Legal money laundering frees up millions in state budget

Posted: Sunday, April 02, 2000

JUNEAU (AP) -- In a form of legalized money-laundering, the state plans to use local hospitals around Alaska to transform millions in federal Medicaid grants into state money that can be used to bring in more federal dollars.

In their yearly struggle to reduce spending from the state's general fund, budget writers in the Republican-controlled Legislature prowl constantly for ways to replace state money with federal funds.

The convoluted money shuffle that entranced members of the Senate Finance Committee last week may that quest's holy grail -- $20 million in federal money that will replace a similar amount of state money in the Medicaid program in this budget year and the next one.

''It's beautiful,'' said Sen. Sean Parnell, R-Anchorage, the committee's co-chairman. ''It's good management practice to use federal dollars in place of state dollars whenever we can.''

Here's how the plan would work:

In each fiscal year, the state sends $8 million to 10 small hospitals owned by local governments across Alaska. The federal government matches that money with $12 million under Alaska's normal 40 percent-60 percent match rate for Medicaid.

The local hospitals keep $2 million, then kick the remaining $18 million back to the state.

The transaction transforms $10 million from the federal government into state funds that must be spent for Medicaid. But that $10 million can also be used to pull down another $15 million in federal Medicaid funds under the 40-60 match.

That means the original $8 million in state money would bring in a total of $27 million from the federal government.

Typically under the 40-60 split, the state would have to spend $18 million to receive $27 million from the federal government. So the benefit of this plan is that $10 million would be freed up from the general fund to be spent on something else.

Why isn't this illegal? Because the federal Health Care Financing Administration authorizes it as a way to bolster small, publicly owned hospitals that serve remote areas, said Bob Labbe, director of the state Division of Medical Assistance.

''We've worked with the federal government on this,'' Labbe said. ''The payment we make to them is expected to be a payment to insure health care access in that area.''

Labbe sent a member of his staff to Oregon late last year to study that state's use of the program.

''Oregon had a $100 million deal going like this,'' Labbe said. ''It's been going on for years.''

The department then brought the idea to the Legislature as a way to help cover an increase in Medicaid costs for the next fiscal year, which begins July 1, Labbe said.

The shift for next year was included in the version of the budget the House passed last month, but Parnell pushed the department to perform the shuffle in the current year as well. That would bring the total savings over two years to $20 million.

That allowed the Senate Finance Committee to redistribute millions from Medicaid to other areas, including child care grants, foster care and subsidies for people who adopt children with special needs.

Spreading that money around made the committee's deliberations on the budget less acrimonious than in prior years, when the panel's overwhelming Republican majority repeatedly thwarted Sen. Al Adams of Kotzebue as the committee's lone Democrat battled budget cuts.

While Adams said he was still concerned about some areas of the operating budget, he supported it in general and especially praised the money for children's programs.

''Even though we will show a reduction here, we have shifted money,'' Adams said in a gentle jibe to his GOP colleagues. ''There is nothing wrong with being a liberal at heart.''

Parnell said the budget spends about $2.1 billion from the general fund, about $25 million less than in the current year.

Counting federal funds and other state money, the budget spends about $6.6 billion, compared to nearly $6.4 billion this year.

The increase comes mostly from the Alaska Permanent Fund, Parnell said. About $41 million more will go to the Permanent Fund dividend program this year, and about $224 million more will be spent to protect the $27 billion fund's principal from inflation.

The full Senate is expected to debate the budget this week.

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