FRA – What’s That?

This year, as in years past, the State Budget requires the extension of the sunset for the Federal Reimbursement Allowance (FRA), a completely voluntary tax on healthcare providers used to fund Missouri’s Medicaid program. Appropriators in the General Assembly point out that without the FRA, the State Budget would have an immediate hole of over $4 billion. So what is the FRA?

First, it’s important to understand how Medicaid is funded. While the Federal Government funds the majority of the program, the States are required to cover a portion. In the case of traditional Medicaid, which covers low-income residents who are over 65, have a disability, are parents or children, the Federal share is nearly 65% and the State share is around 35%. The FRA was seen as a way to reduce the amount of funds that have to come out of State General Revenue that could go to other programs and services in Missouri.

The FRA was invented in the Missouri Department of Social Services during the Ashcroft Administration, but has been adopted by every State except Alaska in the years since. This creative taxing scheme established a completely voluntary tax on hospitals (now extended to pharmacy, ambulance services, nursing homes, and others) that could then be used to draw down federal funds for Missouri’s Medicaid Program, called MO HealthNet.

Originally, the “provider tax” was a legitimate “tax” where the hospitals took dollars out of their bottom line to pay their share and received a higher pay rate for their services under Medicaid. Since that time, there have been two major changes to the system – managed care and uncompensated care write-offs.

The introduction of managed care for children and non-disabled adults erased premium pay for payers of the FRA (mostly hospitals) since it relies on a private insurance negotiated rate. Allowing hospitals to pay through uncompensated care also allowed them to pay less, if any, of the actual tax and instead just take it out of their bottom line on services that wouldn’t have been compensated anyway – which also prevents the costs being spread over the rest of the population which would increase healthcare costs for everyone.

If you’re reading this and thinking that it sounds like an elaborate Ponzi Scheme, you wouldn’t be alone. Part of the Affordable Care Act – also known as Obamacare – included a cap on the percentage of Medicaid dollars that can be drawn down through an FRA and if not for the quick work of then Senators McCaskill and Bond to grandfather in Missouri, the State’s cost for the Medicaid Program could have doubled. From time to time, Congress again considers capping the FRA, as they did in 2017, but now many more States rely on the funding they get through FRA programs with 35 having multiple voluntary taxes propping up their Medicaid programs.

In the currently proposed State Budget, the FRA is expected to bring in $1.5 Billion to draw down an additional $2.8 Billion in Federal funds – which is where the “over $4 Billion hole” claim originated.

So, in essence, if the sunset on the Federal Reimbursement Allowance is not extended or eliminated, the General Assembly would have to cut $1.5 Billion in General Revenue to other programs since Medicaid, like Medicare, is an “entitlement program” meaning that if you qualify, and your State continues to receive Medicaid funding, you must be covered. To put that in perspective, that would be more State dollars than it will take to expand and repair I-70 and I-44 combined.

The Missouri Senate is facing the same issue with passing the FRA that they had two years ago when several members insisted on language included in the legislation that would defund Planned Parenthood. While that provision had considerable support, linking it to the FRA could cause the Centers for Medicare and Medicaid Services (CMS) to deny Missouri’s FRA which would force the State to now operate under the cap again increasing the cost to the State.