‘Scams’ in States’ Medicare Budgets Are Target of Strict New U.S. Rules

In a move that could wreak havoc with state budgets nationwide--and potentially poke an $800-million hole in California’s precariously balanced finances--federal officials plan this week to issue new rules to sharply restrict state methods of raising money for Medicaid.

The new rules are designed to stop a wave of creative financing techniques that Bush Administration Budget Director Richard G. Darman has denounced as “scams” designed to shift Medicaid costs off state budgets and onto federal ledgers.

State officials, however, said that the new rules, drafts of which have been circulating in Washington for several weeks, would infringe illegally on the ability of states to manage their own tax systems and could require huge Medicaid cuts.

At one level, the fight is an arcane budget battle pitting legions of lawyers and accountants in Washington against officials in dozens of state capitals across the country.

But on a more significant plane, the debate is a symptom of an escalating tug-of-war as governments at all levels try to escape the massive--and rapidly increasing--costs of health care for the 27 million low-income Americans--mostly children, pregnant women and elderly nursing home patients--served by Medicaid, which is known as Medi-Cal in California.

Across the country, state officials said that the new federal moves are likely to require either substantial tax increases or service cuts. “They use words like ‘sleight of hand,’ ” Kassy Perry of the California Health Services Department in Sacramento said of federal officials. “They accuse us of raiding the (federal) Treasury. But we have to finance a program that’s pretty expensive.”

Federal officials, for their part, said that, while they sympathize with the financial problems of the states, it is unfair for governors to try to shift their financial problems to Washington.

“As far as I’m concerned,” said one senior Administration official, “this is basically bank robbery.”

The fight could disrupt Medicaid at a time when expansions of the program have begun to yield tangible results in better health care. Alabama, for example, in the mid-1980s had the highest infant death rate in the nation. Earlier this year, however, state officials announced a 10% reduction in infant mortality and attributed the changes largely to expansions of the state’s Medicaid program--traditionally among the most stingy in the nation--to provide prenatal care to more pregnant women.

The expansions in Alabama’s Medicaid program and similar changes in many other states came about because of new laws pushed by members of Congress, particularly Rep. Henry A. Waxman (D-Los Angeles), that require states to allow more people--especially children and pregnant women--into the program. But while the program has been improved, both the federal government and the states have resisted bearing the costs.

The game-playing about who must pay the bill is possible because Medicaid is a joint state-federal program in which the federal government matches money spent by the states--dollar for dollar in the case of wealthy states such as California, more generously in the case of relatively poor states such as Alabama.

Medicaid’s price tag tripled during the 1980s--to some $72 billion during 1990--and the growth has barely slowed. Budget officials expect state and federal costs to more than double again during this decade. Most of the increase has come about because of general inflation of health care costs although a substantial part is attributable to expansion of the program.

Medicaid is now the second-largest item in most state budgets after education. And on the federal level, the program is likely by the middle of this decade to eclipse Medicare, the federal health program for the elderly, which is the second-largest domestic program behind Social Security.

Faced with rising costs, states in recent years have begun experimenting with new ways to increase the amount of federal money they receive. The basic idea has been to find accounting methods that make state spending appear larger, thereby requiring the federal government to increase its matching payments. The proposed federal regulations would close many of the loopholes states now employ, thereby saving the federal Treasury--but costing the states--an estimated $5 billion.

In Massachusetts, for example, a mid-level welfare department official received an award and a $10,000 bonus from Republican Gov. William F. Weld earlier this year after discovering that, through a complex shift in its accounting procedures, the state could increase its federal Medicaid match by $200 million. With dozens of states facing budget crises this year, those sorts of stories circulated quickly among state Medicaid and budget directors. As a result, the number of states using such creative financing techniques for Medicaid has soared--from roughly a dozen two years ago to about 40 now.

Even defenders of the states concede that some of the new programs are clear abuses.

One widely cited example comes from Pennsylvania, where state officials asked 260 hospitals in the state voluntarily to contribute a total of $365 million to a statewide health care fund.

Hospitals, most of which borrowed the money from local banks, had an incentive to make the contributions because the state guaranteed that each hospital would get back at least as much as it had contributed, generally more. The state, in turn, was able to make that guarantee because its spending of the $365 million in the fund automatically triggered federal matching payments.

On the basis of the money raised from the hospital contributions, the state received an extra $375 million in federal money over the last year, according to Vicki Smink of the state’s Health and Welfare Department.

Federal officials argue that the scheme is a clear effort to exploit loopholes in the law to pry more money out of Washington. “It’s potentially a bottomless pit,” complained the senior Administration aide. “They’ve doubled their money for nothing.”

California’s program is different. State officials, including Gov. Pete Wilson--who discussed the issue with Thomas Scully, deputy director of the White House Office of Management and Budget, last week--have been arguing that the state’s program should be exempt from the federal ax because all the spending involved already is government money. Both state and federal officials, however, say that the future of the state plan remains in question.

Under the California plan, counties, hospital districts and units of the University of California system will transfer funds from their budgets to the state health care fund. The state then sends the money back down to county and university hospitals, as well as some private hospitals that take large numbers of Medi-Cal patients.

The added state spending triggers an increase in federal funds. The result is expected to boost by $800 million the amount that the federal government gives California to help run the multibillion-dollar Medi-Cal program, according to John Rodriguez, deputy director of medical care services for the state’s Department of Health Services. The bulk of the money will be spent in public hospitals run by government units that contributed the funds but some will also be spent in private hospitals that serve large numbers of Medi-Cal patients.

Los Angeles County, the largest recipient of the extra funds, expects to send some $180 million to the state under the transfer program. Once the federal government matches the resulting state spending, the county could get back roughly $300 million.