Medicaid relief made simple

A year-by-year look at how the phaseout impacts counties

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By Todd McGee
Communications Director

A new day dawned in North Carolina on Oct. 1. That was the first day that counties began to reap the benefits of the recently enacted state plan to phase out the county Medicaid share. North Carolina joins the 49 other states that don’t require their counties to help fund all Medicaid services.

The multi-faceted plan accomplishes what has been counties’ No. 1 legislative goal for many years – the removal of the onerous requirement that counties foot 15 percent of the state’s Medicaid services bill. Once fully implemented, the plan eliminates an uncontrollable expense increasing at roughly 10 percent or more per year in exchange for a revenue source growing at about 5 percent. Specifically, counties relinquish a half-cent of sales tax revenue, which is projected at $592.6 million in 2012, in exchange for the state assuming the entire nonfederal Medicaid share, which is projected at $744.5 million in 2012.

While that sounds simple enough, the plan’s working parts are such that some county officials may be confused over exactly how the Medicaid relief plan will play out. Here, then, is a year-by-year look at the three-year phase down.

2007-08
On Oct. 1, 2007, the county Medicaid share was reduced by 25 percent, from 15 percent of the nonfederal share to 11.25 percent. According to state estimates, this will save counties approximately $86.1 million for the final eight months of the current fiscal year. Any Medicaid expense incurred on or after Oct. 1 would be charged to counties at the lower participation rate – counties would begin to see their savings accrue with the November Medicaid bill, technically referred to as a “warrant.”

To help the state assume these costs, counties will give up a portion of their ADM Fund (see Frequently Asked Questions for description of ADM Fund). This reduction in ADM funds applies only to the 2007-08 fiscal year — thereafter, the ADM Fund remains intact, in keeping with an NCACC legislative goal.

There are two methods to determine how much of the ADM the state will take from each county.

If a county’s 2007-08 Medicaid relief is greater than what it receives from the ADM Fund, then the county allocation from the ADM Fund will be reduced by 60 percent for 2007-08. Wayne County, for example, is projected to receive $1.37 million in Medicaid relief for 2007-08, while its share of the ADM Fund is projected to be $1.20 million. Given that its projected Medicaid relief is greater than its projected ADM Fund allotment, the county will then forgo 60 percent of its ADM Fund allotment, or approximately $718,000, leaving the county with an adjusted ADM payment for 2007-08 of approximately $482,000. The county’s “net gain” is figured out by deducting the ADM Fund loss from its Medicaid gain, meaning Wayne County will show a net gain of approximately $652,000 for 2007-08.

If a county’s Medicaid relief does not exceed its ADM Fund allotment for 2007-08, then the county’s ADM Fund allotment is reduced by an amount equal to 60 percent of its Medicaid savings. Cabarrus County, for example, is projected to realize $1.1 million in savings because of the reduced Medicaid share, while its ADM Fund allotment is projected to be $1.76 million. As a result, the state will reduce the county’s ADM allotment by 60 percent of $1.1 million, or approximately $669,000. Cabarrus County’s net gain, then, is figured out by deducting the ADM loss of $669,000 from its Medicaid gain of $1.1 million, leaving the county with a net gain of approximately $446,000.

Despite this single-year reduction in the ADM Fund, total school capital funds are not disrupted or reduced. Counties must offset any lost ADM funds by ensuring a level of capital spending that is equal to what the ADM receipts should have been.

The phaseout also includes a “hold harmless” provision that guarantees each county will come out ahead by at least $500,000 in Medicaid relief every year. So for Cabarrus County, the state would kick in an additional $54,000 to up the total net gain to $500,000. Eligible counties will receive 90 percent of the estimated hold harmless payment in mid-March, along with the March sales tax distribution, with a truing up of the actual payment due by Aug. 15. In this and future years, the Medicaid hold harmless payment is based on actual performance – actual ADM receipts, actual Medicaid savings, and actual foregone sales taxes. Counties will not have to worry whether their individual economic activity will keep pace with state estimates – the truing up process ensures a dollar in revenue loss will be replaced by a dollar in Medicaid savings or state payment, with every county enjoying at least $500,000 per year in Medicaid relief.

In total, the state will be taking about $45 million in ADM Funds while returning $19.2 million of that to the counties to fund the hold harmless. All told, counties are expected to receive a net gain of $60.7 million.

2008-09
On July 1, 2008, the county Medicaid share is further reduced to 7.5 percent of the nonfederal share. According to figures from the state, this will save counties approximately $271 million for 2008-09.

To help the state absorb this cost, counties will relinquish a quarter cent of their local sales tax – the per capita portion of the Article 44 sales tax – effective Oct. 1. In addition, counties must hold cities harmless for this revenue loss. The state estimates that the sales tax loss will cost counties approximately $184 million in 2008-09, which includes the amount counties must pay cities for their hold harmless. Counties receiving the Article 44 hold harmless payments from lost reimbursements will continue to receive these funds until the current expiration date of 2012.

The $500,000 hold harmless threshold remains in effect, with 23 counties qualifying for the additional funds of approximately $4.9 million, according to state estimates.

As a result of these changes, the local portion of the sales tax is 2.25 cents from Oct. 1, 2008, through Sept. 30, 2009, while the state sales tax rate would be 4.5 cents (assuming no change between now and then) for this same time frame.

