Most people like Medicaid but don’t know about this quirk in the system that allows states to make money on it—at the expense of federal taxpayers.
Uncle Sam reimburses states a percentage of what they spend on Medicaid. That ranges from 50 to 76.9 percent in 2025, depending on several factors. For people who enrolled through the Medicaid expansion under the Affordable Care Act, the reimbursement rate is 90 percent.
States have figured out how to get more than their set reimbursement by inflating the cost of the program.
Here’s how it works, according to the Congressional Research Service.
Step 1: States impose a tax on medical providers who serve a large number of Medicaid patients, such as nursing homes and some hospitals. Let’s say that brings in $10 million.
Step 2: The states up the reimbursement to providers, but only the ones that serve Medicaid patients. Let’s say that costs them an extra $8 million.
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Step 3: The federal government reimburses the state for the extra $8 million payment. At 60 percent, which is about average, that’s $4.8 million.
So here’s the bottom line:
Providers come out about even if they serve Medicaid patients.
The state collects $10 million in taxes and $4.8 million from Washington and sends out $8 million in payments. That’s a net $6.8 million, which it can spend on anything.
Meanwhile, taxpayers are out an extra $4.8 million in inflated Medicaid costs.
Every state but Alaska does this, as well as the District of Columbia.
In 2018 states collected $16 billion from the federal government for Medicaid expenses that never got spent on health care, according to the Government Accountability Office.
Supporters of the tax say it helps states that can’t afford Medicaid keep up with costs.
Others, including President Joe Biden, have called it a “scam,” as reported by Bob Woodward in his book “The Price of Politics.”
Congress is now eyeing changes to the provider tax system for the first time since 1991.
Read more here.
—Lawrence Wilson
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