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Kelly Whitener: Good morning, or good afternoon. I'm Kelly Whitener with Georgetown CCF. We'll get started in just a minute, still giving a chance for folks to chime in.

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Kelly Whitener: Good morning, this is Kelly Whitener with Georgetown Center for Children and Families. I'm going to go ahead and get us started as folks are continuing to join.

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Kelly Whitener: First, just want to say that Georgetown University Center for Children and Families, or CCF, is a nonpartisan policy and research center. We're founded in 2005 with a mission to support access to high-quality, comprehensive, and affordable health coverage for all of America's children and families.

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Kelly Whitener: Today, we are learning about Medicaid financing, specifically provider taxes, from our research professor, Edwin Park. But first, some housekeeping.

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Kelly Whitener: We will post the slides and recording on our website, on the webinars page. So during today's webinar, please use the Q&A function for your questions. We'll be using the chat function along the way to post some important links, but we will be monitoring that Q&A box for your questions that will

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Kelly Whitener: Try to get through at the end.

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Kelly Whitener: So back in June, we hosted a webinar on the basics of Medicaid financing, including how the federal-state partnership works, how federal funding is mandatory and not subject to annual appropriations.

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Kelly Whitener: and how states finance their share of Medicaid costs. We invite you to go back and listen to that recording if you missed it. There's a lot of helpful background information in that discussion.

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Kelly Whitener: Today, we are taking a closer look at HR1's restrictions on provider taxes and the recently proposed regulation that, if finalized, will even more negatively affect state budgets and their ability to sustain their Medicaid programs, as well as other state health programs moving forward.

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Kelly Whitener: If you're looking for some background, kind of written materials describing these changes, I'd encourage you to check out the explainer that Edwin and our colleague Sabrina Corlette wrote describing all of the Medicaid CHIP, and marketplace changes in HR1 from last year. It's a great resource on these changes and more. And Edwin has also blogged about this proposed rule.

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Kelly Whitener: And its implications over the summer. So we'll put both of those links in the chat as well.

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Kelly Whitener: I will flag that there are 11 days left to comment on this proposed rule, so now is really the time to be writing up your thoughts on the changes and how they would impact you, your community, your state, and whatever sector of the Medicaid stakeholder group you may represent. And we'll put a link in the chat to the Federal Register so you can make sure to see the regulation and see how to comment.

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Kelly Whitener: So now, without further ado, I will hand it over to Edwin.

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Edwin Park: Thanks, Kelly. So, I'm Edwin Park, Research Professor at Georgetown CCF. I will now, share my screen, and we can get started.

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Edwin Park: So, I am, gonna talk about, as Kelly mentioned, the, proposed rule CMS issued at the end of July, related to implementation of certain restrictions on state use of provider taxes that were included in H.R. 1, also known as the One Big Beautiful Bill Act.

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Edwin Park: So, part one, I'll recap, sort of the…

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Edwin Park: how provider taxes work, and H.R.1's, statutory restrictions, specifically those in Section 7115. 71115. So, how do states finance their share of Medicaid costs? It is a federal state

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Edwin Park: financial partnership.

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Edwin Park: Where, states are required to, finance a portion of, the total costs of their Medicaid programs. This financing can come from a variety of sources. States have flexibility.

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Edwin Park: in terms of how they finance their state share. It can be traditional general revenues, income taxes, sales taxes. It can be provider taxes, which are taxes and assessments on a variety of healthcare providers, hospitals, nursing homes, managed care plans, and others.

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Edwin Park: Could be dedicated state revenues, for example, in the past.

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Edwin Park: States have relied on tobacco taxes to finance their Medicaid costs, as well as contributions from other levels of government within the state, local governments, counties, cities.

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Edwin Park: hospital districts, things like that, so long as the state is, still paying for 40% of the state's share.

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Edwin Park: Local government contributions can come in the form of intergovernmental transfers, which can be direct funding transfers, or, certified public expenditures.

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Edwin Park: Essentially, in-kind contributions from locally operated,

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Edwin Park: public hospitals, clinics, and other providers, which are being, used to… which are furnishing services to Medicaid enrollees.

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Edwin Park: Now, in terms of provider taxes, the share of, total state funding supporting Medicaid, GAO did one analysis, findings about 17% came from provider taxes, a lion's share from, traditional state general fund.

