Health care professionals who owe significant back taxes for years still are getting paid by Medicaid because of a loophole in the tax laws, the Government Accountability Office concluded in a report issued Aug. 2.

GAO investigated known federal tax debts owed by Medicaid health care professionals in Florida, New York and Texas — three states whose Medicaid programs received some of the largest allotments of money from the 2009 federal stimulus package. The agency found that roughly 7,000 were delinquent on nearly $800 million in federal taxes from 2009 or earlier but had been paid a total of more than $6 billion by Medicaid. Because the estimates didn’t include entities that either had under-reported their income or failed to file tax returns, the watchdog agency expects that the amount of unpaid taxes was even higher.

The report also profiled 40 Medicaid health care professionals or businesses that had sizable federal tax debts in these states. GAO found that they collectively had received a total of $235 million in pay in 2009 even though they owed nearly $26 million in taxes to the federal government through 2010. Physicians, dentists, hospitals, home care providers, durable medical equipment suppliers and social services providers were among those represented in this case study. Some of these entities, which were not identified by name in the report, had been associated with potential criminal activity or abuse of the federal tax system, according to GAO.

The people profiled are tax cheats, said Sen. Tom Coburn, MD (R, Okla.), the lead Republican on the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations. GAO’s findings underscore a need to raise the integrity of the Medicaid program, said Dr. Coburn, who requested the report along with other leaders on the committee and the Senate Finance panel.

“It’s unfortunate that this much was identified as unpaid taxes, because that’s revenue that could provide care to people,” said Glen Stream, MD, president of the American Academy of Family Physicians. “We expect people to be good citizens and pay their taxes, including physicians.”

But because Medicaid doesn’t pay very well, Dr. Stream suggested that some of the tax delinquency might involve practices being in a state of financial distress. While this isn’t an excuse, he said, “there may be more understandable reasons than egregious financial behavior.”

The Internal Revenue Service can garnish federal payments when the recipient has an unpaid tax bill, but Medicaid’s state-based system has kept its pay from qualifying as a federal payment. “IRS currently may only subject Medicaid reimbursements to a one-time levy instead of a continuous levy,” GAO stated. The report cited an example of a physician who had received more than $200,000 in Medicaid pay but owed more than $500,000 in unpaid federal taxes. The IRS ended up having little success in placing a levy on this physician’s Medicaid payments.

GAO estimates that the IRS could have recouped up to $330 million in these three states if it had been able to issue continuous levies on Medicaid payments. But given the difficulties they face just in processing one-time levies, state officials interviewed by GAO expressed doubts about using continuous levies.

GAO has investigated similar problems in the Medicare program. In 2007, the agency reported that 21,000 physicians in 2005 had been paid by the program despite owing a total of more than $1 billion in back payroll and income taxes.

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