This year, as they have done for many years past, California officials will use an accounting strategy that will yield nearly $2 billion more in federal Medicaid payments than the state might otherwise be entitled to.
The accounting gambit, which is drawing increased scrutiny in Washington, goes something like this: California's cash-strapped counties, public university system and government hospitals scrape together $1.9 billion to send to Sacramento, ostensibly as a local contribution to the Medicaid health program for hospitalization and the uninsured. That money is then returned to the localities, but state bookkeepers continue to carry the funds on their balance sheet. Then the state asks the federal government to provide matching funds, not only for the state's Medicaid expenditures but also for those local contributions.
By so doing, California will increase its federal Medicaid match by nearly 9 percent -- a boon to the Golden State at the expense of the federal taxpayer.
"They're basically money-laundering," charged Jim Frogue, state project director of former House speaker Newt Gingrich's new Center for Health Transformation.
States have used this bit of creative accounting for more than a decade, with the knowledge and approval of the federal government. But this year, such tactics are at the heart of the biggest budget battle in Washington, one that has pitted the Bush administration against the nation's governors and the Senate against the House.
The White House and its allies in Congress say the federal government could save as much as $20 billion over the next five years by clamping down on what they see as fraudulent or abusive budget gimmickry. They began pressing their case this week when the House and Senate budget chairmen met to work out a compromise budget resolution that singles out Medicaid for the largest reductions.
But the states and their allies from both parties say their long-standing tactics are critical to providing medical services to indigent people.
"It's easy to label something as fraud and abuse," said Anne Marie Murphy, the Illinois Medicaid director. "But the reality is, these dollars go to health care."
On Wednesday night, Republican Sens. Gordon Smith (Ore.), Norm Coleman (Minn.), Olympia J. Snowe (Maine) and Lincoln D. Chafee (R.I.) told Senate Majority Leader Bill Frist (R-Tenn.) that they were holding firm on their stand that a high-level Medicaid commission must be convened before they could accept any cuts to the program's growth. Senate Budget Committee Chairman Judd Gregg (R-N.H.) has been just as uncompromising in his push to restore $14 billion in Medicaid cuts that a Senate majority stripped from his budget last month.
"If you go below $14 billion, you're basically admitting you're not going to do anything substantive," he said.
The dispute has all but ended hope that a budget can be completed by the budget committees' April 15 target, budget aides said yesterday. It could derail the budget altogether.
"I don't know how we get a budget that does Medicaid, given the Senate vote," Gregg said, "but I don't see a point in doing a budget without it."
With coverage reaching 53 million people, or 18 percent of the U.S. population, Medicaid is now considerably larger than Medicare, the health insurance program for the elderly. Federal spending on Medicaid is projected to rise 41 percent over the next five years, from $186 billion this year to $262 billion in 2010.
For states, however, the crisis is now. This fiscal year, 47 states and the District of Columbia will cut payments to health care providers, according to the Henry J. Kaiser Family Foundation. Fifteen states will throw people off the Medicaid rosters, and nine will cut benefits for those who remain eligible.
Given those strains, any reduction in federal matches will hurt, state Medicaid directors said.
"If we lost the $1.9 billion, it would be devastating. That would close virtually all the hospitals in California," said Stan Rosenstein, deputy director of medical care services for the California Department of Health Services.
State Medicaid officials are not shy about their creativity. "As state Medicaid director, I'm obligated to find as many federal dollars as I can, as long as it's legal," said David Feinberg, deputy secretary of Pennsylvania's office of medical assistance.
Through taxes on hospitals, insurance companies and, next year, possibly physicians, Michigan has been able to boost its federal contributions without increasing the state's share, said Paul Reinhart, the state's Medicaid director.
"Admittedly we use and continue to use unorthodox payment options," Reinhart said.
In Illinois, Chicago's Cook County adds $1.1 billion to the $1.4 billion the state spends on the county's public hospital system, boosting the federal match for the county to $2.5 billion.
In Pennsylvania four years ago, administrators calculated that the difference between their county nursing home costs and the maximum amount payable under federal law totaled $1.6 billion. So they had 20 county nursing homes go to their banks to borrow $1.6 billion, which was then sent to Harrisburg. The money was returned, but not before the state extracted an additional $850 million from the federal government.
For years, Iowa banked unused federal Medicaid dollars in a fund that the state used for indigent health care when budgets were tight. In effect, Iowa was using federal money to boost its federal match, reducing the state's Medicaid share from the statutory 34 percent to as little as 22 percent, said Kevin W. Concannon, director of the Iowa Department of Human Services.
Under pressure from the federal government, Iowa agreed last month to give up the $66 million scheme in exchange for an increased federal allotment of the same size. The state will also forgo a nursing home tax that is costing Washington millions more, Concannon said.
Indeed, Iowa and the federal Centers for Medicare and Medicaid Services see the Iowa agreement as a model for other states. Under the waiver, not only will Iowa drop its creative accounting but the Bush administration also granted Gov. Tom Vilsack (D) broad new powers to reduce Medicaid costs, for Iowa and the federal government.
Setting aside a federal requirement that Medicaid be available statewide, Iowa will be allowed to expand health coverage for the uninsured but limit their access to three general hospitals and four psychiatric hospitals. The state was granted permission to tighten eligibility requirements for nursing home coverage, but liberalize access to cheaper alternatives, such as home nursing care, elder day care centers and temporary respite care to give family caretakers a break.
The Iowa agreement underscores a strongly held contention among GOP budget writers that states could easily absorb a clampdown on their accounting tactics if they are given more flexibility to hold down costs. As it stands, the main options governors have to save money now is to cut services or throw Medicaid recipients off their rosters.
"Any governor who's worth his salt as a manager, you give him more flexibility with even these dollars, they'll be able to give more services to more people," Gregg said.
But Medicaid directors are firmly against Gregg's approach. The cuts in the budget committees' original spending plans appear to be arbitrary budget targets, not figures based on the savings available, Concannon said.
California's Rosenstein agreed. "I think every governor, including Arnold Schwarzenegger, believes Medicaid needs to be reformed," he said. "But we should decide the policy first, then see what savings that policy generates."