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Edwin Park: Kff in, a recent budget survey had about the same, result, in surveying states. About 18% came from provider taxes. So, obviously, there's gonna be a variety, variation across states.

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Edwin Park: Now…

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Edwin Park: All states but Alaska rely on provider taxes to help finance the state share of the Medicaid program. More than 40 states have 3 or more taxes. As I mentioned, these include a variety of different providers who are paying these taxes and assessments. There are 3 provider tax restrictions in HR1.

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Edwin Park: So, up a nearly trillion dollars,

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Edwin Park: in Medicaid cuts over 10 years that were enacted as part of H.R. 1 last year.

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Edwin Park: About $225 billion over 10 years came from these three provider tax restrictions, and they were expected to increase the number of uninsured by 1.2 million, out of the $7.5 million increase in the uninsured due to the Medicaid cuts, according to CBO estimates.

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Edwin Park: Now, which states have provider taxes? You can see here, you know, 41 states have 3 or more provider taxes, but all states but Alaska, as you can tell, do rely on provider taxes for the Medicaid program, so it's certainly a critical source of funding to support Medicaid.

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Edwin Park: Now, provider taxes can only be used if they're in compliance with long-standing federal rules. Statutory changes were made in the early 1990s.

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Edwin Park: regulations that constitute the framework, for provider tax use by states. It was also done in the early 90s, implementing that statutory change.

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Edwin Park: And there's basically three requirements. The taxes must generally be uniform, broad-based, and you can't hold the tax-paying providers harmless. Waivers are allowed for those first two requirements related to uniformity and broad-based. If states can satisfy mathematical tests, those mathematical tests and waivers have been in place

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Edwin Park: again, since the early 1990s. In terms of the,

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Edwin Park: Whole harmless, no whole harmless requirement.

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Edwin Park: In showing that there's no indirect whole harmless, there's always been a two-pronged test.

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Edwin Park: Either, you didn't exceed, what's called a safe harbor threshold, where the tax wasn't, of a certain size, and it couldn't exceed, under prior law, 6% of net patient revenues among the providers that are taxed.

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Edwin Park: or a so-called 75-75 test, which I'll discuss, later on, where…

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Edwin Park: no more than, 75% of the taxpaying providers receive more than 75% of Medicaid payments or other state payments that might be financed by that tax.

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Edwin Park: Now, Section 71115 of H.R. 1, includes, two provisions, which are the subject of this proposed rule. The first is no new or increased, provider taxes. It's a permanent prohibition.

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Edwin Park: Where taxes can't be added.

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Edwin Park: It can't be an increase in existing taxes as of date of enactment, with penalties being enforced starting October 1st of this year. Whether there's an increase in existing tax depends on what the size of that existing tax was, measured, again, as a percentage of net patient revenues.

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Edwin Park: Existing taxes are grandfathered under H.R. 1 if they were both enacted and imposed prior to, the date of enactment, July 4th, 2025.

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Edwin Park: The second provision, that's the subject of the proposed rule

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Edwin Park: would affect expansion states only, those states that have taken up the Medicaid expansion. Reduces the permissible size of provider taxes.

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Edwin Park: But only in expansion states. It does not apply to taxes on nursing homes and intermittent care facilities for those with intellectual disabilities. But that 6% limit that was in place

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Edwin Park: under prior law would be phased down by half a percentage point, each year, starting October 1st of next year, October 1st, 2027, and it's half a percentage point each year until you get to Federal Fiscal year 2032, where it will be at 3.5% in that year and thereafter.

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Edwin Park: There is a third, provision included in H.R.1 related to provider taxes, different section, it's affecting certain, uniformity waiver, provider taxes, where there's a

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Edwin Park: significant, difference in tax rates between Medicaid and non-Medicaid providers, based on, for example, their Medicaid patient load, their Medicaid revenues. This is primarily going to affect states, with MCO taxes, and you can see, you know, some of the details here in this slide. Happy to answer questions about it.

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Edwin Park: But it's not the focus of this webinar.

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Edwin Park: final regulations from CMS implementing this particular provision, were issued in January of this year.

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Edwin Park: So, many expansion states will certainly be affected, by,

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Edwin Park: that phase down in the permissible size of provider taxes. According to KFF, as many as 31 states will have to lower their provider taxes at some point. And many states have used provider taxes.

