Crackdown on Medicaid Provider Taxes Spurs States to Fight Back

Federal Medicaid officials’ push for greater oversight of states’ health-care provider taxes could lead to more lawsuits against the Biden administration as states seek to forestall denials or clawbacks of billions of dollars in funding for their Medicaid agencies.

Florida and Texas have already sued the Centers for Medicare & Medicaid Services over the agency’s demands that states more closely regulate what happens with their provider taxes, which states assess to hospitals, nursing homes, and other health-care facilities to pay the states’ share of Medicaid funding.

The CMS, in a February 2023 informational bulletin, without naming Florida or Texas, said it had “become aware of some health care-related tax programs that appear to contain a hold harmless arrangement that involves the taxpaying providers redistributing Medicaid payments after receipt to ensure that all taxpaying providers receive all or a portion of their tax costs back (typically ensuring that each taxpaying provider receives at least its total tax amount back).”

The agency said such hold harmless arrangements are prohibited under Medicaid. Such private agreements among hospitals allowed Texas clinics to recuperate at least 105% of their total tax cost with federal matching funds, federal attorneys representing the CMS said in response to the Texas lawsuit.

Florida and Texas in their lawsuits reject the notion their governments have engaged in prohibited hold harmless agreements with providers. Florida alleges in its suit that the CMS, “without engaging in rulemaking—or providing any notice or an opportunity for public comment,” is now requiring states to oversee “private agreements among hospitals to redistribute Medicaid payments once received from a State.”

If the CMS determines that states or entities within the states are engaging in prohibited hold harmless agreements, it could respond by withholding or clawing back some of the federal Medicaid funding it provides to the states.

Currently, 49 states and the District of Columbia rely on provider taxes. In total, provider taxes generated Medicaid programs $36.9 billion in non-federal share in state fiscal year 2018, according to the Medicaid and Chip Payment and Access Commission.

A former senior Health and Human Services official in the Trump administration told Bloomberg Law that considering the Biden administration’s position on provider taxes, he wouldn’t be surprised if more states line up in the cross-hairs of the CMS.

“States that have these kinds of programs could come under threat, and they should be worried,” said the former official, who spoke on the condition that he not be named.

Increasing Oversight

The CMS asked Florida and Texas to police private redistribution pacts or risk the loss of future federal Medicaid matching funds, even if the states were not directly involved with the agreements. That is something both states argue is in violation of federal rulemaking procedures and would be excessively burdensome to oversee.

The states’ argument that the CMS’s redefining of established terms would violate the Administrative Procedure Act holds water because the agency would be enforcing a new statutory interpretation of a hold harmless agreement via guidance instead of going through proper notice and comment rulemaking, Charles Luband, partner and co-chair of Dentons’ health-care practice, said.

Claire Bornstein, a health-care attorney at Dentons, explained that since 2008, state Medicaid agencies have operated under the interpretation that the prohibition on hold harmless arrangements applies only when guarantees come from the governmental taxing authority itself and not private entities collaborating after funds were redistributed.

In its lawsuit against the CMS, lawyers for the state of Texas said the agency’s bulletin “contradicts CMS’s prior position—that private arrangements do not fall within the ambit of a prohibited hold harmless provision—without even attempting to explain why that position was incorrect.”

The Trump administration briefly tried to change this definition in 2019’s Medicaid Fiscal Accountability Rule, but the proposal was dropped due to intense backlash from state Medicaid agencies, the Texas lawyers said.

Future Battles Likely

Judge Jeremy D. Kernodle, in his June 2023 opinion granting Texas’ motion for preliminary injunction in the US District Court for the Eastern District of Texas, found the state is likely to succeed on its claim the agency violated APA rules when administering the bulletin, noting the agency “may not rewrite clear statutory terms to suit its sense of how the statute should operate.”

The CMS argued that the informational bulletin is not a legislative rule subject to APA notice-and-comment requirements.

The preliminary injunction only applies to Texas, and there’s no guarantee a federal judge in Florida would decide the same way as Kernodle, Brett Friedman, former New York state Medicaid director and an attorney at Ropes and Gray LLP, said.

Friedman said both sides have a credible position due to inherent uncertainty regarding the extent to which a state Medicaid agency is complicit in post hoc hold harmless agreements.

“They wouldn’t bring litigation if they didn’t think they had an argument. I think one of the things that litigation will do is it will generate the ability to look at the communications between the hospitals or the hospital associations and the state regarding how the provider tax was designed and what it was intended to be. If there are bad communications, then that could really hurt Florida’s position here,” Friedman said.

Wait-and-See Approach

Matt Salo, former executive director of the National Association of Medicaid Directors, said most states with similar provider taxes will continue to take a wait-and-see approach before they decide whether to attack the CMS’s bullish stance on provider taxes.

“I think a lot of states don’t want to sue the administration just because that’s a political mess they don’t want to be involved in. They’d rather say, ‘Well if Florida and Texas don’t mind suing the administration and are going to go ahead and carry our water, then that’s great.’” Salo said.

“But if the Florida and Texas lawsuits are ineffective, and the administration keeps coming after other states, I think you’ll probably definitely see more lawsuits.”

A CMS spokesperson told Bloomberg Law: “CMS takes its commitment to enforce existing federal statutory and regulatory requirements seriously and stands ready to assist states in ensuring that states are relying on appropriate sources of financing for the nonfederal share of Medicaid expenditures.”

“CMS will continue to approve permissible health care-related taxes that do not contain ‘hold harmless’ arrangements and meet all other applicable federal requirements,” the spokesperson said.