Overall, counties would see a net gain of $153.3 million, while cities would continue to receive their expected sales tax revenue stream along with any growth therein.

2009-10
On July 1, 2009, the county Medicaid share is eliminated completely. The state estimates that this will save counties approximately $593 million in 2009-10.

To help the state absorb this cost, the state will take the final quarter cent of the Article 44 sales tax, effective Oct. 1, 2009, with counties again being required to hold cities harmless (now and in perpetuity). This is the final portion of the revenue swap with the state. State estimates put the county revenue loss for 2008-09 at approximately $461 million, which includes the municipal hold harmless.

In an effort to even up the impact on counties, however, the General Assembly opted to change the distribution method of the half-cent Article 42 sales tax from per capita to point of delivery, beginning Oct. 1, 2009.

This switch provides more revenue to retail centers, like Mecklenburg, Wake, Watauga, Lee, Pitt, New Hanover, Pasquotank and Iredell, among others. In general, the Medicaid burden in these areas was not as significant as it was in more rural counties, like Robeson, Bertie, Swain and Davie, but the loss of the local sales tax was more significant to these counties that serve as retail centers for their region.

The Article 42 half-cent also retains its required 60 percent set aside for school capital needs.

As a result of these changes, the local portion of the sales tax is now 2 cents, while the state sales tax rate would be 4.75 cents (assuming no change between now and then). In addition, 1.5 cents of the local sales taxes (Article 39 and Article 42) will now be distributed via point of delivery, with 0.5 cents (the Article 40) being distributed on a per capita basis.

The $500,000 hold harmless threshold for counties also remains in effect (and in perpetuity), which will result in the state providing an additional $14.2 million of relief to 27 counties.

Overall, counties would see a net gain of $210.9 million.

2010-11
This is the first year that all elements of the plan are in place for the entire fiscal year. The state estimates that the removal of the county Medicaid share will save counties $670.7 million for this fiscal year, while the loss of the half-cent sales tax will cost counties $563.4 million. In addition, the $500,000 hold harmless threshold provides $42 million in hold harmless funds to 49 counties.

Now that all elements are finally in place, we can look at how the deal impacts specific counties. For example, Martin County is expected to realize $3.7 million in savings for 2010-11 due to the complete removal of the Medicaid burden. The loss of the Article 44 half-cent sales tax and the conversion of the Article 42 will cost the county roughly $2 million, giving Martin County a net gain of approximately $1.7 million.

Union County receives $7.5 million in Medicaid relief but gives up $11 million of Article 44 sales tax revenue and the conversion of the Article 42. With the hold harmless, the state will pay Union County approximately $3.9 million to give the county a net gain of $500,000.

Overall, counties would see a net gain of $149.2 million.

2011-12
The state projects that 15 percent of the nonfederal Medicaid services costs would amount to $744.5 million for this year, an increase of 11 percent from the previous year. The state estimates that a half-cent of local sales tax would have generated $592.6 million, an increase of 5.3 percent from the previous year, meaning that the revenue given up by counties is growing at less than half the amount of the cost the state has assumed.

In addition, with the $500,000 hold harmless threshold, the state will pay $32.2 million to 39 counties.

All told, counties gain $184.1 million.

Given that Medicaid costs seem to be showing no signs of slowing down in the immediate future and will likely continue to grow at a much faster rate than any increases in sales tax revenue, this deal will continue to pay dividends for all 100 counties well into the future.

Frequently Asked Questions

What is the ADM Fund?
The ADM fund, also known as the Public School Building Capital Fund, is a portion of the corporate income tax that is dedicated to counties to be used for school capital projects. Counties receive an allotment each quarter based on average daily student membership. Counties may let their allotments accrue until they are ready to use them for a specific project, at which time they must match one-third the amount from the state.

When we adopted our 2007-08 county budget, we estimated our Medicaid costs based on the 2005-06 cap. If our actual costs, even with the 25 percent reduction, wind up being more than what we budgeted for, who is responsible for paying the overage?
The county is. Counties are responsible for 15 percent of the Medicaid services costs from July 1 through Sept. 30, and 11.25 percent from Oct. 1 through June 30, regardless of what you budgeted.

The state estimates our savings for 2007-08 to be $600,000. But what if our savings wind up being less than $500,000? Do we still qualify for the hold harmless?
The estimates provided by the state are exactly that – estimates. The Medicaid relief, however, will be “trued” up based on actual numbers during the fiscal year. Beginning Oct. 1, the state will reduce your Medicaid expenses by 25 percent. You will begin seeing this reduction immediately, when you receive your October warrants in November. At the end of the fiscal year, the state will figure up exactly how much Medicaid relief you received, exactly how much ADM Fund monies you gave up and then use those numbers to determine any hold harmless payments that are due.

When the Article 42 sales tax is converted to point of delivery from a per capita distribution, what happens to the required 60 percent set aside for school capital needs?
The school capital set aside requirement is retained with Article 42 – counties with fewer Article 42 sales tax receipts will have to set aside fewer school capital dollars.

Are the new revenue sources – either the quarter-cent point of delivery sales tax or the 0.4 percent land transfer tax – needed to replace lost sales taxes?
No. The state’s Medicaid relief plan is predicated on counties not having to raise taxes to receive county Medicaid relief. The new revenue authority is designed to help counties meet their growing infrastructure demands, thereby easing pressure on the county property tax.