Most states assess taxes against hospitals or other providers as a means of funding their Medicaid programs. The revenues generated by the taxes are used, with CMS’s approval, to fund Medicaid payments to various providers, and the federal government participates in these Medicaid payments by paying its share (called Federal Financial Participation). Many Medicare providers have then claimed those taxes on their Medicare cost reports, and, until recently, Medicare had been paying its share of those taxes. This practice was consistent with the general principle that taxes assessed against providers are allowable costs under Medicare, but the practice has faced harsh scrutiny by the courts.

We previously reported on the Kindred decision, in which the U.S. Court of Appeals for the Eighth Circuit ruled that hospitals must offset amounts received from a voluntary hospital pool against the amount of the provider tax claimed for Medicare reimbursement. Now a second court of appeals decision again casts a shadow on this practice, by upholding another offset.