New York Has a Budget Trick to Try on the Federal Government

Facing increased Medicaid enrollment and a cash crunch across New York’s health care system, Democrats in Albany hope to employ a maneuver that they say will allow the state to generate billions of dollars a year essentially out of thin air.

The proposal takes advantage of a loophole in the Medicaid reimbursement process that allows states to bill the federal government for billions of dollars.

Here’s how it could work: New York could create a tax aimed at managed care organizations like Aetna and UnitedHealthcare that would force them to pay a hypothetical $1 billion into state coffers. The state would then repay the insurers through Medicaid, using $500 million in state funds and $500 million more in matching federal funds — leaving the state an extra $500 million for its budget.

Because whatever the state spends on Medicaid is reimbursed by the federal government, the loophole creates the potential for a legal shell game where the Medicaid insurers come out even, the state makes money and the federal government loses it.

Variations of this trick have been around for years, with 18 states using some type of tax on managed care organizations to increase their share of federal reimbursements. But last year, as California faced vast budget gaps, state leaders advanced an aggressive version of the scheme that narrowly drew from and benefited Medicaid insurers, resulting in a head-spinningly circular transaction worth billions of dollars.

Now Democrats in New York are eyeing California’s maneuver, seeing the move as an easy way to inject billions of dollars into the state’s health care spending as it negotiates the overall state budget.