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Edwin Park: to finance their share of the cost of the Medicaid expansion, most recently in North Carolina, Missouri, but also, in states that took up the expansion, right away, like Arizona.

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Edwin Park: So, now to get to the real subject of this webinar, after going through some of that background, is CMS's proposed rule related to those first two restrictions on provider taxes that were enacted as part of H.R. 1?

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Edwin Park: So, there was a new rule, issued, July 21st, by CMS,

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Edwin Park: As I mentioned, covers those first two provisions of, H.R. 1 that restrict provider taxes in Section 71115.

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Edwin Park: As I mentioned, uniformity waiver provision was already addressed in the final rule in January, so this is not included here.

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Edwin Park: Public comments, as Kelly mentioned, are due, relatively soon, on September 21st, of this year, so in about a little under 2 weeks.

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Edwin Park: But… This proposed rule isn't just implementing

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Edwin Park: those first two HR1 provider tax restrictions. Similar to how CMS,

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Edwin Park: has implemented other Medicaid cuts in H.R. 1, it goes significantly beyond what H.R. 1 actually requires. Examples include how CMS has

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Edwin Park: implemented the medical frailty exemption in the interim final rule for work reporting requirements, how, CMS

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Edwin Park: has, moved much farther, than H.R. 1 in restricting the ability of states to provide, state-directed payments through managed care to healthcare providers, in a proposed rule from earlier this year, that's, that's,

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Edwin Park: Currently, being, you know, in the process of being finalized by CMS, with the public comment period already,

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Edwin Park: closed, as well as a recent, guidance implementing a different provision of H.R. 1 related to how budget neutrality is calculated for Section 1115 waivers. Again.

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Edwin Park: That provision, was about essentially codifying long-standing policy on budget neutrality, but there are many significant changes that were included in that guidance, which we expected to be included in forthcoming regulations. So this is part of a theme

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Edwin Park: In terms of how CMS has been implementing the already, incredibly harsh cuts in H.R. 1, the historically large, Medicaid cuts that H.R. 1 enacted.

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Edwin Park: So let me go through now some of the key elements of this proposed rule. Again, that's open for public comments, that are due September 21st. So the first is.

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Edwin Park: That the, proposed rule specifically adds as a class subject to, provider tax rules, taxes on health insurers.

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Edwin Park: What…

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Edwin Park: this proposed rule does, which is, highly inconsistent with long-standing CMS practice and state understanding, is that

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Edwin Park: It explicitly extends the provider tax rules that generally apply.

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Edwin Park: as well as the new HR1 provider tax restrictions, Two health insured taxes.

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Edwin Park: Even if not funding Medicaid, even if they have nothing to do with financing the state's share of Medicaid.

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Edwin Park: And that's what the preamble, states.

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Edwin Park: Now, what this means, is that despite states

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Edwin Park: Having a long understanding since the beginning of these provider tax.

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Edwin Park: The requirements in the early 1990s.

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Edwin Park: Is that, inconsistent with,

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Edwin Park: parts of the statute and, long-standing CMS policy and practice, and how it's enforced and applied, the provider tax rules in Medicaid, is that the proposed rule

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Edwin Park: Whether it's an unintended consequence or not, Would appear to apply

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Edwin Park: the rules of provider taxes, governing provider taxes, and the HR1 restrictions, to a variety of state taxes and assessments on health insurers that are used for many non-Medicaid purposes.

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Edwin Park: This could include, for example, the user fees that states charge insurers that participate in their state-based marketplaces. That's used to fund the operations of the marketplace in the state.

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Edwin Park: Whether it's, supporting the administrative structure, oversight of plans, education outreach, to consumers, reinsurance programs that states have, put in place to, bring down the cost of, of,

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Edwin Park: of coverage in the individual small group markets in the state, including in the marketplace. Some states have…

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Edwin Park: provided subsidies to supplement the premium tax credits that are available under the Affordable Care Act's marketplaces, and that's particularly vital with the expiration of the enhanced premium tax credits at the end of last year.

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Edwin Park: As well as, and this has been in place for, many decades, fees.

