WASHINGTON--Even if states win this battle, they probably can't win the war.

The battle is with the Health Care Financing Administration over regulations the agency issued Sept. 12 that will prevent states from counting certain funds -- donations from hospitals and revenues from certain taxes on hospitals--as eligible for matching federal dollars under the Medicaid program.

But the controversy over the regulations is only the most visible skirmish in a bigger war being fought to determine whether the federal government, the states, or hospitals will be forced to cover the skyrocketing costs of the Medicaid program.

The program was begun in 1965 to ensure health care services for poor people.

In the battle over the regulations, the states have enlisted Congress as their ally, with lawmakers pushing legislation to delay the Jan. 1, 1992, effective date of the rules for nine months.

But many of those same lawmakers appear willing to sit down with the Bush administration to craft new legislation that would stem what the administration says is a hemorrhage of federal dollars into Medicaid. The administration, meanwhile, is not stopping at donations and hospital taxes as areas where it can cut health care costs administratively. That means states are likely to be left footing more of the Medicaid bill.

To understand the roots of the current battle, and the reasons that states may end up losers, one needs to go back to a late-night session of Congress on Oct. 26, 1990, when lawmakers were putting the finishing touches on a bill to cut Medicaid costs that was part of the 1990 deficit-reduction package.

That night, House and Senate health conferees met for five hours and emerged at 7.30 a.m. with a compromise on the Medicaid bill. The final result gave the health administration broad authority to stop states from counting donations they receive from hospitals as money that is eligible for federal matching funds under Medicaid.

But the agreement also blocked the agency from taking almost any action in the area of state taxes on health facilities -- often referred to as "provider-specific" taxes. The Bush administration had been arguing that this source of state money had to be capped, because states had recently discovered they could tax hospitals, counting that revenue toward the match, and then kick back a part of their share to the hospitals.

The conferees rejected a blanket ban on provider-specific taxes, but did agree to one small curb: the agency would be allowed to write regulations denying Medicaid reimbursement to a hospital for the amount that facility paid in taxes to the states.

But when the health agency wrote regulations implementing the law, it broadened that curb, disallowing the revenue from many types of provider-specific taxes that states had been using to count toward the Medicaid match.

That bold move unfuriated such lawmakers as Rep. Henry Waxman, D-Calif., chairman of the House Energy and Commerce Committee's subcommittee on health and the environment. He persuaded his subcommittee to pass legislation delaying the effective date of the regulations to Oct. 1, 1992.

On the surface, the health agency's move to issue broad regulations seems puzzling. Why didn't it wait until another opportunity presented itself to influence legislation in Congress, rather than inviting controversy and charges from Rep. Waxman that it had "gutted" the legislative compromise?

The answer, according to many observers is that the decision to publish such broad regulations was made by the Office of Management and Budget. This was not an effort by the health agency to clamp down on what it viewed as unfair state practices, those lobbyists say. Rather, it was a concerted effort started at the very top of the Bush administration to rein in federal spending on health care.

If that is true, then the Sept. 12 regulations are not the end, but the beginning of attempts to cut federal Medicaid contributions. Lobbyists said the agency's publication last week of regulations limiting the number of hospitals that can be designated to received extra Medicaid payments for their treatment of poor patients is evidence the effort will continue.

As the fight continues, states may not have Congress as a strong ally, some lobbyists predict. They say states should not make the mistake of assuming that a vote for delaying the provider-tax regulations is a vote against the Bush administration's attempt to cut Medicaid costs.

For one, the conferees' decision in 1990 to continue allowing provider taxes to count toward the Medicaid match was a compromise move, coming at the end of a long bargaining session, and before a large number of states had instiuted the practice.

For another, many of the legislators who lambasted the health agency for its regulations sounded more concerned with the way the agency ignored congressional intent and less upset about the policy being espoused in the rules.

Several House and Senate leaders, including the chairmen of the budget committees, Rep. Waxman, and Rep. John Dingell, D-Mich. chairman of the full Energy and Commerce Committee, wrote to the health agency Oct. 7, urging it to withdraw the rule. But in that letter, they also said they wanted an "opportunity to formulate appropriate policies with respect to controlling Medicaid costs and the proper balance of the federal and state burdens in sharing those costs."

Another ominous sign for states was the fact that a vote in the Energy and Commerce Committee on Rep. Waxman's bill, scheduled for Oct. 30, was postponed at the last minute. The reason given by the committee was Rep. Dingell with other legislation, but speculation has persisted that Rep. Dingell was dragging his feet because he agreed with the policy underlying the administration's regulations.

Rep. Dingell's position is likely to be made clearer later this week, because the vote by his panel has been rescheduled for Thursday.

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