opposition, may be alleviated by something brought to the negotiating table by the nursing home industry itself. To make the new tax more palatable to those middle-class nursing home residents who have not yet spent enough of their assets to rely on Medicaid — and their family members who often pay the bills — the second daily bed tax of $1 was added. Proceeds are earmarked for a $32 million fund designed to pay $2,000 a year to about 30 percent of private pay nursing home patients.

Hospitals, by contrast, did not have such ready access to a pool of constituents who would complain. For them, any cost increase from the new tax will simply be added into their charges, continuing a long-standing practice of cost shifting. Cost shifting is the adding of costs for things not covered by government health programs to the bills of paying patients. Costs will go up for paying patients, but since most have employer-provided insurance coverage, they do not see the effects of cost shifting.

Bradley concedes that hospitals are likely to cost-shift the tax onto their paying patients, particularly at hospitals getting less back in Medicaid reimbursements than they are paying in taxes. He argues that the picture is larger than individual hospitals. First, he says, the cost is being shifted to hospitals in good financial condition that do not provide much care for poor Medicaid patients. And since the federal government contributes $735 million to match the Illinois health facilities tax, cost shifting among institutions is less with this combined Medicaid pot than without it. And without the plan, Bradley says the "cost" would have included the closing of more hospitals since state Medicaid reimbursement rates would have dropped.

Opponents of the tax plan were able to achieve one victory they regard as significant: The program lasts for only one year. Yet it is hard to see what will change. Even if the legislature and governor agreed to higher general taxes, Medicaid alone would require a .6 percent income tax. Bradley says it is hard to imagine medical care for the poor muscling its way to the front of the line, ahead of education and abused children.

Former legislator William L. Kempiners, executive director of the nursing home trade group Illinois Health Care Association, says a general tax increase is necessary to fund Medicaid, but he does not believe the governor will go along with one. He and Bradley agree that the entire system needs some comprehensive attention, which could be spurred by the need to figure out a financing scheme next spring. (See box on page 20) "The state of Illinois better start pulling its act together, or we'll be in such a hole that we'll never be able to get out of it," Kempiners says. "We have used so much baling wire and chewing gum that we're going to have a catastrophe when the flying machine falls apart in mid-air. We've reached a point where if one thing fails in the machine, it's going to fall apart and collapse around us."

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