The General Accounting Office (GAO) recently published a report highlighting the growing practice of states using provider taxes to avoid funding Medicaid expenses from their general funds, and the impact that this is having on the federal government. These taxes are referred to as “bed taxes” in the industry and apply primarily to skilled nursing facilities and hospitals. Although these taxes are legal, the GAO is urging the federal government to monitor them more closely because of the additional costs they impose on the government.
Bed Taxes Over the Years
In 2008 nursing homes and other healthcare entities paid approximately $10 billion in bed taxes to the states. By 2012, that number had increased by almost 100% to $19 billion. States have increased bed taxes in an effort to avoid using their general funds to pay for Medicaid expenses. Because Medicaid is jointly funded by the states and the federal government, when a state increases its bed tax revenues and applies these additional funds to Medicaid, it forces the federal government to increase its Medicaid contributions as well. The effect on providers is that they end up paying more in taxes but some of them also end up getting higher Medicaid reimbursements because the state now has more money to fund the program. For example, in 2011 California raised its bed tax rates for skilled nursing facilities and then turned around and used some of the revenue that was generated by this increase to pay for higher Medicaid reimbursements to certain providers, including some skilled nursing facilities. The effect of this change was that Medicaid payments to California’s skilled nursing facilities totaled $2.94 billion in 2011 instead of the $2.80 billion figure it would have been if the state had not increased its bed taxes. This change also resulted in the federal government contributing $1.73 billion to California’s Medicaid system instead of the $1.65 billion it would have contributed if California had not increased its bed taxes, an increase of approximately $80 million. Furthermore, although California also increased the amount of Medicaid payments that it made to providers, the state actually ended up paying $11 million less in Medicaid expenses from its general fund because the increase was paid for using bed taxes instead of general fund revenues.
Although these bed taxes have led to increased reimbursements for some skilled nursing facilities, according to trade officials that are quoted in the GAO’s report, most nursing homes are against these increases, presumably because sporadic increases in bed taxes makes it hard for them to engage in long-term planning and they would prefer the certainty of a consistent tax rate to the uncertainty of intermittent tax increases that may or may not be offset by increases in Medicaid reimbursements.
Although these bed taxes are legal, the General Accounting Office is recommending that the Department of Health and Human Services monitor this situation more closely to make sure that any bed tax increases are done in accordance with the law and that they don’t result in a significant financial burden being placed on the federal government. Time will tell if the states continue to use this method to fund their Medicaid programs or if the GAO’s report motivates them to use a different method instead. In the meantime, as the population continues to get older and demand for senior housing services increases, industry participants who wish to take advantage of this situation by acquiring additional senior housing assets should contact Cambridge Realty Capital to learn more about the many different financing programs that it offers for acquisitions, joint ventures, sale/leasebacks, and other purposes as well.