Missouri’s Hospital Provider Tax Pooling Arrangement

June 1, 2016

Author: Daniel Landon
Senior Vice President of Governmental Relations

Missouri’s hospital provider tax is called the Federal Reimbursement Allowance, or FRA. It is the state’s largest and oldest provider tax, having begun in 1992 shortly after Congress enacted laws detailing how provider taxes could be used in the Medicaid financing system.

The FRA is a state tax. It is levied at a rate of 5.95 percent of hospital “net revenues” as defined in state regulation. Federal standards require the tax to be assessed separately for inpatient and outpatient revenues. Federal law caps state provider tax rates at 6 percent of the taxable base. Because of the uncertainties of taxing based on estimates of projected revenues, the tax rate is slightly below the federal cap to provide a compliance cushion.

The FRA produced slightly more than $1 billion in state revenue in state fiscal year 2015, the last completed fiscal year. Virtually all of the proceeds are used as the state share of federally-subsidized Medicaid payments. At Missouri’s matching funds rate of 37 percent state/63 percent federal, the $1 billion in FRA generated $2 billion in federal funds, enabling $3 billion in payments. The payments are predominately directed to hospitals for treating Medicaid and uninsured patients. Various hospital payment streams are funded partly or exclusively by the FRA, including inpatient per diems, direct or “add-on” payments, and Medicaid disproportionate share hospital payments to partly offset the cost of treating the uninsured and others.

Through its MHA Management Services Corporation, MHA operates a pooling arrangement regarding most of the payments generated by the FRA. Within the limits of available funding and program policies, the pooling arrangement redistributes some FRA-funded payments so that participants in the FRA pooling arrangement are not financially harmed by the FRA program. By insulating pool participants against financial loss, the pooling arrangement enables industry concurrence with the state’s use of provider taxes, which generates more funding than likely would be possible under alternative scenarios.

The pooling arrangement first assesses the net benefit of the FRA program for each hospital. The amount of FRA each hospital pays to the state is dictated by the uniform tax rate applied to its net patient revenues. The FRA-funded payments a hospital receives are dictated by the amount of care delivered to Medicaid and uninsured patients and the reimbursement rate of that care.

Some hospitals pay more in FRA than they receive in FRA-funded payments. This may be driven by factors such as the make-up of their revenues or the presence of Medicaid and uninsured patients in their service area or payer mix. Other hospitals will receive more in FRA‑funded payments than they pay in FRA. This likely is to be the case for hospitals with higher percentages of Medicaid and uninsured patients, such as safety net hospitals or children’s hospitals.

Through the pooling arrangement, hospitals that receive more in selected FRA-funded payments than they pay in FRA agree to contribute a portion of the excess to the pooling arrangement. They are “pool contributors.” Their contributions to the pooling arrangement are used to make payments to hospitals that receive less in FRA-funded payments than they pay in FRA — “pool recipients.” Subject to the availability of pool contributions, the pool recipients receive payments from the pooling arrangement as needed to offset financial loss incurred by participation in the FRA.

Participation in the pooling arrangement is voluntary. Most hospitals participate. The policies governing the pooling arrangement restrict the ability of a hospital to rejoin the pool for a period of time after it has withdrawn.

In practice, the pooling transactions work as follows. On or around the 5th and 20th of every month, the state’s MO HealthNet Division makes payments to hospitals for services delivered to Medicaid and uninsured patients. These distributions are called “Medicaid payrolls” and the payments are electronically transferred to the hospitals. After a pool-participating hospital receives the state payment, it is electronically transferred to a centralized account maintained by the MSC, along with payments from all the other participating hospitals. There, pooling transactions redistribute the funds between the pool contributors and pool recipients and the adjusted funds are electronically transferred back to each of the participating hospitals.

The process occurs almost instantaneously, but the speed masks the work that undergirds the process. Money is being taken from some hospitals and given to others. The pool participants must have absolute confidence that the process is fair and accurate.

The fairness of the process is established by its governance. There is a two-tier process of developing pooling policies. The FRA Policy Committee is comprised of a mix of 20 hospital chief executive officers and financial executives appointed pursuant to bylaws to reflect various membership perspectives. Focusing on the technical aspects of developing and modeling the effect of policies, the FRA Policy Committee develops recommended policy proposals designed to promote equity among the pool participants. Those recommendations are considered by the MSC Board of Directors, which has final authority over the policies governing the pooling arrangement. The MSC board is comprised of hospital and health system chief executive officers, with the chair of the FRA Policy Committee holding an ex officio, voting position.

Pooling policies require attention and revision between, and sometimes within, state fiscal years to reflect evolving circumstances. Factors that may incite policy changes include Medicaid DSH audit standards, changes in projections of hospital revenues, and/or new payment standards.

The accuracy of the payment transactions also is paramount. The payments will follow the Schedule A forms which encompass a hospital’s projected FRA assessment and FRA-funded payments from MO HealthNet. The latter relies on projections of services to be delivered to the Medicaid and uninsured patients.

State and federal standards govern the amount of Medicaid and DSH payments. The pooling arrangement is not governed by state standards directly, but it is subject to several components of the Missouri Medicaid Partnership Agreement between Missouri state government and the Centers for Medicare & Medicaid Services. Created in 2002 and renewed in 2008, the Missouri Medicaid Partnership Agreement provides a means for getting federal approval for proposed new uses of state funds to generate federal Medicaid matching funds, while protecting state government from federal recoupments or reinterpretations of approved payment streams.

Federal regulations create standards for state provider tax programs. One component defines statistical tests designed to ensure that a state provider tax program continues to follow the intent of the federal law if the state changes the structure of its program. One of these statistical tests is called B1/B2; an alternative is P1/P2. As required by the Missouri Medicaid Partnership Agreement, Missouri does the B1/B2 test, which is a linear regression to measure the effect of pooling redistributions.

Most commonly, compliance with the federal B1/B2 standard requires some redistribution of funds to the highest-volume Medicaid providers. MSC bylaws direct the governance and policy process to minimize the amount of B1/B2 adjustment, which appears to be largely correlated with the amount of money being redistributed by pooling transactions.

Since the inception of the pooling arrangement, not-for-profit hospitals have been grouped in one pool and for-profit hospitals in another. The rationale for doing so is to protect against challenges to the tax-exempt status of not-for-profit hospitals based on a potentially impermissible co-mingling of taxable and tax-exempt assets.

Since the closing months of state fiscal year 2014, the pooling arrangement for for-profit hospitals has been unable to hold its pool recipients harmless for all of the amount by which the FRA paid to the state exceeds the amount of FRA-funded payments received from the state. The for-profit pool has far fewer participating hospitals than does the not-for-profit pool and so is more significantly affected by changes in participation. In recent years, a number of for-profit contributor hospitals have exited the pooling arrangement by withdrawing their participation or converting to not-for-profit status. Pool recipients have a financial incentive to remain in the pooling arrangement; pool contributors do not. With the loss of pool contributors, there are too few contributions being made to fully offset the losses incurred by the for-profit pool recipients. To address this problem, MHA and MSC staff are working to develop proposals for consideration by the FRA Policy Committee and the MSC Board of Directors.