President Biden’s recently released budget avoids making any serious changes to the entitlement programs that are driving future deficits and instead proposes large tax increases. Even with those tax increases, federal debt would rise to record levels. The budget would make the problem even worse by proposing hundreds of billions of dollars in higher federal health spending.
Biden’s rhetoric is almost as bad as his budget. He is making it nearly impossible for a serious national dialogue on the need to reform entitlements. In a speech in Virginia last week, he used scare tactics to falsely claim that Republicans have a plan to take health coverage away from up to 70 million people.
His position is different than the last Democratic president. In early 2010, President Obama said, “Almost all of the long-term deficit and debt that we face relates to the exploding costs of Medicare and Medicaid. … And if we don’t get control over that we can’t get control over our federal budget.”
It’s also different than his position when he was vice president. During the 2011 deficit reduction talks that the tea party wave election forced on Washington, Biden led the Obama administration negotiators in backing meaningful Medicaid reform.
Medicaid’s key characteristic is an open-ended federal reimbursement of state expenditures on health services for enrollees. As states spend more, they get more federal money.
On average, the federal government reimburses 65 percent of state spending. On the surface, this means that states bear about 35 percent of the cost of their Medicaid program. But the federal government permits states to use accounting gimmicks (basically fake expenditures) and claim reimbursement for these.
Provider taxes are one legally permissible accounting scheme. Consider how they work: A state assesses a $1 million tax on a provider and then returns the $1 million to the provider through additional Medicaid spending. Common sense shows that this isn’t a real transaction. But the state provides a receipt of the $1 million Medicaid expenditure to the federal government. For the average state, the federal government pays the state $650,000 for this illusory expenditure, part of which goes to the provider. Through these schemes, states and providers reap windfalls at the expense of federal taxpayers.
Oregon state Rep. Mitch Greenlick referred to provider taxes as a “dream tax” for states. “We collect the tax from the hospitals, we put it up as a match for federal money, and then we give it back to the hospitals.”
The provider tax scheme is so pervasive that the Congressional Budget Office estimates that eliminating the quid pro quo arrangement would reduce federal deficits by $526 billion over a decade, not accounting for reduced interest payments from lower federal debt.
In the 2011 deficit talks, Biden supported eliminating the scheme.
According to reporting by Bob Woodward, Biden referred to provider taxes as a “scam” in the negotiations. According to Woodward, Biden’s position was that “the states were gaming the system, taxing doctors and hospitals so they could get federal reimbursements and then returning the money to the providers. Let’s call it like it is, and let’s just do this. … ‘If we can’t do this—’the vice president said, ‘come on!’”
Eliminating the Medicaid provider tax scheme would be meaningful entitlement reform and deliver much needed deficit reduction to put downward pressure on inflation and interest rates.
It has never been a better time to end provider taxes and other schemes that let states rip off the federal government through Medicaid. While Washington is running a nearly $1.5 trillion annual deficit, states’ coffers are overflowing. The Census Bureau reports that states were sitting on $6.6 trillion of cash and security holdings in 2021.
President Obama’s position about Medicare and Medicaid driving federal budget problems is more true now than when he said it in 2010. The key for Medicaid reform is to align state incentives while maximizing value from the program, not just to draw more federal dollars. Ending the provider tax scheme does just that.
Both congressional Republicans and President Biden should rediscover the support they had for this reform from last decade, when the federal fiscal situation was much less dire than it is now.
Brian Blase, who served as a special assistant to President Trump at the National Economic Council, is president of Paragon Health Institute. Paragon has a new study on options to reduce federal health spending.