Does Anybody Notice the $300 Million Tax Increase Baked into Medicaid Expansion?

Governor Ralph Northam (left), Richmond School Superintendent Jason Kamras, and Senator Mark Warner met yesterday to discuss Medicaid expansion and school funding. Photo credit: Richmond Times-Dispatch

Governor Raph Northam and U.S. Senator Mark Warner hit the road yesterday with the media in tow, making the case that Medicaid expansion will free up $421 million over two years for other priorities such as K-12 schools.

“When we talk about education, we have to talk about health care,” Warner said during a roundtable discussion at Albert H. Hill Middle School in Richmond, as reported by the Richmond Times-Dispatch. “We’ve got to do this.”

Meanwhile Secretary of Finance Aubrey Layne is making the case that enacting Medicaid expansion is necessary to preserve Virginia’s coveted AAA bond rating, which is teetering on the edge of a downgrade.

That’s quite the rhetorical jiu jitsu move. For years, Republicans have opposed expanding Medicaid under the provisions of the Affordable Care Act on the grounds that it would be fiscally irresponsible, running up state Medicaid expenditures even after accounting for a 90% federal contribution, and competing with other priorities such as K-12 schools, higher education, and pay raises for state employees.

How is it possible for the Commonwealth to simultaneously expand Medicaid at an estimated cost of $300 million over the next two years and free up $421 million for other programs, as the Washington Post quotes Northam as saying? Two things. First the state cost of Medicaid expansion would be offset by means of an “assessment” — in other words, a tax — on the net patient revenue of Virginia’s acute care hospitals. Surprised to hear about that? Yeah, so am I.

Second, Medicaid expansion will allow the state to reduce spending by $380 million on indigent care funding, state spending on mental health, prison inmates and various programs for the poor, according to the House version of the budget. (I can’t figure out where Northam gets his $421 million estimate.)

Voila! That’s $380 million (or $421 million if you use Northam’s figure) that can be spent on other things, such as directing money into the state’s cash reserves and/or K-12 schools. Regarding those reserves, the state has only $281 million set aside in the event of a several revenue downturn, with $154 million scheduled to be injected this year. The budget submitted by former Governor Terry McAuliffe would have added $281 million, but the proposed budget adopted by the House would add only $91 million over the next two-year budget, and the proposed budget adopted by the Senate would add only $180 million.

Bacon’s bottom line: Does the public realize that there is a $300 million tax increase embedded in this plan? I did not understand that to be the case until I read the news accounts with a fine-tooth comb. The Times-Dispatch and Washington Post coverage mentioned the tax only in passing deep in their stories. Of course it’s in the interest of Democrats to downplay the tax increase, but, remarkably, I’ve seen nothing to suggest that Senate Republicans, who oppose expansion, have made an issue of it.

Let’s imagine an alternate universe in which Virginians said, (a) we want Medicaid expansion, and (b) we want to fund it without a tax increase on hospital revenues, which likely would be passed on to patients in the form of higher hospital charges. If the state is generating savings in the realm of $400 million a year from Medicaid expansion, why not just apply those savings to the 10% state share of the program? Why the necessity of adding a roughly $300 million “assessment?”

According to the numbers we’ve been given, paying for Medicaid expansion with savings to state programs would leave about $100 million left over to plunk into the state’s cash reserve. Of course, that approach wouldn’t allow Northam and Warner to tell people that “Medicaid expansion” will help Virginia schools, and it wouldn’t put as much money into the state’s cash reserves as Layne would like.

I find it astonishing that the hospital assessment has not become a hot-button issue. Health care costs are out of control as it is, and a $300 million tax on patient revenues can only make the problem worse (unless you believe that hospitals will settle for lower profits, in which case I’ve got some great swamp land in Florida I’d like to sell you.)

You’ve got to give Northam political credit. He and House Republicans are very close to pulling off the trick of expanding Medicaid and “freeing up” hundreds of millions of dollars for new spending without Virginians even noticing that they’d be indirectly paying for a $300 million tax increase on hospitals. This guy is good.

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15 responses to “Does Anybody Notice the $300 Million Tax Increase Baked into Medicaid Expansion?

  1. This is superb work. Thanks for the sleuthing.

  2. Never say I never agree with Democrats. The Governor’s proposal does a couple of the things that I’ve been advocating if Medicaid were to be expanded. 1) Tax the health care industry in order to recapture some of the financial benefits being showered on the industry by other taxpayers. 2) Cut state spending on indigent care. While I don’t trust the state to implement expansion in a way that saves insurance premium payers and taxpayers, Northam is heading the right direction. Maybe that’s because he voted Republican for president in 2000 and 2004.

    • “While I don’t trust the state to implement expansion in a way that saves insurance premium payers and taxpayers …”

      How would that work? Tax the hospitals and they raise their rates (they don’t have any margin to speak of). Higher rates either make premiums go up or make deductibles go up.

