As my colleague Edwin Park has detailed, House Republican leaders are considering draconian cuts to Medicaid that would decimate the program. Among the House Budget Committee’s list of options for Medicaid cuts being considered is a restriction on states’ current ability to use provider taxes to help finance their share of the cost of Medicaid. The House Budget Committee list claims that this proposal would cut federal Medicaid spending by $175 billion over ten years (though the list does not specify what is the basis of these estimates). Provider taxes are poorly understood, and yet their role is critical to states and their Medicaid programs. Let’s understand why.
What Are Provider Taxes?
Medicaid is jointly financed by the states and the federal government. Thus, though the federal government pays more than half of the bill, the states contribute the remainder. Under federal law, states have flexibility in how they finance their share of Medicaid costs. States’ general funds account for most of their state share (67.6% in state fiscal year 2024, according to the National Association of State Budget Officers (NASBO). But states also rely on other financing sources, including dedicated taxes, funding from local governments, and taxes and assessments on health care providers and managed care plans. While there is no more recent data, in 2018, provider taxes accounted for about 17% of the state share of the cost of Medicaid (this is an average; many states have more at risk). Under provider taxes, states can levy taxes and assessments on a wide range of provider types, including hospitals, nursing facilities, intermediate care facilities, managed care plans, and others. Every state including the District of Columbia, except for Alaska, uses provider taxes to help fund their programs. Thirty-nine states including the District of Columbia have at least three provider taxes.
Why Support Provider Taxes? (A Top Eight List)
- Restricting the use of provider taxes would significantly cut state funding for Medicaid. Under federal law, provider taxes and assessments must comply with three federal requirements: they must be uniform and broad-based and cannot hold providers paying the tax harmless. The hold harmless requirement can be satisfied under a longstanding safe harbor if the tax does not exceed 6 percent of patient revenues. Under the House Budget Committee list, this safe harbor would be phased down to 3 percent by 2028. According to a survey of state Medicaid programs, in state fiscal year 2024, 48 states including the District of Columbia have at least one tax that would no longer qualify for a safe harbor under this proposal. This restriction on existing and new provider taxes would produce federal savings ($175 billion over ten years, according to the list) because states would be unable to replace revenues raised by such taxes with other sources such as income taxes and sales taxes. As a result, states would end up cutting their Medicaid programs in response which would therefore reduce federal Medicaid spending as well. So this represents a massive cut of state Medicaid programs – the loss of all the federal dollars plus the loss of what the states raised with provider taxes above the new threshold that they cannot replace. Entirely eliminating state use of provider taxes would cut federal Medicaid spending by $630 billion over ten years, according to the Congressional Budget Office.
- The federal and state funding cut after provider taxes are restricted would lead to huge harm. State Medicaid programs rely on provider taxes to bolster their programs and support safety-net providers that children and families depend upon for a wide range of essential health care services, including obstetric care, neonatal intensive care units, and of course emergency care generally. Safety-net providers in rural areas operate on particularly thin margins to provide these services. Restricting state use of provider taxes means huge harmful impacts when states can no longer sustain their existing Medicaid programs and protect their safety-net providers. States would be forced to deeply cut eligibility, services, and provider payment rates, destabilizing the health care system.
- Provider taxes are vital to maintaining coverage for people covered through Medicaid expansion. When states were given the opportunity to implement Medicaid expansion, numerous states relied upon a new provider tax or a provider tax increase to fund the state share of Medicaid expansion. (The federal government picks up 90% of the costs of the expansion on a permanent basis.) Restricting state use of provider taxes would put Medicaid expansion at serious risk in these states. If states are unable to replace these provider taxes with other financing sources, which is likely, many expansion states would likely drop the expansion over time. It would also foreclose an important financing source for expansion in the remaining 10 states that haven’t yet expanded.
- Provider taxes are already subject to federal requirements and oversight. Since the early 1990s, Congress has instituted numerous requirements related to provider taxes (and the Centers for Medicare and Medicaid Services has instituted extensive regulations and reporting requirements. As discussed above, federal law requires the tax to be broad-based and uniform, meaning states cannot pick and choose who to tax within a provider class. States are also prohibited from holding providers harmless of the taxes. This requirement can be satisfied through a safe harbor where the size of the tax cannot exceed 6% of patient revenues (states could forego the safe harbor and go higher than 6% but don’t to ensure they are complying with the federal hold harmless prohibition). While it makes sense to further improve transparency and reporting about the funding (as the Government Accountability Office has recommended), the importance of the funding is indisputable and it doesn’t make sense to cut it.
- Providers support the taxes. Providers are supportive of the provider tax system because they understand it is critical to ensure their state’s Medicaid program is adequately funded. Without a financially sound Medicaid program, providers know they will face higher uncompensated care costs and reimbursement rate cuts.
- Provider taxes can support a wide range of providers. Provider taxes are also critical because a portion of the funds raised is often reinvested in higher Medicaid reimbursement rates to a wide range of safety-net providers, including hospitals, nursing facilities, intermediate care facilities that provide services to individuals with intellectual disabilities, home health care providers, nursing providers, ambulance providers and many more (who often operate on thin margins). Supporting these providers, including those in rural areas, means supporting the health care infrastructure that all state residents rely upon.
- Provider taxes are critical to states during recessions. During recessions, states suffer losses in revenue as economic activity declines and, at the same time, face increasing health care costs when more and more people lose employment coverage and must rely on Medicaid to meet their health needs. Data shows that during and after recessions state use of provider taxes increases. This makes sense, since the provider tax is like a lifeboat for a state that has come up short in general funds needed to pay for its state share of Medicaid amidst a budget shortfall.
- Reducing provider taxes post-pandemic would be especially harmful. When the COVID-19 public health emergency ended, states lost a significant amount of enhanced federal Medicaid funding they had received to help them meet people’s needs during the pandemic. Thus, per NASBO, while total Medicaid spending increased 5.3% in 2024, federal funding only increased .2% while state funding increased 16%. This means states are currently already increasing their spending to keep Medicaid fully funded, even as more states face budget deficits because of the expiration of other pandemic-related federal funding. Reducing state use of provider taxes at the same time would be a double whammy at exactly the worst time.
The fabricated justifications to restrict state use of provider taxes belie the simple fact that they are a critical financing mechanism that states rely upon to meet their obligations to fund Medicaid. Reducing or eliminating the flexibility to use provider taxes would result in devastating financial losses for states, deep damage to state health care infrastructure, and most importantly, harmful impacts on access to health care for children, families, seniors, and people with disabilities.