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Edwin Park: premium taxes, the states have charged health insurers in the individual and smart group markets, to finance the operations of an insurance, department in the state. And that's just not… that's not just licensing, but,

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Edwin Park: You know, general operations, consumer protection, education, outreach, other oversight… oversight that they provide for,

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Edwin Park: you know, consumers that are purchasing coverage in the individual and small group markets, you know, even before the Affordable Care Act.

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Edwin Park: So that's one, sizable change. And again, this is talking about applying the general rules of a, you know, uniform broad-based, no whole harmless.

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Edwin Park: And the HR restrictions, where there's, no ability for states to now, add new health insurance taxes, increase any existing taxes if they don't, if they already have them.

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Edwin Park: As well as having to phase down the permissible size, of such, health insurance taxes, again, if not… even if not used for Medicaid, if they are in an expansion state.

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Edwin Park: So, just to give you a sense of, of sort of how this might play out, let's say there is a, user fee in a state-based marketplace.

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Edwin Park: It would not be a, broad-based tax, because it's only charged to, issuers in the marketplace, not to insurers that may be outside the marketplace in the individual and small group market.

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Edwin Park: So, a state has never applied for a broad-based waiver, under the Medicaid provider tax rules, because one, states never assumed the provider tax rules applied, and, as a result, they never applied for a waiver.

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Edwin Park: And so that gives you a sense of a tax would now be out of compliance with

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Edwin Park: Medicaid provider tax rules and wouldn't be allowed to go forward. I'll talk a little more about

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Edwin Park: the grandfathering in a second, but state would have never applied, for a waiver as a result, never gotten one, and therefore, never would have been grandfathered under HR1.

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Edwin Park: Cms also clarifies in the proposed rule that

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Edwin Park: Any other taxes on, healthcare entities, taxes, assessments, fees,

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Edwin Park: involve classes not listed, not enumerated by CMS, under Regulations, and the statute.

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Edwin Park: are specifically prohibited, again, even if not funding Medicaid.

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Edwin Park: Now, again, states haven't understood that there have been any applicability coming into play here related to the provider tax rules, but, you know, states have been doing tax assessments to

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Edwin Park: Finance affordability programs for prescription drugs by taxing pharmacy benefit managers. Some states, apparently, tax third-party administrators that administer employer-sponsored insurance plans in the state, health benefit consultants, manufacturers of opioid drugs.

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Edwin Park: Where, those taxes assessments are used to finance treatment programs for those with substance use disorders, specifically those, related to, opioids.

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Edwin Park: And so, those aren't, gonna fit in any, class of provider, that's enumerated by, CMS for purposes of the Medicaid provider tax rules. And as a result, again, even though it has nothing to do with Medicaid, would be,

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Edwin Park: Subject to the various requirements, and as a result, since they're not in the permissible class, these kind of taxes and assessments would, seemingly be prohibited under the proposed rule.

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Edwin Park: So, you know, it's quite, a staggering, impact here on states, state budgets, and state programs and initiatives, again, that have nothing to do with Medicaid, but

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Edwin Park: have a variety of health purposes in the state that could be either outright prohibited.

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Edwin Park: Or forced to phase down, in terms of the size of that tax and assessment, with states having to identify other revenues if they want to keep those programs and initiatives going.

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Edwin Park: Another big change is how, the provider tax rules that, again, have been in place in the early 1990s, how, they're to be complied with by states.

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Edwin Park: So right now, for example, for purposes of that

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Edwin Park: Safe harbor threshold, that old 6% threshold that's been in place for a long time.

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Edwin Park: States have been able to rely on prospective projections, estimates, other statistical methods to show that their tax,

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Edwin Park: is, you know, not exceeding that safe harbor threshold, and therefore there's no indirect hold harmless, and therefore, they're satisfying that aspect, that third part of the provider tax rules for Medicaid.

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Edwin Park: As HR1 restrictions are implemented, this proposed rule now creates an entirely different system. There's going to be a new, onerous, punitive, retrospective, compliance and enforcement process and system that CMS is envisioning under the proposed rule.

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Edwin Park: Now, every state

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Edwin Park: for purposes of their provider taxes, again, it's all kinds of provider taxes, including even those not related to Medicaid, would have to report every quarter

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Edwin Park: They're actual data, to CMS. And by actual data, I mean the actual tax revenues collected by that, specific provider tax.

