“Budget Neutral” Funding for State Share of Medicaid Expansion: Hospital Fees and Taxes?

As new plans to expand Medicaid are proposed, one issue increasingly coming up is the idea of “cost neutrality” to state budgets when creating the framework for a state expansion. The Affordable Care Act provided 100% federal funding for state expansions through 2016 but after that date states must pay a small graduated share of the costs of expansion. The state’s share increases in steps and is capped at 10%. While comprehensive analyses done in 16 states so far have shown overall state budget savings from expansion despite the state share, the politics driving coverage expansions in the remaining reluctant states are resulting in discussion of budget neutral financing mechanisms. This should be no surprise – by forgoing one or more years of the initial 100% federal financing for expansions, state costs become slightly higher the longer states delay.

One mechanism to reach budget neutrality is to propose a fee or tax on hospitals within the state to either partially or fully fund the expansion. Hospitals are willing to consider this option because the benefits to their bottom lines are so great. In states that have expanded Medicaid already hospitals are seeing a reduction in their admissions of uninsured people by 28 to 33 percent – a stunning drop. When a third of the people being admitted to your hospital who previously couldn’t pay their bills can now pay in full, expanded Medicaid in whatever form is a huge financial boost. Hospitals in non-expansion states are no doubt looking at these numbers and calculating that overall they will still see significant savings from Medicaid expansion even if they are required to pay an additional fee or tax.

So far I’ve identified five states to watch regarding these fees.

ARIZONA: Arizona, which has already expanded Medicaid, is both the leader and a state to watch in regard to these hospital fees. That is because Arizona’s Supreme Court will decide this spring whether or not these hospital fees – used to pay the state share for expansion in Arizona – were properly passed by the Arizona legislature where a “tax” requires a supermajority vote and a “fee” a simple majority. One politician’s fee is often another’s tax, so I’m not sure how the state Supreme Court will rule on this issue. However, the hospital association in Arizona has no doubt that, after a year of experience, the decision of the hospitals to pay a fee as part of Arizona’s Medicaid expansion was the right one:

Greg Vigdor, CEO of the Arizona Hospital and Healthcare Association, called the decision [to hear the case challenging the Medicaid hospital fee] a disappointment that reopens debate on policy that hospitals had believed was resolved. “All evidence has shown this to be the right policy decision,” he said. The state’s newly insured have sought medical care and state hospitals have seen unpaid bills drop significantly, he said.

Hospitals surveyed by the state association reported a 33% drop in uncompensated care during the first nine months of 2014. The assessment raised $75 million in 2014 and is projected to raise $270 million in the coming year, according to the association.  [See the full article here.]

UTAH: Utah Governor Gary Herbert’s “Healthy Utah” plan to expand coverage now being considered by the Utah legislature includes discussion of provider fees to finance the plan:

Healthy Utah costs that exceed the savings achieved from implementation of the program could be covered through increased provider assessments. Generally, it would make the most sense to increase assessments for provider groups that stand to benefit the most from the increased coverage provided by Healthy Utah.

Obviously this is not very specific, but Herbert’s plan hints that hospitals don’t pay any fee or assessment now while other providers in Utah do pay such a fee. Discussion and debate continues in Utah around Herbert’s plan and alternatives.

TENNESSEE: Governor Bill Haslam in Tennessee has a plan for using federal Medicaid expansion dollars that is widely supported in his state. While public hearings and intense legislative discussions are ongoing, Haslam’s plan may be the next Medicaid expansion approved after Indiana’s approval this week. The state share of Haslam’s plan is completely covered by a hospital fee:

Haslam said the program will not create any new taxes for Tennesseans and will not add any additional cost to the state budget. The Tennessee Hospital Association has committed that the industry will cover any additional expenses created by the plan, he said.

 INDIANA:  Indiana’s recently approved Medicaid expansion plan includes funding the state share of the proposal starting in 2017 by a combination of revenues from Indiana’s existing cigarette tax and a increase in Indiana’s existing “hospital assessment fee.” The state and the Indiana Hospital Association are described as having reached a “mutually beneficial agreement” for the fee increase. Part of this mutually beneficial agreement is an increase of the reimbursement rate paid to “physicans and physician extender services” to 75% of Medicare reimbursement rates. This is a significant bump depending on definition. For example, currently Indiana Medicaid pays only 55% of Medicare reimbursement rates for primary care physician services.

KANSAS: Hospitals here have indicated financial stress for rural hospitals in the state is becoming significant and is driving discussion of a Medicaid expansion alternative plan in this very conservative state. The head of the Kansas Hospital Association, Tom Bell, recently told the Associated Press that the Association was open to considering a hospital fee or tax to help fund the state share of Medicaid expansion. The Association is supporting a legislative-initiated effort to jumpstart discussions around using the federal Medicaid expansion money in the state. However, discussion in Kansas around this issue is firmly at the beginning stages and far behind developments in Indiana, Tennessee and the Intermountain West.

As more states investigate plans for using the federal Medicaid expansion dollars to create their own state-based plans for Medicaid, I expect to see more consideration of such provider fees. The savings to hospitals are simply too great for this not to be a serious consideration in most states. Nevertheless, I don’t think such fees are a given. As part of the original passage of the Affordable Care Act hospitals saw reductions in the amount of funding they receive for taking care of uninsured patients. So new state Medicaid expansion fees are an additional cost to hospitals in addition to the cuts in their funding already enacted. On the other hand, I don’t think many policy analysts foresaw the enormous and almost immediate reductions in the number of uninsured patients hospitals in expansion states are currently experiencing. For right now at least in some states the benefits to hospitals from a new expansion are clearly outweighing the costs of additional fees.


Adam Searing is an Associate Professor at the Georgetown University McCourt School of Public Policy’s Center for Children and Families.