State Tax Trends: Abuse of Medicaid Matching Funds

Washington, D.C., June 5, 2012—Many states have been seeking greater federal funding for their Medicaid programs, only to use the additional revenue to plug holes in their general state budgets, according to a new analysis by the Tax Foundation.

Most states levy taxes on doctors and hospitals to fund Medicaid expenditures, which then qualify for matching funds from the federal government. Matching levels are based on a federal formula that takes into account poverty and unemployment levels in the state. Some states have then used the federal money to pay for health care for low income residents, diverting the state’s share of the money to close budget gaps in unrelated areas.  

The states that are most likely to abuse Medicaid matching funds are those that have been most irresponsible with managing their state budget. Their use of Medicaid funds to backfill other state programs is at odds with the purpose of the Medicaid program, but the open-ended nature of federal matching encourages this practice.

“While health provider taxes and matching funds can remedy state budget problems in the short-term, they rely on the continued dysfunction of the Medicaid matching fund system,” said Tax Foundation Vice President for Legal & State Projects Joseph Henchman.

In 2009, for example, Wisconsin Governor Jim Doyle (D) pushed through a 20 percent increase in the state’s health provider tax. The tax increase led to an increase of federal matching funds received by the state from $635 million to $796 million, with an estimated $292 million of the money being diverted for non-Medicaid uses.

Tax Foundation Fiscal Fact No. 305, “Trend #9: State Abuse of Medicaid Matching Funds” by Joseph Henchman is available online.

Read about all of the Top 10 State Tax Trends in the Recession and Recovery here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.