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Edwin Park: The net patient revenues for the providers that are subject to the tax, Again.

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Edwin Park: inconsistent with long-standing policy and practice, you know, can't use projections, estimates, other methods, anymore.

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Edwin Park: And…

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Edwin Park: One, there's no such system in place now for states to collect this information. They'd have to create a new one for determining what tax revenues are being collected each quarter, as well as,

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Edwin Park: You know, collecting information from every provider that's in the class about what their net patient revenues are.

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Edwin Park: This will be particularly, problematic because even if they can get these systems up and running to produce accurate information.

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Edwin Park: tax revenues and net patient revenues and the class of providers that are taxed is going to be particularly volatile. And that's because there's going to be major disruption in the U.S. healthcare system as the Medicaid cuts are, fully implemented, cuts to the marketplace, we're seeing coverage losses, you know, across.

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Edwin Park: A number of different,

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Edwin Park: populations in Medicaid already, particularly kids, but other Medicaid enrollees. Provider revenues will be falling with the increase in the uninsured. As a reminder, CBO estimated that the number of uninsured

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Edwin Park: will increase by $10 million due to the healthcare cuts in HR1, and that's not including the impact of

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Edwin Park: the expiration of the enhanced premium tax credits, as well as other, effects, on coverage, including the impact on,

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Edwin Park: Immigrant families, due to chilling effects related to the public charge rule, and, and, immigrant… immigration enforcement actions.

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Edwin Park: So, that's going to be particularly hard for states to predict, and when they have an existing tax, whether they might be exceeding the relevant safe harbor threshold, the permissible size.

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Edwin Park: of provider taxes, particularly in expansion states, as those, safe harbor thresholds are going to be phased down starting October of next year.

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Edwin Park: Cms reiterates that all revenues from a tax are non-permissible, if the tax exceeds the limit by any amount. So if it exceeds the amount based on actual data, by a cent, by a hundredth of a percentage point.

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Edwin Park: and all revenues

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Edwin Park: from that tax, not just the overage, not just the amount by which, tax revenues exceed the permitted size, the permitted threshold, all revenues are not, are no longer permissible. What does that mean? Well, that amount of state dollars,

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Edwin Park: Would, be not… no longer allowed, and would…

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Edwin Park: mean that any federal Medicaid funds that attach to that amount of revenues, and again, it's irrespective of whether it's for Medicaid or not, whatever federal dollars would have attached

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Edwin Park: To that kind of, amount of state dollars, would have to be, returned to the federal government, either paid back or provided through, disallowances or deferrals.

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Edwin Park: Or states are gonna have to return all the tax revenues, or return… refund tax revenues, that were collected from

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Edwin Park: those providers, two or more years after the fact, after the particular fiscal year where a provider tax is found out of compliance. So what does that mean from a state perspective, a state budgeting perspective, to avoid a,

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Edwin Park: Hard to predict.

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Edwin Park: A potentially massive hit to their budget in terms of the loss of federal dollars that they have to pay back.

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Edwin Park: This encourages states to further reduce the size of their provider taxes below whatever applicable safe harbor threshold there is, and those safe harbor thresholds, at least in expansion states, are going to be reduced. But it also means that states are worried about some existing provider taxes.

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Edwin Park: Even if they are grandfathered, they haven't been phased down, but if they're close to, you know, they're worried that their tax might exceed their long-standing provider tax amount of, let's say.

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Edwin Park: 2.5%, they would lower that further to avoid the risk of having to pay back, the federal government a portion of their federal matching funds for a particular fiscal year, two years down the road or more.

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Edwin Park: Again, even if the tax has nothing to do with Medicaid, under that earlier element I discussed.

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Edwin Park: So there's a third, change, again, something not required by H.R. 1, it's inconsistent with the statute.

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Edwin Park: Elimination of that 75-75 test. As I mentioned earlier, states can show that there's no indirect whole harmless arrangement with providers that are taxed if they either have a tax

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Edwin Park: Satisfies that safe harbor limit.

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Edwin Park: Or, they satisfy a different test, called a 75-75, prong or test, where no more than 75% of providers receive, no more than 75% of the Medicaid or other state payments that may, be financed by, that tax or assessment.