      • Hospitals and doctors have their real rates largely fixed by the insurance companies and other payers. For example, FEP Blue, one of the biggest insurers in the U.S., simply doesn’t have to increase its reimbursement or co-pay to recognize the tax. Ditto for Medicare.

        I have a friend who is a very skilled doctor with an excellent practice. Even though he doesn’t take insurance, he’s kept his rates flat since 2010 to keep them in line with what is reimbursable to his competitors.

        I guess the hospitals can recover some of the tax from uninsured patients, but can they collect?

  3. Good grief, Jim. Accepting the federal funding to expand Medicaid, but not agreeing to the new provider (hospital) tax to fund the state’s share of the cost – that universe has been occupied by Senator Hanger for some time now.

    Let me let you in on another shocking secret – both the House and the Senate have actually voted to expand Medicaid! Both extend benefits to recipients at 138 percent of the federal poverty level, up from the current income cap! But the Senate limits the expansion to recipients who already have certain medical conditions – so not as many potential new individuals or families are covered. It would put some people on a waiting list to hold down costs. Medicaid Expansion Lite – but it is not status quo ante bellum even in the Senate budget.

    The debate over the provider tax has been there for anybody to see or hear, and if you didn’t pick it up in the print coverage – well, you were not reading. In all of the stories about the major gap between the House and Senate versions of the budget there has been some mention of the provider tax as the biggest difference. As for the broadcast news or social media, well you know better than to rely on them.

    https://ihodvirginiageneralassembly.s3.amazonaws.com/agenda_block_docs/attaches/000/000/263/original/Side_by_Side_Comparison_of_House_and_Senate_Budget_Amendments_2-27-18.pdf?1519758539

    Governor Wilder had proposed a provider tax to fund Medicaid long ago, and I still had a “No Sick Tax!” lapel button from the GOP campaign against it 25 years ago. I shared it with somebody else as a novelty item, since I wasn’t working the issue. I guess I should have sent it to you, Jim.

    • Thanks for correcting my misperceptions.

      I don’t write about Medicaid expansion with any pretense of being an expert in the subject. Rather, I’m reacting on this blog as someone who has paid about as much attention, maybe a little more, as an everyday citizen to what’s being published in the news.

      I’d be interested to hear more on your take.

  4. “This guy is good.” If by good you mean underhanded and dishonest then I agree … he’s good. Pity. I harbored some hope that Northam might not be just another sleazy Virginia politician like Mark Warner. Who can forget Mark Warner’s campaign promise not to raise taxes (repeated publicly something like 13 times)? Then, once elected to his one consecutive term … “I have discovered that the state has financial problems. I have to raise taxes”. Really?

    From your picture … Gov Northam might want to consider wearing a plastic glove before he shakes that hand.

  5. I looked at my own prediction in that earlier discussion and I was too optimistic that at least some of the Senate R’s would go along. They had before, but so far only Hanger is assumed to be likely to agree to a conference report that includes the larger version of Medicaid expansion – and as noted he remains critical of funding it with the provider tax (which as DJ notes is not coming out of the hospitals’ margins – it’s passed on somehow.)

    I have more comfort personally with passing on the tax increase, at least in that form. You are right that indirectly the hospital tax is paying for spending increases in other areas of the budget – and that side by side I posted shows how the House is more generous in many places. Frankly I think the state’s share of expansion should come from GF and if other areas of the budget get squeezed, that is just the cost of being honest about our finances. To expand Medicaid and then also expand spending in so many other areas of state government is just asking for trouble down the road.

    The one unknown is the true state and local impact of the federal tax changes. I still think that ultimately the loss of all those federal deductions, and so many people moving to the standard deduction for TY 18 (me included, I expect), will produce a bonanza of new state revenue. I also think there will be a stronger economy for a while as a result. The legislators won’t have to cast a single roll call to reap that money. And I don’t sense any political pressure building to adjust the state tax code to prevent that windfall, because – again – nobody is really talking about it. That may be how this is paid for in the short run.

    Oh the irony of the Trump tax cut allowing VA Republicans to expand Medicaid..

  6. So…. just for giggles and grins… does the AAA rating stay intact if you don’t expand MedicAid … and don’t increase taxes or cut something?

    It was my understanding that the state is up against the AAA wall on the budget if they don’t expand MedicAid, no?

    Also .. if you could get 9 federal dollars for every one you spend – would that provide jobs?

    It works for DOD … and it works for the grants the Feds provide for education and COPs grants for public safety and transportation dollars…that require matches…

    how does it work for all these other Fed grants and not for Medicaid?

    and yes.. there should be a tax on the richer hospitals… even Bacon himself has blathered almost incessantly about the “profits” from some of the hospitals.

    Ironically – a good bit of the Medicaid Expansion money -itself – comes from taxes on Medical devices and services and HSAs and similar.

