Introduction

It is no secret that the U.S. medical system fails to treat all patients equally. Those with Medicaid often lack access to the same primary care and subspecialty clinics as those with Medicare or private insurance and face longer wait times. Medicaid is jointly funded by the states and federal government. The solution is to increase Medicaid reimbursement. Of course, in my home state, Texas, and many others like it, this policy is a political nonstarter. The most frequently discussed alternative route—a federal mandate for higher Medicaid reimbursement—would present a major threat to state budgets. Circumventing these restrictions, many hospital systems around the country found a way to pull down extra federal Medicaid dollars without sending a bill to their state. In Texas, these “off-budget” payments sum to almost a quarter of Medicaid expenditures. Although recently passed regulations threaten to curb this practice starting in 2028, the hospitals’ present success should be investigated as a potential path to fix longstanding inequities in primary care.

A brief history

Medicaid was originally intended to be a small program. The architects did not expect that, 60 years later, one in five Americans would be enrolled. At the time, Congress limited states’ ability to fund their share of Medicaid expenditures by taxing health care providers. These rules were last updated in 1991, and they are due for maintenance.

Two recent articles highlighted a quirk in these rules. In policy circles, the loophole has a playful nickname: “legalized money laundering,” but this term is misleading. The supposed grift is simple: hospitals agree to pay back the states’ share of Medicaid expenditures at their facilities. In exchange, the Medicaid program pays the hospitals a higher reimbursement rate, essentially funded entirely by the federal government. Under the arrangement (currently a form of “state-directed payments”), the hospitals profit, the states pay nothing, and the federal government gets stuck with the bill. Variations of this scheme, however, have been around for decades, and this interpretation misses the fact that payments by the federal government are generally capped at the lower of 6 percent of sum hospital revenue and the average commercial reimbursement rate. Furthermore, recipients of funds are required to report how payments improve access to care or quality of care.

In addition to enhancing Medicaid reimbursement, these arrangements give hospital-based care an edge over primary care and other outpatient practices. Instead of rewarding a generalist for prescribing lisinopril to control hypertension (~$60 per visit and 15¢ per pill), Medicaid rewards hospitalization after a heart attack (~$18,300). You get what you pay for.

The present

While the Centers for Medicare and Medicaid Services (CMS) works to improve the auditing of state-directed payments, Congress needs to address why Medicaid still reimburses primary care practices at 67 percent of the Medicare rate. By law, outpatient practices can participate in a provider-tax arrangement, just like hospitals; however, in practice, it is impossible to do so. The reason is another quirk of the rules.

Provider taxes used to finance the state share of Medicaid must meet three criteria. First, the tax must be “broad-based,” meaning it applies to all of one type of practice. For example, if any hospital is to participate, all hospitals must participate. Second, the tax must be either “uniform” or “generally redistributive.” In other words, all practices of a type must be taxed the same percentage of their revenue or, by some other formula, taxed in a way that practices serving a larger volume of Medicaid patients see a greater return. Third, the tax cannot “hold harmless” participating practices using either the “6 percent” or “75-75” rule. In layman’s terms, earnings from the arrangement cannot exceed 6 percent of total practice revenue. The third criterion generally caps expenditures. There is one exception to the rule—the 75-75 rule, under which practices can earn more than their 6 percent if 75 percent of taxed entities are making less than a 75 percent return on the tax—and some states currently use private hospital-to-hospital payments to compensate the “losers” of the arrangement. In response, CMS recently capped many payments to the local average commercial rate and plans to ban these private compensation arrangements starting in 2028.

Big picture

The main barrier to primary care practice participation in the arrangement is the “broad-based” rule. If one primary care practice wants to participate in the arrangement, then they all must pay the tax. While all hospitals serve Medicaid patients, not all clinics do. In fact, owing to Medicaid’s poor reimbursement rate, many clinics refuse to see any Medicaid patients. To profit from the arrangement, a practice must serve Medicaid patients. So a sufficiently broad-based provider tax would hurt many primary care practices and benefit only the minority that serve a high volume of Medicaid patients. Naturally, such a tax has never passed in a state legislature.

A proposal

Under current laws, primary care practices cannot benefit from the same rules as hospitals. The solution is easy. Congress should provide one exception to the broad-based requirement for provider taxes, permitting primary care practices that do not wish to participate to opt out of the program. Under this policy, a primary care practice could choose to invest up to 6 percent of its revenue into greater Medicaid reimbursement. The return on investment is directly related to a state’s average federal medical assistance percentage (FMAP). Under a 6 percent tax in a state with an average FMAP of 60 percent, any practice that earns more than 10 percent of its revenue from Medicaid patients would profit by choosing to participate, with greater returns for those seeing more Medicaid patients. Practices earning less than 10 percent of their revenue from Medicaid patients could simply forgo participation in greater reimbursement and skip the tax. Given that 20 percent of the insured population has Medicaid, this breakpoint seems reasonable.

To equalize payments between Medicaid and Medicare, however, a higher hold-harmless cap specific to primary care practices is likely needed. While the exact math varies state-to-state and practice-to-practice, rather than 6 percent, a 30 percent cap seems reasonable. Additionally, payments should not exceed the average commercial rate. Given the difference, state-directed payment arrangements with primary care practices should be considered distinct and separate from state-directed payment arrangements with hospitals and hospital systems—a parallel program.

Benefits and tradeoffs

More generous primary care reimbursement would improve access to care. Private practices would no longer have such a strong incentive to turn away Medicaid patients. Meanwhile, margins at existing safety net clinics would improve, allowing them to hire more staff and see more patients. With a policy change, Congress could mitigate the tiered nature of our health care system. More money for primary care might incentivize large systems to train more residents in primary care and entice the graduates of these programs to forgo fellowship.

The cons of this proposal are manageable. The policy would increase Medicaid expenditures, but the growth of expenditures over time would be capped by the lower of the hold-harmless rules and the average commercial rate.

Conclusion

Medicaid has grown to a mammoth size unanticipated by its designers. The rules written three decades ago need maintenance. The federal government is already paying the lion’s share of Medicaid patients’ inpatient care expenses in a growing number of states, and this trend is unlikely to be reversed. The program needs to re-balance its priorities of care. By creating an exception to the broad-based tax requirement and a separate hold-harmless policy for primary care practices, Congress may level the playing field with the hospitals, improve health equity, and expand access to essential health services for millions.

Alexander Gajewski is an internal medicine resident.