How intergovernmental transfers can benefit states

Suppose a state made a $100 million Medicaid disproportionate-share hospital payment to a county hospital, of which $50 million was reimbursed by the federal match, said Katherine Baicker, dean of the University of Chicago Harris School of Public Policy and healthcare economics professor who has studied Medicaid financing.

If the county then transferred $50 million back to the state in the form of an intergovernmental transfer, the state would have made no net contribution.

HHS’ Office of Inspector General found that supplemental Medicaid payments in six states were not based on the actual cost of care, nor were they used to improve care, according to a 2001 report. Hospitals would return the majority of Medicaid DSH funding to the state through intergovernmental transfer. That would maximize federal reimbursements without states committing their share of the required matching funds, regulators found.

“The federal government writes down a set of rules, then states figure out how to maximize access to those assets. The federal government closes that loophole and then states would find another,” Baicker said. “States would be able to reprogram resources in ways that are not the intention of the DSH provision while complying with the law.”

DSH dollars were stickier in some states, but it isn’t a consistently effective mechanism to ensure funding goes to the underserved, she said.