More Bark than Bite: Feds Back Pennsylvania’s Gross Receipts Tax after Inspector General Report

Sharon Ward |

CMS Is Not Asking for Its Money Back

A report issued by the Office of Inspector General (OIG) at the U.S. Department of Health and Human Services on Pennsylvania’s tax on Medicaid managed care services has a relatively sensational title. But the reality is the federal government is not going to force Pennsylvania to eliminate its Gross Receipts Tax (GRT), or even modify it, anytime soon.

The report comes at a critical juncture for Medicaid expansion. Lawmakers are reportedly revisiting the idea, which would generate immediate substantial savings that could help to close a $1.5 billion-and-growing budget gap (not to mention giving health coverage to half a million working people). It would also give Pennsylvania’s economy a desperately needed boost.

A bill that would allow Pennsylvania to expand Medicaid sponsored by State Rep. Gene DiGirolamo was reported by the House Human Services Committee on Wednesday, June 4. The OIG report is no reason to slow the Medicaid expansion train down.

Buried in a lengthy Capitolwire article is the good news:

“[The federal government], if it determines the tax is inappropriate, does not intend to force Pennsylvania to “offset,” meaning repay, the revenues the GRT generated and which were used to pay for Medicaid managed care services since the creation of the GRT. Nor will the state be forced to repay—as was suggested by the OIG report—the federal matching funds received by the state due to those GRT-funded state managed care expenditures after Fiscal Year 2011-12.”

It is important to tamp down the hysteria and look at the facts. The feds are bending over backward to work with Pennsylvania in their negotiations over a potential Medicaid expansion.

The federal Centers for Medicare & Medicaid Services (CMS), which oversees Pennsylvania’s Medicaid program, has not found Pennsylvania’s GRT to be “impermissible.” The OIG report confirms that states may be permitted to use revenue from health care-related taxes to help finance the states’ share of Medicaid.  The decision about whether a GRT is impermissible rests with CMS, and CMS has not made that determination in Pennsylvania.

Pennsylvania changed its managed care assessment in 2009 to comply with federal law. Medicaid managed care companies are subject to Pennsylvania’s 5.9% GRT, the same tax that is paid by telecommunications and electric companies and transportation entities.

The events that triggered the OIG investigation were anomalies. Certain federal requirements do not apply to states with GRTs under 6.0%, but during the recession, Congress lowered the threshold rate to 5.5%. After September 30, 2011, that threshold (called a “safe harbor”) reverted back to 6.0%. 

A second trigger occurred when Pennsylvania GRT taxpayers were assessed a 0.16% surcharge in 2011, which put Pennsylvania above the 6.0% threshold for a second time. Once Pennsylvania was over the GRT safe harbor threshold, certain prohibitions (on sharing revenue with the managed care payers) that are not applicable to a state GRT under 6.0% kicked in.

CMS has issued no guidance on what a permissible GRT looks like.  CMS has not issued guidance to help states determine if their GRTs are permissible.  Last year, CMS told Pennsylvania Medicaid officials that it had no plans to issue the guidance and that it did not plan to scrutinize Pennsylvania’s GRT. And CMS has authority to waive existing GRT requirements, including requirements that the GRTs be broad-based and uniform.

According to an article in Bloomberg news, the Department of Health and Human Services will “work with Pennsylvania to develop an approvable tax structure.”

The article also notes that 49 states have some form of assessment on managed care nursing homes or other health services that help to draw down additional federal Medicaid dollars.

The OIG report will have no impact on the 2014-15 budget.  The OIG report focuses only on the unique circumstances surrounding the GRT in 2011 and 2012.  It has no impact on the upcoming budget.

There are some unknowns ahead. What is known is that Pennsylvania has a budget shortfall and can not afford to walk away from billions of dollars in new federal funds that could jumpstart the terribly sagging economy, and can not afford to ignore the savings that would come immediately from the Medicaid expansion.