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Provider Taxes Valuable to Missouri Businesses and Residents

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A new report from the University of Missouri concludes that congressional proposals to reduce federal Medicaid cost sharing in Missouri could harm the state’s economy and lead to significant increases in the cost of health insurance for Missouri’s employers.

The report was commissioned by the Taxpayer Research Institute of Missouri within Associated Industries of Missouri.

“The congressional ‘super committee’ is charged with reducing federal funding by $1.2 trillion,” said Ray McCarty, president of Associated Industries of Missouri. “This report points to the significant economic damage that would result from using Medicaid provider assessments to reduce federal expenditures.

Like many states, Missouri utilizes provider assessments to help fund the Medicaid program. Because of Missouri’s significant reliance on this funding mechanism, the proposal being considered in Washington, D.C. would disproportionately harm the state and could burden employers with higher costs for insurance. The uncertainty created by the lack of funding would hurt our ability to create and retain jobs.”

According to researchers, potential approaches to reduced federal matching funds include increasing the state’s appropriation for Medicaid, reducing provider payments and reducing eligibility or a combination of the options. However, the researchers point specifically to the limitations and consequences of these solutions, individually and in combination.

The absence of viable alternatives increases the likelihood that costs will be shifted to private payers. Cost shifting ultimately results in higher premiums for individuals with health insurance coverage and the employers who subsidize employee coverage. The study estimates a $2.4 billion reduction in federal revenue to Missouri would increase premiums $715 annually for each privately insured individual by 2018.

Medicaid is a state-federal partnership based on a system of state expenditures and federal matching funds. Since the early 1990’s, Missouri has used provider taxes to finance and expand the Medicaid program. The state’s hospital provider tax, known as the Federal Reimbursement Allowance (FRA) program, produces approximately $900 million annually — the state’s third largest source of revenue behind income taxes and the state’s sales tax. Provider taxes are being considered for reduction by the congressional “super committee” – as recommended by President Obama.

Researchers concluded a reduction in FRA assessment from the currently allowable 6 percent of hospital revenue to 3.5 percent would have a profound effect. Assuming that the FRA allowance rate would be reduced incrementally between 2015 and 2018, the result would be a loss of $1.4 billion in FRA revenue and $2.4 billion in federal match throughout the period. Assuming all or a portion of these costs are not shifted to other payers, the impact would be the loss of 16,479 jobs in the hospital sector and a decrease in the number of Medicaid beneficiaries of 199,790 by state fiscal year 2018.

The reductions also will have direct, indirect and induced impacts throughout the economy. Multiplied using accepted economic development models, the $3.8 billion reduction in spending will have a direct reduction on economic activity of $6.4 billion and an indirect and induced effect of $6.8 billion. The total, multiplied economic impact of the cuts would be $13.2 billion.

The reduced economic activity would reduce hospital employment. However, the total decrease in economic activity resulting from removing more than $13 billion in economic activity from the state would increase the job loss total to 27,911 by 2018.

“The ‘super committee’ should be cognizant of the negative and disproportionate economic consequences of provider tax cuts to the state’s Medicaid financing system,” McCarty said. “As  this report illustrates, we can’t address the nation’s fiscal problems by shifting additional costs to businesses that create jobs and provide health coverage.”

The Taxpayers Research Institute of Missouri (TRIM) is a non-profit organization, within Associated Industries of Missouri, dedicated to research and development of legislation affecting Missouri Tax Laws. TRIM advocates for a low tax, business friendly environment.

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