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Pennsylvania's Gross Receipts Tax on Medicaid Managed Care Organizations Appears To Be an Impermissible Health-Care-Related Tax

Pennsylvania's Gross Receipts Tax on Medicaid managed care organizations (MCOs) appears to be a health-care-related tax that is impermissible for Medicaid funding. For State fiscal years (FYs) 2009-2010 through 2011-2012, Pennsylvania collected Gross Receipts Tax revenues of $1.8 billion from its Medicaid MCOs and applied those revenues to reduce its share of Medicaid managed care costs. Pennsylvania included in its capitation rates a supplemental payment to cover the Medicaid MCOs' cost of the Gross Receipts Tax. We calculate that Pennsylvania reimbursed Medicaid MCOs $1.6 billion for the tax.

Pennsylvania's Gross Receipts Tax on MCOs appears to be a health-care-related tax under the definition established in the Federal regulations. The tax appears to be an assessment on health care items or services, specifically the health care services provided by MCOs. If the tax is determined to be health-care-related, it is impermissible because it is not broad based (the Gross Receipts Tax does not apply to all MCOs) and because it holds the Medicaid MCOs harmless as taxpayers (the State agency includes the cost of the Gross Receipts Tax as a supplemental payment in its capitation payments to Medicaid MCOs).

Under Medicaid rules, revenues from an impermissible health-care-related tax may not be used to finance the State's share of Medicaid expenditures. However, by using revenues from this tax, Pennsylvania lowered its share of MCO capitation payments and increased the Federal share. During our audit period, the Federal Government paid $981 million for supplemental capitation payments designated to hold the Medicaid MCOs harmless. The MCOs received $1.6 billion in supplemental capitation payments to reimburse them for the Gross Receipts Tax, and Pennsylvania retained $1.1 billion of Gross Receipts Tax revenues in its Medicaid MCO fund. No additional services were provided and no additional beneficiaries were served with the proceeds from the Gross Receipts Tax.

We recommended that CMS determine whether the tax on Medicaid MCOs is an impermissible health-care-related tax and, if so, (1) offset $1.8 billion in Gross Receipts Tax revenue from State Medicaid expenditures for State FYs 2009-2010 through 2011-2012, (2) offset Gross Receipts Tax revenue from Medicaid expenditures when determining the Federal share of Pennsylvania's Medicaid program expenditures for periods after State FY 2011-2012 and (3) clarify its policy concerning permissible health-care-related taxes with all States.

CMS agreed that Pennsylvania's Gross Receipts Tax on Medicaid MCOs "may be considered a health care-related tax." CMS also agreed that further guidance is needed and said that the appropriate course of action would be to clearly articulate the meaning of the statutory requirements defining a health-care-related tax. CMS did not agree to offset any Gross Receipts Tax revenues but said that if it determines that the Gross Receipts Tax is an impermissible health-care-related tax, it will work with Pennsylvania to develop an approvable tax structure.

Filed under: Center for Medicare and Medicaid Services