When Missouri voters approved Medicaid expansion in August, they were told by the ballot language that the price tag was unknown, with possible costs at $200 million stated alongside $1 billion in potential savings.

What is known for certain is that about 250,000 Missourians will become eligible for coverage next year — and the next budget must account for them. 

Since advocates of expansion, led by then-Gov. Jay Nixon, began to push lawmakers for approval in 2013, they have been met by a wall of refusal from Republicans who balked at new costs for what was already the biggest single spending program in state government.

The counter argument is that Missouri has a complex Medicaid program ripe for large savings using the 90 percent federal funding offered to cover the new enrollees.

With Election Day less than two weeks away, the impact of expansion on the state budget is a key fissure between Republican Gov. Mike Parson and his Democratic challenger, Nicole Galloway. Parson counts himself among those who expect it to blow a hole in the budget. Galloway expects expansion to pay for itself.

But one aspect of the Medicaid funding stream is often overlooked in the discussions of where savings may be found. The biggest share of the required state contribution to Missouri’s Medicaid program doesn’t come from the general revenue collected through income and sales taxes.

Instead, the major burden is on provider taxes, assessed on hospitals, pharmacies, ambulances and nursing homes. While the entire Medicaid program costs about $13 billion, more than public schools, state colleges and universities and prisons combined, the general revenue it consumes is only about two-thirds the total given to K-12 education.

The first provider tax, a levy on hospitals, was enacted in 1992. Despite the dependence of the state on what are called reimbursement allowance taxes, it has always carried a sunset date and, in recent years, has received a series of one-year extensions.

“That is always nail biting on my standpoint, because I have carried it for the last couple of years,” said Senate Appropriations Committee Chairman Dan Hegeman, R-Cosby.

The reimbursement allowance taxes will likely be part of the puzzle of paying for Medicaid expansion, said Brian Kinkade of the Missouri Hospital Association, but it can’t be expected to cover the full cost.

“To make this work, the state has to make an investment in the actual Medicaid program,” Kinkade said. “Hospitals today are paying 80 percent or more of the cost of the hospital program through the (reimbursement allowance).”

How it started

Former state Rep. Chris Kelly, a Columbia Democrat, was House Budget Committee chairman and Jim Moody was commissioner of administration for Republican Gov. John Ashcroft in 1992 when the idea of a hospital tax to fund Medicaid was enacted.

It grew out of a loophole created in federal law in 1986, Moody said. He moved from the Department of Social Services to the state budget office in 1987 and was looking for ways to save money on the Medicaid program.

In fiscal 1990, according to the Missouri Hospital Association, general revenue paid 39.5 percent of Medicaid’s cost, with the federal share at 58 percent.

The then-director of the Missouri Hospital Association, Dwight Fine, came up with an idea, Moody said.

“He asked what would happen if we borrowed some money and gave it to the state and the state gave it back in rates?” Moody said.

The answer was that the federal government was obliged to match anything the state spent.

“We called it the donated funds program,” Moody said. “We were getting so much federal money that the Congress passed a law.”

But the federal changes allowed for broad-based taxes on providers and since all hospitals provide care for the indigent, a deal was struck. The hospital provider tax alone is now worth almost $1.3 billion annually, drawing an estimated $2.4 billion in federal support for the state Medicaid program, according to data provided by the Department of Social Services.

In addition to supporting payments to hospitals, the funds are a general revenue equivalent for other services such as Managed Care and the Children’s Health Insurance Program

“It is clearly the most important thing I ever did, and I did it at the specific request of John Ashcroft, who I think was one of the finest governors in the history of the state,” Kelly said.

Almost every state has at least a hospital provider tax and many, like Missouri, tax other providers who take care of the people enrolled in Medicaid. By fiscal 2019, provider taxes paid more than 24 percent of the state’s Medicaid cost, while general revenue provided less than 15 percent.