  7. re: ” The one unknown is the true state and local impact of the federal tax changes. I still think that ultimately the loss of all those federal deductions, and so many people moving to the standard deduction for TY 18 (me included, I expect), will produce a bonanza of new state revenue.”

    well not so much as the CBO has predicted after all is said and done that a recurring deficit will occur – steadily increasing the debt.

    It will do that even if there is a stimulative effect – according to most credible economist who do dismiss supply-side economics as a fraud.

    the bigger question is – what will Congress do if they actually start to see increasing deficits?

    My bet is that the GOP will try to cut entitlements – if they are able to maintain their majority.

    If the Dems prevail… I expect taxes to go up to “pay” for the tax-cuts and to shore up the entitlements… like Medicare Part B and Medicare Advantage which allows most seniors to afford dirt-cheap health insurance to allow them to own a regular home and a beach home and enough SUVs to transport them between…

  8. I was referring to a state revenue boost, not a federal revenue boost. Yes, the federal tax cut will create larger federal deficits, in my opinion.

  9. We can argue about the government’s role in insuring medical care for all, but again … we need to address the issues going wrong with medicine itself that makes the US the most expensive system.
    Here is info .. online forum re: treating “causes not symptoms” …

    “Monday’s LIVE Functional Forum: Interconnected Medicine.

    It’s been months since we returned to our original LIVE format, and we (us and the Ashland functional medicine community) have an epic show planned for you.

    I’m especially excited to announce the co-founding father of Functional Medicine (with Dr. Jeffrey Bland), Dr. David S. Jones, will be making his debut appearance at this Forum, along with other local practitioner legends.

    We will also be disrupting the healthcare climate in a big way by announcing a more affordable alternative to health insurance for individual payers. This will be our biggest announcement to date, so be sure to tune in and spread the word (we’re counting on you!)…..

    You can catch a fresh new episode of The kNews: The Opioid Crisis. In this broadcast, we report on the breaking news that doctors who receive the most kickbacks from opioid drug companies prescribe the most opioids by far.

    This means you, as the patient, need to know how to protect yourself from special interests like this. This broadcast will teach you how (and it’s less than 5 minutes long).

    On the kNew Health blog this week, we continue our Understanding Your Lab Work series with a focus on detecting and tracking chronic inflammation using the Highly Reactive C-Protein (hsCRP) tes”

    I have been following the birth of Functional Medicine since the early 90’s. Maybe they are getting strong enough now to be on the stage with Big Pharma and huge corporate medical practices.

  10. I sorta think there are two parts. The first is that whether it’s employer-provided or Medicare – we pay more than most other countries – AND it does NOT show up as better quality that contributes to longer lifespans.

    The second part is what do we do with folks who are not old enough for Medicare and their employer does not offer insurance or even if they do -the worker does not make enough to afford it.

    We keep confusing the two. We keep talking about if we can make healthcare more “transparent” that people could choose wisely and for less money. But that’s pretty much a pipe dream because even if you knew the prices … you still would not know the quality and as Steve said earlier.. if you have a serious health problem..you’re NOT looking for the lowest cost doctor.. but the doctor who has a good reputation regardless of his cost.

    I don’t think we “fix” health care in this country by requiring transparency.. although I do support the concept. If we are actually serious about it and can get over the idea that some people will need healthcare provided to them – we could get on to some real solutions.

    Right now – we have a flock of people who think that those who do not have health insurance – do not deserve to have it subsidized .. and that’s the real name of the game.

  11. And the thing that most folks don’t really recognize is that it’s the govt that requires employer-provided insurance to accept all employees no matter their health status AND to charge all employees the same price for insurance through self or family plans. Without the govt mandating that they do that, many, if not all insurance companies would vary their rates according to age and health status – and refuse to cover people with expensive conditions.

    Insurance would be cheaper for the young and healthy and become more and more expensive the older you got.

    Medicare is the same way – We do pay for Medicare Part A via FICA taxes but Medicare Part B , we did not, and we have to pay for it and you don’t have to take it. But the more germane point is that EVERYONE is entitled to buy Medicare ..no one is turned down… and everyone who has a retirement income less than 85K – pays just $134 a month for it.

    So the two largest groups of folks with health insurance in this country – get it as a result of government rules that require everyone to have access to it – and at one price – regardless of your age or health status.

    These two groups of people also typically oppose MedicAid and other forms of Govt health care assistance – on the premise that they themselves “paid” for their insurance and are opposed to “giving” insurance to those who don’t pay for it – completely ignoring the fact that many of them – themselves would not have insurance at all at ANY price, if it were not for the government.

    Soon or later, we have, collectively, have to recognize that reality and take responsibility for … the truth … and admit that virtually all of us – have insurance not because we “deserve” it but because the govt – mandates that insurance be made available to most of us.

    If we REALLY don’t want the govt “providing” insurance to people – then we need to be honest about how many folks would actually end up with no insurance or insurance too expensive for them to afford.

    Right now – we have a lot of people who either don’t know the reality – or they do know it but they are fine with the two-tier system as long as they are in the tier that does get access to insurance.

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