Thousands of Medicaid Providers Fail to Pay Taxes, GAO Finds

"The fact is, we believe that the stated goals of this investigation were based on big misconceptions about the authority and responsibilities of the Medicaid program," CMS spokesman Jeff Nelligan said in an e-mail.

Though the federal government provides much of the funding for Medicaid, the program is administered by the states, which issue payments to providers such as doctors and hospitals.

The IRS and other government agencies have concluded that Medicaid payments do not qualify as "federal payments." As a result, the IRS is legally precluded from using an automated system known as the Federal Payment Levy Program to dock future Medicaid payments, Acting IRS Commissioner Linda E. Stiff said in testimony prepared for the hearing today.

Adding to the difficulty, Medicaid payments are processed by dozens of state agencies, and the IRS does not have a mechanism for automatically deducting money from them, said Frederick W. Schindler, the IRS's director of collections policy.

IRS officers can and do use manual systems to target Medicaid payments in individual cases, Schindler said.

The GAO study gave extra scrutiny to 25 Medicaid providers with large debts. One nursing home, for example, owed $16 million in unpaid federal taxes and received $39 million in Medicaid payments in fiscal 2006.

Like other providers in the study, the nursing home was already in the IRS's sights: Multimillion-dollar tax liens had been filed against it.

Willful failure to remit payroll taxes can be a felony. However, tax cases are hard to prosecute, and criminal enforcement is not an efficient way of recovering unpaid taxes. And unless their behavior is egregious, driving health-care providers out of business to collect their debts can be self-defeating, Senate staff members said.

"If they go out of business the government loses any and all opportunity to recover the taxes they owe," LeRoy Coleman, Sen. Coleman's press secretary, said by e-mail.