How Medicaid works

Begun in 1965, Medicaid is a shared state and federal responsibility. Each state must provide health services to defined groups, such as people over 65, people with disabilities and people in poverty.

For some groups, the income limits for eligibility are set in federal law. For others, states are given greater discretion on who to cover.

How much each state pays is based on its wealth relative to the nation as a whole. This year, the basic match for the richest states is 50 percent federal support and the poorest state, Mississippi, has 78 percent of its Medicaid program paid by federal dollars.

The federal share of the Missouri program is just under 65 percent.

Missouri currently provides few services beyond the minimum required by federal law. It covers people over 65 if their income is less than 85 percent of the federal poverty guideline. It covers people with disabilities, but with varying income limits depending on circumstances.

Women who get pregnant are covered for their prenatal and delivery care up to 185 percent of poverty and children are eligible up to 200 percent.

But adults with children can only be covered if their income is below the amount paid to a family receiving welfare cash payments, $241 a month for a single parent with a child. And until Medicaid expansion takes effect, no adult without a child or another qualifying condition is eligible.

Under Medicaid expansion, anyone with an income below 138 percent of the federal poverty guideline, $1,982 a month for a household of two, is eligible. And for new enrollees who did not qualify for the existing Medicaid program, the federal government pays 90 percent of the cost.

“It is so counterintuitive that you can actually put more people on a Medicaid roll and the state doesn’t have to spend more money,” said Brian Colby of the liberal think tank Missouri Budget Project, which has issued several studies showing savings. “What the studies have shown is we see a big influx of federal money. Federal spending goes way up but the state spending does not.”

The major savings in the program, advocates argue, is the simplified eligibility. A childless woman who currently becomes eligible only if she becomes pregnant would be eligible and likely enrolled.

Under the current program, Missouri pays 35 percent of the cost for the pregnancy. Under expansion, it is 10 percent. For pregnant women, a Missouri Budget Project report projects general revenue savings of $51.5 million.

People with significant health needs are seen as another source of potential savings. Instead of seeking a disability determination to become eligible, which would prevent them from working, that population can remain employed and obtain coverage, saving up to $171 million in general revenue.

House Budget Committee Chairman Cody Smith, R-Carthage, said he’s not convinced all those savings are real. An actuarial study done for the Department of Social Services puts the first year cost at about $150 million in general revenue, rising to $300 million the third year, Smith said.

“Something we have learned that is expressly prohibited by Medicaid to do is that anyone who is qualified for traditional Medicaid cannot be put on the 90/10 match,” Smith said. “Projections that have a lot of that show cost savings.”

Current impact of provider taxes

Because of the reimbursement allowance, the general revenue portion of the appropriation for hospital care is only 9 percent of the total. The pharmacy reimbursement allowance tax means general revenue only pays 15 percent of the pharmacy appropriation and the ambulance reimbursement tax means no general revenue is spent on emergency transport.

The hospital reimbursement tax is worth almost $1.2 billion and how a small portion of it is spent shows how Medicaid expansion could generate savings.

The Gateway to Better Health program in St. Louis is a $22.3 million program that provides care to people otherwise ineligible for Medicaid. It is funded from the hospital provider tax, requiring $7.7 million to match federal funding.

Because everyone enrolled in the program is eligible for expanded Medicaid, it will end, Kinkade said. The money, redirected to expansion costs, would be enough to match $69.3 million in federal funds instead of $14.6 million.

There is uncertainty in the future revenue stream for providers taxes. Like everything else in Missouri’s budget, the disruptions due to COVID-19 makes forecasting tough.

Because it is a revenue-based tax, it can produce fewer dollars if hospitals treat fewer patients.

“This has been a very difficult year for hospitals,” Kinkade said. “Revenues have been very seriously challenged because of the COVID crisis. You know that elective procedures were suspended for a good part of the year, and it has still been the fact that people are slow to come back to hospitals for the care that they need.”