Editorials

Like other states, Kentucky should look to hospitals, tobacco tax to fund Medicaid expansion

Amid the hue and cry over Gov. Matt Bevin’s proposed Medicaid revamp, an important point has been missing: It would not save very much money.

Like his predecessors, Bevin is right to worry about the increasing drain that Medicaid, the health-care plan for low-income and disabled people, puts on the $11 billion General Fund, siphoning money that’s needed for education, infrastructure and other needs.

Bevin has said the state cannot afford to continue the 2014 Medicaid expansion as is. But the modest savings from his rollback of coverage would come at a high price. To save the average $66.3 million a year projected by Bevin’s plan, Kentucky would have to forfeit $380 million a year in matching federal funds for health care, a poor tradeoff in a state that suffers a surplus of sick people and a shortage of primary care.

Fortunately, there are ways to ease the budgetary strain while maintaining Medicaid coverage:

▪ Lift the cap on a dedicated tax that is paid by Kentucky hospitals and flows into health care.

▪ Increase the tax on tobacco products.

▪ Give the lowest-paid Kentuckians a raise.

Indiana is financing its Medicaid expansion through hospital and cigarette taxes. Bevin modeled his cutbacks on Indiana’s program but his plan oddly makes no mention of revenue. If Kentucky hospitals resumed paying the 2.5 percent tax on gross revenues that they paid before 2007, an additional $99 million a year would be generated.

Forty-nine states levy health-care provider taxes and many are tapping hospitals to pay for the Medicaid expansions made possible by the Affordable Care Act. Tennessee hospitals asked to be taxed to pay for a Medicaid expansion.

In Kentucky, the health care provider tax flows into a restricted fund that supports health care and is returned to providers. The tax was frozen at the $183 million that hospitals paid in 2005-06 when they collected $7.3 billion in revenue. Their current revenue is $11.3 billion, according to the Kentucky Center for Economic Policy which analyzed data from the state. Despite the higher revenue that’s flowing into hospitals, mostly because of the Medicaid expansion, hospitals are still paying $183 million a year.

In 2004, General Fund revenues paid for 66 percent of state Medicaid costs but now pay 78 percent because of the erosion in the provider tax.

Kentucky’s provider tax is due for an overhaul because of changes in health care economics. Lawmakers should ask themselves if the cap makes sense.

Ohio raised its cigarette tax to $1.60 a pack late last year, which may be making the drive across the Ohio River for cigarettes taxed at 60 cents a pack worthwhile and may explain why Kentucky’s cigarette tax revenue ticked up $3.4 million or 1.5 percent last fiscal year. Indiana’s cigarette tax is 99.5 cents a pack.

Raising Kentucky’s cigarette tax to $1 a pack, along with similar increases in taxes on other tobacco products and e-cigs, would generate an estimated $110 million, perhaps up $145 million, a year.

Tobacco taxes are admittedly regressive, disproportionately burdening low-income people. Low-income people would be disproportionately burdened by Bevin’s Medicaid rollback as well. Higher cigarette taxes produce reductions in smoking and less tobacco-related disease, while rolling back Medicaid would produce worse health outcomes. On balance, a cigarette tax increase would be more responsible than denying Medicaid to almost 86,000 Kentuckians as Bevin proposes.

Finally, Kentucky could shift more costs onto the federal government by raising the minimum wage. The feds pay about 70 percent of Medicaid for people under 100 percent of poverty but 90 percent for higher earners up to 138 percent ($16,394 for a childless adult) of the poverty level. Raising the minimum wage to $10.10 an hour would save the state $34 million a year by moving people into the group that qualifies for a higher federal match, estimates the Center for American Progress.

Without his changes, Bevin says, the state share of the Medicaid expansion would be $250 million a year — about the amount the three ideas above would yield.

Since 2013, the rate of Kentuckians without health insurance has been more than halved. Kentucky can build on the extraordinary progress it’s made if the governor and lawmakers are willing to make the same tax increases that neighboring states are making.

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