The House Energy and Commerce Committee is completing its markup of its section of the House Republican budget reconciliation bill. The bill includes draconian Medicaid cuts, as well as cuts affecting the Affordable Care Act’s marketplaces, which would cut Medicaid enrollment by 10.3 million people and increase the number of uninsured by 7.6 million people by 2034, according to preliminary, partial estimates from the Congressional Budget Office.
Among the bill’s Medicaid cuts are two provisions related to provider taxes, which nearly all states use to finance their share of Medicaid costs. The first provision would immediately bar states from instituting any new provider taxes or increasing existing taxes. The second provision would essentially codify a new proposed rule from the Centers for Medicare and Medicaid Services (CMS) prohibiting certain existing provider taxes but without the rule’s limitations and clarifications protecting other current taxes. It would also not offer any guarantee of a transition period for states. These provisions would seriously undermine state financing of Medicaid. They would not only likely prevent states from making significant improvements to their Medicaid programs but also force states to make significant Medicaid cuts over time.
Provider Taxes
We recently held a webinar on provider taxes and the critical role they play in state Medicaid financing. As the webinar explains, under longstanding federal rules that have been in place for nearly 35 years, states may institute taxes and assessments on hospitals, nursing homes, managed care plans and other providers to raise revenues and help states finance their share of Medicaid costs. Such taxes must comply with three federal requirements: they must be uniform and broad-based and cannot hold taxpayers harmless. The hold harmless requirement can be satisfied under a safe harbor if the tax does not exceed six percent of net patient revenues. As KFF has documented, all states but Alaska rely on such taxes, with 39 states including the District of Columbia having at least three such taxes.
Prohibition on New and Increased Provider Taxes
Under section 44132 of the bill, as of the date of enactment, states would be prohibited from establishing any new provider taxes or increasing existing taxes (by increasing the tax rate or increasing the base of the tax). This means that states would no longer be able to use new or increased provider taxes to raise additional revenues to finance their share of Medicaid costs. States would be locked into their existing taxes, even if they have applied taxes only to certain providers — hospitals and nursing homes but not intermediate care facilities, ambulances and managed care plans — or the size of some or most of their taxes are considerably below the safe harbor maximum of six percent. In the past, states have turned to new or increased provider taxes to help close Medicaid budget shortfalls. They have also used provider taxes to finance improvements to their Medicaid programs. Many Medicaid expansion states have directly tied new provider taxes or provider tax increases to adoption of their expansion, including states that more recently implemented the Medicaid expansion like Missouri in 2021 and North Carolina in 2023.
Now, states would have zero flexibility on provider taxes moving forward. For example, in the face of a recession that leads to declining income and sales tax revenues and growing budget deficits, without the option of additional provider taxes, states would either have to cut other parts of their budget like education or most likely, deeply cut their Medicaid programs even as people are losing their jobs and health insurance. States would also be far less able to identify the state financing needed to expand Medicaid eligibility and benefits — such as expanded access to home- and community-based services — or increase provider payment rates to induce greater provider participation and improve access to care especially in underserved areas. Notably, without provider taxes as a financing source, it would also make it considerably more difficult for the 10 remaining non-expansion states to adopt the expansion in the future.
Prohibition of Certain Provider Taxes
Under section 44134 of the bill, as of the date of enactment, states would no longer be able to use certain provider taxes to finance Medicaid. As noted, provider taxes must be applied in a uniform manner but under federal regulations that have been in place since the early 1990s, states may instead comply with the uniformity requirement by obtaining a waiver. To receive federal approval for the tax, it must still be “generally redistributive,” which can be demonstrated by satisfying a mathematical “B1/B2” test.
While leaving that mathematical test in place, the bill would prohibit any tax from still being considered redistributive and therefore permissible if it fails to meet three new technical requirements. The requirements are intended to capture currently allowed taxes which satisfy the B1/B2 test despite, for example, sharply differing tax rates for Medicaid managed care plans and for non-Medicaid plans that should otherwise be out-of-compliance with the generally redistributive condition. These requirements would apply not just to taxes on managed care plans but also on any type of provider including hospitals The bill is essentially codifying a new proposed rule from the Trump Administration just issued on May 12. According to the rule, there are at least 8 taxes (7 taxes on managed care plans and one on hospitals) in 7 states that would no longer be allowed.
The bill, however, lacks the rule’s somewhat more measured approach. For example, the preamble to the rule states that CMS will apply the new requirements of the rule “narrowly” and that CMS “made every effort to ensure the impact of this proposed rule would be limited” to only a small number of current taxes. The preamble also makes clear that existing provider taxes that treat some providers differently would continue to be permissible so long as these adjustments have legitimate goals, such as excluding or instituting differential tax treatment for sole community hospitals or rural hospitals because of the vital roles they play in their communities. But no such exceptions are included in the bill. As a result, the bill could end up prohibiting many additional existing provider taxes, rather than the highly limited number of existing taxes the rule is ostensibly targeting.
In addition, the bill does not take into account how this provision would interact with the prohibition on any new or increased provider taxes. In the preamble, CMS argues that states should be able to maintain the same level of revenues raised by their newly prohibited taxes because they can modify the prohibited taxes to come into compliance with the new rules or institute other provider taxes. But with section 44132, states would not be able to substitute a different provider tax, increase a different provider tax, or modify the non-compliance tax in ways that increase the rate or expand the base of the tax even if those changes are needed to satisfy the new requirements. This means that some states could see significant cuts in their Medicaid financing that will create budget shortfalls they will need to close, likely with Medicaid cuts.
Finally, while the bill allows the Secretary of Health and Human Services to provide a transition period for those states of up to three years, there is actually no requirement that any transition be provided. Those states that see existing provider taxes invalidated —including taxes beyond the intended scope of the proposed rule — could therefore see an immediate reduction in their revenues under this provision. Without obtaining alternative financing by raising other taxes or cutting other parts of their budget, such states would likely have no choice but to cut their Medicaid programs, potentially right away.
Likely Combined Impact of the Provider Tax Provisions
Under the bill, some states could see existing provider taxes prohibited immediately. Those states may even be barred from modifying those taxes even if they are trying to come into compliance with the new uniformity requirements imposed by the bill. All states would be permanently prohibited from raising additional revenue by adding new provider taxes or increasing current taxes. As a result, the bill would make it much more difficult for states to raise the revenues they need to finance their share of Medicaid costs over the long run. They will certainly be less able to make any substantial improvements to their Medicaid programs. Without new or increased provider taxes as a financing option, they will likely have to shrink their programs over time by cutting eligibility, benefits and provider payment rates, especially in the face of budget shortfalls including from a recession but also if other revenue sources used to finance Medicaid fail to keep up with rising health care costs.