Many 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). In the past, those providers reimbursed by Medicare on a reasonable cost basis often claimed the provider tax payments on their Medicare cost reports, and Medicare, too, paid its share of those taxes. This practice was consistent with the general rule that taxes assessed against providers are allowable costs under Medicare reasonable cost principles. See Provider Reimbursement Manual, § 2122. In more recent times, however, CMS has begun offsetting certain sums that the hospitals receive from the Medicaid program against these tax costs. Now, a recent decision from the United States Court of Appeals from the Eighth Circuit supports these offsets.
In Kindred Hospital East v. Sebelius [PDF], CA No. 11-3555 (8th Cir. Sept. 12, 2012), the court addressed Medicare's reimbursement of state-imposed provider taxes and whether those taxes are subject to offset. The case, which involved a hospital in Missouri, has somewhat unusual facts. The Missouri provider tax, like many, was based on hospital revenues, and it resulted in what were called winners and losers under the program. Hospitals that treated a large number of Medicaid patients received more Medicaid reimbursement and were winners when that reimbursement was measured against the amount of taxes paid. Conversely, hospitals that treated smaller numbers of Medicaid patients but that had comparatively high revenues paid more in taxes than they received in Medicaid and were considered to be losers. This inequality led the Missouri hospitals to initiate a pooling program under which certain Medicaid reimbursement amounts were transferred into a privately administered pool account and then used to compensate the losers for their losses. More specifically, those hospitals whose Medicaid add-on payments exceeded the tax they paid contributed the excess amount into the pool, while hospitals whose Medicaid add-on payments were less than their provider taxes received payments from the pool.
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