State Medicaid Financing Practices

Pursuant to a congressional request, GAO provided information on state Medicaid financing arrangements in Michigan, Tennessee, and Texas. GAO noted that: (1) until the Health Care Financing Administration (HCFA) ruled in 1985 that states could use Medicaid provider donations to reduce their share of Medicaid expenditures, states could only use provider donations for the cost of training administrative personnel; (2) Michigan raised $684 million for its Medicaid program through hospital donations and federal matching funds in fiscal years (FY) 1991 through 1993, allowing it to fund $566 million in additional Medicaid payments; (3) in 1993, Tennessee required certain medical providers to pay a $2,600 tax on their nursing home beds and a 6.75-percent tax on services, but it discontinued the hospital services tax in 1994 when it implemented the TennCare program; (4) Tennessee earned $458 million from nursing home and hospital taxes in FY 1993 and received $954 million in federal matching funds, which accounted for over half of its 1993 Medicaid spending; (5) Congress enacted legislation in 1993 that restricted state financing arrangements by limiting disproportionate share hospital (DSH) program payments, causing states to modify their DSH programs and overall DSH payments to decline; and (6) despite the 1993 legislation, states were able to use intergovernmental transfers and other creative funding arrangements to reduce their share of Medicaid costs.