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What Is the “Bed Tax” and Why Is It Controversial?

Tuesday, November 27th, 2012

Among all the things American politicians squabble about, the bed tax is relatively new. But you may be hearing more about it in the future.

The bed tax is a way some states raise money for Medicaid. Let’s see how it works.

Medicaid, of course, is a program jointly run by federal and state governments that provides health care for low-income people without insurance. Close to half of Medicaid recipients are children. About 10 percent of recipients are elderly, but these seniors receive 25 percent of the benefits.

The Kaiser Family Foundation estimates that 7 out of 10 nursing home residents are on Medicaid, and most of those patients are seniors. About 70 percent of people over the age of 65 will need long-term care services eventually, and Medicare pays for very little of that. The needs of someone with debilitating illness, such as mesothelioma, would overwhelm many families were it not for Medicaid.

Medicaid is jointly funded by the federal government and states. The federal government contributes matching funds to the amount states commit too Medicaid. However, the exact percentage of the “match” varies from state to states. On average, the federal government contributes 57 percent of Medicaid dollars. But in high-income states it might be a 50 percent match, while a state with high levels of poverty might receive a 75 percent match. Even so, if states cut their own Medicaid funds, what the federal government provides goes down also.

Nearly 40 states use a “bed tax” to pay for part of their share of Medicaid. There are several versions of the bed tax, but basically it’s a tax paid by hospitals and nursing homes that goes into the state Medicaid fund. The state funds plus the federal matching dollars are then redistributed to hospitals and nursing homes. States then can pay their share of Medicaid without taking all of the money from general revenue.

Obviously, the hospitals and nursing homes aren’t benefiting as much from the program if they are funding part of it themselves. But it’s better than not getting Medicaid at all. Many states are barely making ends meet as it is.

The bed tax recently has come under fire. Last month, anti-tax crusader Grover Norquist added ending the bed tax to his crusade. Among other thing, he sent a letter to Republicans in the Georgia legislature urging them to not renew Georgia’s bed tax, which is scheduled to expire soon. He didn’t suggest another way to fund Medicaid; he doesn’t want the state to accept federal funds at all.

What would happen when 7 out of 10 of the state’s nursing home residents lose their beds, Norquist doesn’t say.

Now other conservative politicians are talking about the bed tax. For example, this month Sen. Bob Corker (R-Tennessee) called for “ending a massive ‘bed tax’ gimmick the states use in Medicaid to bilk the federal government of billions.”

Others have called the bed tax practice a “ponzi scheme.” They claim hospitals are using the federal matching funds to pay the bed tax, so that the state can then add the federal funds to the state Medicaid fund and use those dollars to get more federal Medicaid money. Round and round and round.

Hospitals are firing back. In Georgia, Children’s Healthcare of Atlanta, Grady Health System in Atlanta, Memorial University Medical Center in Savannah, and an association of rural hospitals sent their own letter to the Georgia legislature. The hospitals asked that the tax be renewed, because without Medicaid funds the burden that would fall on the hospitals and the patients would be catastrophic.  Medicaid remains an essential funding source for many hospitals, even if they are helping to pay for it.