WASHINGTON -- State governments, already financially strapped, may lose more than $5 billion in 1992 as a result of the federal government's attempt to close what it calls a loophole in the Medicaid program, a National Governors Association official said yesterday.

"This will have a greater financial impact on states' fiscal situation than any single thing Washington has done recently," said Jim Martin, director of the office of state-federal affairs for the governors group. He was referring to a rule issued by the Health Care Financing Administration this week that will disallow certain types of state funds that had been eligible for federal matching funds under the Medicaid program.

Many hospitals, in turn, could see Medicaid payments from states curtailed, this hurting ratings on any tax-exempt bonds they may have outstanding, according to John Goetz, a vice president in the health-care group of Moody's Investors Service. "We view it as a fairly serious issue for the hospitals we have rated," he said.

The rule stipulates that, beginning Jan. 1, 1992, the federal government will not longer match funds from donations and will place tight new restrictions on the use of taxes states collect from hospitals for the Medicaid program.

Using donations to count toward the match is inappropriate because it allows the state to receive more federal aid without kicking in its own funds, the health agency, an arm of the Department of Health and Human Services, said in a statement.

The statement also said state taxes pose a fairness problem because of the practice many states have of making higher Medicaid payments to health-care institutions on which the tax is levied. The agency said this is equivalent to reimbursing the hospitals for the taxes they paid.

"These devices are contrary to the cost-sharing partnership that is the hallmark of Medicaid," said Health and Human Services Secretary Louis W. Sullivan.

But the governors' group disagreed with that assessment. "States use donated funds and voluntary taxes to supplement -- not supplant -- state spending," the association said in a statement. "These funds do not drive Medicaid inflation, but enable states to keep pace with a health-care inflation rate that is twice the general inflation rate."

The health administration estimates the federal government will spend $65 billion on the medicaid program during the fiscal year running from October 1991 to September 1992. The governors group said states will spend $41 billion from July 1991 to June 1992, the fiscal year followed by most states.

Mr. Martin said the biggest immediate concern for the states is the fact that the regulations are scheduled to go into effect on Jan. 1, 1992, when most states will be in the middle of the current fiscal year.

States have already counted on receiving a certain amount of Medicaid money from the federal government, and if some of that money is not forthcoming it will exacerbate an already precarious budget situation in many states, Mr. Martin said. Attempts to reach officials in individual states to find out how the rules would affect them were unsuccessful.

Hyman Grossman, managing director of Standard & Poor's Corp., said he would not comment on the effect of the regulations on states' credit ratings before studying the regulations in detail. But Mr. Grossman did publish an article in the April 12 edition of Standard & Poor's Credit Week that discussed the regulations in an earlier draft form and warned of the potential problems for states' finances.

"For many states and hospitals, the consequences of any federal policy that eliminates or restricts alternative mechanisms used to increase matching funds could be enormous," the article stated.

Mr. Goetz, meanwhile, said there "could potentially be a serious shortfall of cash for some of the hospitals we have rated." But he also noted that the change had been expected for some time, and Moody's has taken that into account when rating hospitals that rely heavily on Medicaid reimbursements for their revenue streams.

"I don't know if this will result in any downgrades," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.