January 25, 2005

Medicaid and Provider Taxes--A Primer on Economics

I know that some in Texas support the idea of a provider tax on nursing homes to make up for shortfalls in Medicaid funding. For those who do--and those who don't know one way or another--I invite you to go read Dr. Bob at The Doctor is In about a similar tax his state of Washington contemplates putting on physicians for the same reason--a shortfall of Medicaid funding. I excerpt portions:

The large majority of Washington physicians would prefer to see Medicaid patients, but are quite simply financially unable to do so. For years, both Medicare and Medicaid have operated under an unspoken and hidden tax, paying for less than the cost to provide services while relying on providers to make up the difference from their insured patients.(Me: insert private-pay residents here) As insurance carriers have progressively ratcheted their reimbursements down in response to spiraling health care costs and insurance premiums, subsidizing patients insured under Federal programs such as Medicare and Medicaid is no longer feasible.


The State government in Olympia has come up with an ingenious new plan to solve this crisis: it plans to tax physicians to generate additional revenue to pay for higher Medicaid reimbursements. (Me: Insert nursing homes for physicians)In his final budget, our previous Democratic governor, Gary Locke, proposed a 67% increase in the state business and occupation tax on physicians. Unlike most states, Washington does not have an state income tax, but instead levies a business and occupation tax on gross receipts, as well as a substantial sales tax. The specific tax rate varies by industry and business type. Our new governor, Christine Yanukovich Gregoire, formerly Governor Locke's Attorney General, also supports this idea:

Gregoire said she supports the goal behind Locke's proposal. "I can't imagine that it wouldn't get us more providers," she said. "I hope that means that those who are in need actually have access.

Now, as a physician, it should come as no surprise that I am somewhat resistant to the idea that I have been specially singled out for this honored responsibility. But it really does go beyond my personal reluctance to pay higher taxes -- even narrowly targeted ones such as this proposal. The simple fact is, this legislation, if passed, will not result in "those who are in need actually have[ing] access", but will severely exacerbate the crisis of access to health care for low income individuals in Washington State.

According to Governor Locke's own statistics, Medicaid currently reimburses at 62 percent of Medicare rates. Hence, even without considering the issue of profit, physicians seeing Medicaid patients are already picking up over a third of the tab for provider services in Washington State. The proposed legislation would increase reimbursements to 75 percent of the Medicare rate. So, a substantial new tax will be added for providers, while still paying them less than the cost to provide this care. The income from services to Medicaid patients is not exempt from the tax on gross receipts, and therefore the higher reimbursements will also be taxed at the new rate.

Now Dr. Bob explains the bad economics behind this plan in understandable terms:

Imagine you are selling computers. You build a computer with a supply cost of $1000 (not including your time and expertise to make it), and must sell it retail for $620. Needless to say, this business model will not win you any Nobel prizes in economics. Now the State comes in, and wants to buy a large number of your computers, and offers to pay you $750 a computer -- but is going to nearly double your tax on that $750. Such a deal! It is not hard to see what you will do: you are going to stop selling computers, or sell them only to someone who will pay you more than $1000 -- or go out of business. The end results of this brain-dead legislation is simple: physicians in large numbers will simply stop seeing Medicaid patients, as they will be increasingly unable to afford to do so, no matter how strong their desire to care for the poor.

Perhaps a counter argument to this is that nursing homes--unlike physicians--will have no choice but to admit Medicaid residents in order to survive at all. Dr. Bob--or an economist-- might respond: Perhaps in the short run--but--given the inexorable realities of economics-- how long will it be before Atlas Finally Shrugs?