Medicaid Expansion Relies on Uncertain Funding

Feb 23, 2015

By Joe Nichols


Ohio’s Controlling Board took a risk when it authorized the state to fund Medicaid expansion with federal grants. Supporters of this plan claimed that expansion would actually yield a net gain to the state budget because large savings and revenue boosts would make up for the additional spending. Even the most optimistic projections assume that the fiscal feasibility of Medicaid expansion hinges upon revenues from a highly contentious state tax scheme. Renewed scrutiny of that state tax scheme by the federal government means the scheme may be outlawed, potentially costing the state billions of dollars in revenue and putting taxpayers at risk of higher taxes, fewer services, or both.

The key revenue stream in question is the state sales and use tax as applied to Medicaid managed care organization (MCO) premiums. The state takes advantage of a loophole in the Medicaid funding system through which taxing these premiums provides revenue to the state and increases the amount of federal grant money that Ohio receives. Thus far, this tax loophole has cost the federal government hundreds of millions of dollars, and allowed Ohio to reduce its share of total Medicaid expenditures and spend even more. But that loophole is about to close.

A recent investigation by the Office of the Inspector General of the Department of Health and Human Services (OIG) should warn states like Ohio currently using the loophole to fund expansion. Responding to OIG, the Centers for Medicare and Medicaid Services (CMS) stated it intention to bring wayward states into compliance. This means that Ohio will likely need to abolish its sales tax on Medicaid MCO premiums, and lose the critical revenue it provides.

Glowing fiscal projections of Medicaid expansion dim without this tax revenue. Independent analyses by pro-expansion groups projected expansion to cumulatively net over $1.8 billion for the state budget by fiscal year 2022. Extending the calculations another decade reveals a $2.5 billion gain by 2032. But if MCO taxes are abolished in 2016, Ohio will miss out on $1.3 billion in anticipated revenue over the next four budget cycles. Worse, if nothing changes, Medicaid expansion will lose up to $1.2 billion on net by 2032. Inevitably, Ohio taxpayers will be on the hook for this devastating shortfall.

Click here to download the full report: Medicaid Expansion Relies on Uncertain Funding