CMS Proposes a Policy Clarification Regarding Medicare Treatment of Medicaid Provider Taxes

Payment Matters Newsletter

June 10, 2010

By: Carel T. Hedlund and Thomas W. Coons

CMS has proposed a policy "clarification" regarding the Medicare treatment of Medicaid provider taxes in the proposed FY 2011 inpatient prospective payment system (IPPS) rule published on May 4, 2010 [PDF]. In many cases this clarification would permit Medicare contractors to disallow all or a portion of Medicare reimbursement for the provider taxes that hospitals pay to their states. Under the proposed policy, CMS would permit its contractors to offset against the tax expense the Medicaid or other state payments that the hospitals receive from the state.

In the preamble discussion, CMS acknowledged the general rule, set forth in Provider Reimbursement Manual (PRM) section 2122, that taxes assessed against a provider by a state are allowable costs under Medicare cost reimbursement principles. CMS then indicated that section 2122.2 of the PRM, which lists taxes that are not allowable, has not been updated since 1979 and does not "reflect the variety of provider taxes imposed by the States." Moreover, CMS stated that, even if a provider tax is allowable, the providers may not "incur" the entire amount of the tax expense. In some instances, according to CMS, assessed taxes may be paid by hospitals into a fund from which the state is authorized to disburse monies to hospitals and that these types of subsequent disbursements "are associated with the assessed taxes and may, in fact, offset some, if not all, of the taxes originally paid by the hospitals." CMS then stated its belief that the treatment of these types of payments should be analogous to the treatment of purchase discounts, allowances and refunds of expenses addressed in 42 C.F.R. § 413.98.

After making these statements, CMS concluded that in circumstances "in which payments that are associated with the assessed tax are made to providers specifically to make the provider whole or partly whole for the tax expense, Medicare should . . . recognize only the net expense incurred by the provider." Continuing, CMS stated that "while a tax may be an allowable Medicare cost in that it is related to beneficiary care, the provider may only treat as reasonable cost the net tax expense; that is, the tax paid by the provider reduced by payments the provider received and that are associated with the assessed tax" (emphasis in original).

Thus, CMS proposed to "clarify" its policy set forth in the PRM to state that Medicare contractors are to "determine the allowability of provider taxes on a case-by-case basis . . . and will determine if a reduction of the allowable tax expense is proper to account for payments providers receive that are associated with the assessed tax." Finally, CMS stated there would be "no financial impact [as a result] of the proposed change," which change it termed a "clarification of longstanding policy."

Comments on this proposed policy clarification are due by June 18, 2010.

Ober|Kaler's Comments

Although this proposal is under the heading "Cost of Provider Taxes as Allowable Costs for [Critical Access Hospitals]," in fact it would have a much broader impact. This proposed policy would also affect other hospitals that have some of their services reimbursed on a reasonable cost basis, such as those with outpatient hold harmless payments, organ acquisition costs, and rural health clinics. In addition, if these costs are removed as allowable costs on PPS hospital cost reports, that will affect future rebasing of PPS rates.

Many Medicare contractors have allowed provider taxes as administrative and general (A&G) costs for years, without offsetting revenues received from the States. This is not surprising, given that the Medicaid side of CMS has approved many such tax programs, finding that the taxes are permissible health care-related taxes. In making this finding, CMS had to determine that providers were not "held harmless" for the tax assessments through Medicaid or other payments from the State. Thus, this proposed "clarification of longstanding policy" will no doubt surprise many Medicare contractors as well as providers.

State Medicaid programs may also be affected. As more states are interested in such provider taxes as a way of funding increased Medicaid expenditures, they may find that hospitals are reluctant to support such programs if Medicare will not reimburse their share of those taxes.

Moreover, the discretion granted to Medicare contractors to make case-by-case determinations on this issue would likely result in uneven interpretations throughout the country. Some contractors may determine provider taxes are allowable and not require any offset, while other contractors may offset any revenues received from the state against the amount of the similar tax assessments.