July 9, 2005

How Sundquist Scammed Medicaid

Now that former Tennessee Gov. Don Sundquist has been appointed to head a national commission on Medicaid reform, it's worth looking back at how the Sundquist administration scammed the federal Medicaid program - and ripped off federal - taxpayers to the tune of $555 million, while driving up nursing home costs for thousands of Tennesseans during his eight-year reign of error.

Tennessee taxpayers caught a lucky break last week when the federal government forgave Tennessee the $555 million debt it owed Uncle Sam thanks to a multi-year financing scam started in the waning days of the McWherter administration but continued for several years by the Sundquist administration despite warnings from Uncle Sam that the financing arrangement was not legal.

Here's how it worked:

Tennessee taxed tax nursing homes and non-Medicaid eligible nursing home residents used the money to draw down a two-to-one match in federal funding from Medicaid. The state then reimbursed residents who paid the tax by way of special grants - dubbed "granny grants" - to offset the cost of the tax, and also provided the nursing homes with new funding. The effect was to free the state from having to fund nursing home costs with state dollars.

It was very clever. And it was illegal. And the federal government told the state to stop doing it, and the Sundquist administration kept doing it for the next seven years.

Here are the gory details:

In 1992, before Sundquist was elected, the state of Tennessee levied a $2,600-per-bed tax on nursing homes, raising about $100 million a year. The state - which encouraged nursing homes to raise their rates to cover the tax - used the money raised by the tax to attract about $65 million worth of federal matching funds. It gave grants of up to $2,372.50 to low-income nursing-home residents ineligible for Medicaid. The "Granny Grants" helped about 3,800 people pay for nursing home care - but the nursing home bed tax caused higher nursing home rates for most or all of Tennessee’s 36,000 or so nursing-home residents.

As more than 70 percent of Tennessee’s nursing home residents have their bills paid by Medicaid, that means Medicaid itself actually paid a big chunk of Tennessee's nursing home tax, and then Tennessee used that revenue to draw down matching federal dollars from Medicaid.

Sundquist was elected in 1994 and took office in early 1995, at which point the granny grants scam had been in place for three years.

In September 1999, the federal Health Care Financing Administration (now called the Center for Medicare & Medicaid Services) informed the Sundquist administration that the nursing home tax and "granny grants" kickback scheme violated a 1991 law that prohibits states from imposing taxes on health care providers and returning all or a portion of the tax directly or indirectly to the taxpaying entity.

But that wasn't the first time that the federal government had warned the state that the granny grants financing scheme was an illegal scam.

John Morgan, the state's Comptroller during the Sundquist years, testified in 1999 before the legislature's TennCare Oversight Committee that the federal government had warned the state as early as 1994. "There was some correspondence back as early as 1994 where they said this is kind of fishy," Morgan confessed to the committee, "but then it went away for a while."

The Sundquist administration, which took office in January 1994, inherited granny grants. But it also inherited the knowledge that the granny grants financing scheme was improper. Still, Sundquist continued the illegal financing scheme for seven more years, until the federal government finally dropped the hammer in 2001 and told the state to knock it off and to prepare to pay back the money, some $555 million, that the Sundquist administration had, in effect, stolen from federal taxpayers.

While the current administration in Washington has forgiven the $555 million liability owned by Tennessee thanks to Sundquist and the "granny grants" scam, the fact remains that the multi-year scam ripped off federal taxpayers. And Gov. Don Sundquist - now appointed to head a national commission on Medicaid reform - let it happen despite knowing it was illegal.