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Hospital Franchise Fee

The federal government provides a fiscal incentive for states to extend Medicaid coverage to more low-income individuals. This incentive is counterbalanced by the requirement for states to share in the cost of Medicaid.

Forty-nine states and the District of Columbia use a hospital tax or provider fees to help fund the state’s share of Medicaid. In Ohio, the tax on hospitals is called a franchise fee.

FINANCE NEWS - FRANCHISE FEE

Connect here to view Franchise Fee-specific Finance News prepared by OHA's Health Economics & Policy team.

FLOW OF FUNDS

Ohio provides the state’s share of Medicaid dollars to draw down the federal match using the hospital franchise fee funds. For every $1 in franchise fee funds sent to Washington, D.C. the state receives $3 in matching funds, creating a pool of $4 Medicaid dollars for every $1 invested.

From the total pool of Medicaid dollars generated for state fiscal year 2021, 46% of the funds are paid to hospitals for patient care provided. The other 54% goes to the state of Ohio to administer the Medicaid program and for additional provider payments.

All Hospitals Participate

All Ohio hospitals pay the same rate, regardless of the volume of Medicaid patients they treat. About 30% of member hospitals pay more in franchise fees than they receive back in Medicaid reimbursements for services provided.

HISTORY OF OHIO'S FRANCHISE FEE

In 2009, Ohio Gov. Ted Strickland’s Administration faced a $1 billion structural deficit in the 2010–2011 biennium budget. Ohio hospital leaders agreed to the franchise fee to provide Ohio’s state share of Medicaid.

Currently, Ohio hospitals are taxed at a rate of 3.9321% on gross expenses (less Medicare expenses).

Supplemental Payments - Transition to Cost Coverage Add-Ons

Upper Payment Limit, or UPL, supplemental payments have been part of the hospital franchise fee since its inception in 2009, but were eliminated as of December 2019. UPLs were designed to bring Medicaid payment levels up to par with Medicare reimbursement levels when hospitals provide fee-for-service care to Medicaid beneficiaries. Because of the growth in Medicaid managed care, UPLs declined dramatically in the late 2010s.

To replace the loss of UPL funding, OHA worked with the Ohio Department of Medicaid to create enhancements to hospital Medicaid base rates, called cost coverage add-ons, or CCAs, which took effect in January 2020.