WASHINGTON (AP) _ The government warned states on Wednesday to end a practice by which they temporarily transfer money into their own Medicaid programs to earn higher matching funds from the federal government.

In a sharply worded letter, Timothy M. Westmoreland, director of the Health Care Financing Administration, which oversees Medicaid, said many states allow their Medicaid providers to keep only a fraction of the nearly $2 billion generated by the transfers. In some cases, he said, as little as 5 percent is properly allocated.

The letter was obtained Wednesday by The Associated Press.

Under the practice, which is legal under a loophole in laws concerning Medicaid, some states transfer their own funds, borrowed money or property taxes into state coffers to qualify for more matching funds. The states then siphon off a portion of the federal funds to use for non-Medicaid programs.

The practice drives up the cost of Medicaid, the federal-state program that provides health benefits to low-income Americans.

Westmoreland said the states' estimates of federal Medicaid spending for fiscal year 2000 have already increased by $3.4 billion over earlier projections _ with an estimated $1.9 billion due to the loophole.

HCFA officials say they became concerned recently as some states have gotten more creative with their transfer programs and bolder about using the matching funds for programs other than Medicaid.

Some states simply keep a portion of the money in their general fund for other programs. A Department of Health and Human Services official, speaking on condition of anonymity, said New Jersey has used the money to fund tax cuts, while Kansas and Louisiana have used it to trim budget deficits.

Since January 1998, Nebraska has received $139 million in matching Medicaid payments, but has paid only an estimated $500,000 to county-owned nursing homes that qualified for the money, the official said.

Bob Seiffert, the administrator of the Nebraska Medicaid program, said he wasn't familiar with the figure quoted, but defended the state's use of Medicaid funds.

``We believe that all our decisions on the use of federal dollars are reasonable,'' he said. ``All expenditures are made in accordance with our approved federal plan for Medicaid services.''

In his letter, Westmoreland said 17 states are using the transfers to get extra federal funding and 11 others are considering the practice.

He said the HCFA's inspector general's office, which investigates possible waste, fraud and abuse, is examining how states are using the Medicaid funds. The General Accounting Office, Congress' investigative and auditing arm, may also investigate, he said.

State Medicaid officials say they have been using the so-called intergovernmental transfers for years without a peep from the HCFA. They contend that a change could lead to service cuts or nursing homes not being able to afford to take new Medicaid patients.

Some states could lose millions in Medicaid payments under the proposed change. It could dramatically reduce federal matching funds in many states that have come to rely on the money to shore up struggling county-run nursing facilities.

Intergovernmental transfers vary from state to state. Michigan routes $300 million in state funds through county-run nursing homes to increase its matching funds, which are then used for health services for the poor. Louisiana plans to have county-run nursing homes borrow money from banks and hand the funds over to the state, which will use the money to boost what it can qualify for. The loans are paid back out of the federal funds and nursing homes get the rest.

Medicaid cost an estimated $181 billion last year. The federal government's share was $103 million.

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