WASHINGTON — It was about a year ago when federal officials started to catch on. States were bragging to one another about a new way to collect extra Medicaid dollars. Word got back.
In Washington, the inspector general investigated, concluding that states were pretending to spend billions of dollars for Medicaid to draw down inflated matching money from Washington. In most cases, the extra money ended in the state coffers, available for just about anything.
Over protest from states, the Department of Health and Human Services put regulations into effect this month to close the loophole. The Bush administration is continuing the policy put in motion by the previous administration, seeking to cut an additional $17 billion over the next 10 years.
It's unclear how far the administration will get, given the fierce opposition HHS met last year from members of Congress whose home states have been benefiting handsomely from the situation.
For now, the administration is talking tough, and this week HHS plans to announce a further crackdown on what investigators call a sham and a shell game.
"The loophole has allowed states to draw down billions of dollars in federal reimbursement for hospitals and nursing homes without any assurances that these payments were used for their intended purpose," the administration said last month in its budget blueprint.
The blueprint notes that while HHS and Congress addressed the issue last year, what is called the upper payment limit loophole continues to cost the federal treasury billions — an estimated $6 billion above and beyond what Medicaid would normally cost just this year.
Medicaid, the health insurance program for the poor and disabled, is financed by a combination of federal and state dollars. On average, Washington pays 57 percent.
States are allowed to set their own payment rates to doctors, hospitals and nursing homes, but there's a ceiling: They can't pay more than Medicare pays for any one service.
For years, this was irrelevant, because typically Medicaid pays much less than Medicare, which mainly serves the elderly. But beginning in the early 1990s — just as the federal government was shutting down an earlier Medicaid maneuver — a few states discovered a lucrative accounting trick.
States would massively inflate their payments to state- or county-owned hospitals and/or nursing homes. When those payments were averaged with the lower payments made to private facilities, the state as a whole would be at the maximum charge, making the situation technically legal.
Those overpayments, however, were not being used to enhance care.
The state would transfer the money to the hospital or nursing home, and it would stay there just long enough to draw down inflated matching money from Washington — perhaps just a few hours. Then the facilities returned the money to the state, which could use it for any purpose.
By late 1999, state officials were buzzing about the accounting trick, and HHS began receiving more applications from states to change their Medicaid reimbursements.
Since it was legal, federal officials had no choice but to go along.
HHS promised to crack down, which had one immediate effect: Even more states applied for these financing arrangements, wanting to get in on the extra cash before the law changed.
In September, 19 states were receiving inflated payments. Today, 26 states are in on it, and five others have applications pending that are likely to be approved because they were covered by old rules.
Last fall, HHS proposed regulations phasing out the procedure over five years by changing the way the maximum payments are calculated.
State governments and their representatives in Congress protested loudly, arguing that states had come to rely on the money. While the money might not be spent on Medicaid patients, they said, it was being used for health care and other important programs.
"There are a number of states who are using the money raised by this to prop up urban public hospitals that otherwise would go under," said Matt Salo, a Medicaid specialist for the National Governors' Association.
Critics responded that once the money is put back into state treasuries, there's no way to know what it's paying for. Still, the states has powerful allies in Congress, and they succeeded in extending the loophole for up to eight years, depending how long a state had been relying on the money.
The new regulation took effect this month. Cushioning the blow, it allowed for some inflated payments. For state-owned hospitals, states could set payments at 150 percent of the Medicare rate, although they could no longer massively inflate these payments by averaging them with lower checks for private hospitals.
This week, HHS is expected to propose cutting that 150 percent to 100 percent. The department also may suggest cutting some states off the arrangement sooner than scheduled.
Congress already is resisting. In its budget resolution, the House declined to go along with the administration's plan. "The budget resolution does not contain Medicaid savings," a Republican document says.