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Edwin Park: This conflicts with the statute. Both HR1 had nothing to do with the 75… 75 prong, left it in place. It's been previously codified, despite CMS claims to the contrary.

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Edwin Park: It appears the goal of this change

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Edwin Park: is to just simply make it hard to finance Medicaid, not to, implement, the HR1 restrictions in Section 71115.

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Edwin Park: And, you know, a tax, by definition that satisfies the 75 test is one that, you know, doesn't look like it has a hole harmless because of the nature of that test. That's why the prong was first included in the original provider tax regulations for the early 1990s.

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Edwin Park: Well, it's true, as CMS notes in the preamble to the proposed rule, that very few states have taken up that option because it's easier to,

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Edwin Park: have, satisfied the whole harmless, restriction by,

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Edwin Park: complying with the safe harbor threshold. It certainly is a way for states to maintain some of their provider taxes moving forward, and

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Edwin Park: CMS does not explain why, a provider tax that can satisfy the 7575 test is somehow a problem requiring CMS in this proposed rule to eliminate this option entirely.

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Edwin Park: And again, states have used the 75 prong in the past, and they're likely to, look at that

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Edwin Park: with, greater attention in the future, as a way to comply with the significant restrictions on provider taxes in H.R. 1.

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Edwin Park: Now, I mentioned that for…

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Edwin Park: H.R.1's restrictions, in Section 7115,

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Edwin Park: 1115, a tax is grandfathered only if it's enacted or imposed. The proposed rule does make a significant improvement over previous guidance issued in November. That guidance said that for a tax to have been considered imposed, and therefore grandfathered under HR1,

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Edwin Park: Taxes had to have been actively collected already from the tax-paying providers.

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Edwin Park: Now, the proposed rule says something's imposed as long as there was a legally enforceable obligation, and that's important because a number of states had enacted increases in provider taxes in the run-up to enactment of H.R. 1.

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Edwin Park: But they actually had not been fully implemented, hadn't been actively collecting those provider taxes to that point. This would allow those taxes to now be grandfathered, but it could still potentially affect some states. There may be some states, for example, that

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Edwin Park: had enacted… imposed a provider tax before July 4th of last year, but the effective date was at some point, later in 2025, not July 4th, 2025, with those, taxes.

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Edwin Park: still be grandfathered or not, I think that's a question about what constitutes a legally enforceable obligation.

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Edwin Park: The rule still does not clarify, whether a state that's trying to comply with that separate uniformity waiver prohibition

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Edwin Park: can do so without violating the prohibition on new and increased taxes. The final uniformity waiver rule from January did not include any clarification of that. This proposed rule does not address it either, and certainly leaves states in a limbo in terms of if

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Edwin Park: One of their taxes is prohibited.

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Edwin Park: now, under that uniformity waiver provision in H.R. 1, can they fix it to be in compliance before the end of whatever applicable transition period they received?

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Edwin Park: And have that tax be considered grandfathered under the separate provisions of H.R. 1.

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Edwin Park: There is, greater scrutiny of certain,

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Edwin Park: intergovernmental transfers. Now, we had been concerned that CMS would go far beyond H.R. 1 in restricting the ability of states to use intergovernmental transfers or certified public expenditures. HR1 did not address IDTs or CPEs at all.

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Edwin Park: The proposed rule does not explicitly impose new restrictions on state use of these arrangements, but as part of the proposed rule.

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Edwin Park: States must now notify for the first time of any new exemptions for provider tax for public providers, local government-operated providers, and there'll be increased review and oversight of such arrangements if there is a new exemption.

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Edwin Park: Even though that is permissible, it does not require a waiver under the statute.

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Edwin Park: But CMS now requires notification of that change, and special review and oversight, especially if that public provider, is then, related to a new intergovernmental transfer.

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Edwin Park: Now, there's no details or standards for what that review would look like.

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Edwin Park: And there's also no explanation from CMS in the proposed rule why such exemptions do not be permissible under the statute and existing long-standing regulations, which it looks like that's the case, there's no change, and so this new standard, this new review is manufactured out of whole cloth.

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Edwin Park: that, you know, is not required by H.R. 1, and seems perfectly… these kind of arrangements continue to be perfectly permissible under existing, CMS policy guidance, as statute and regulations.

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Edwin Park: I note that in the regulatory impact analysis for this proposed rule, CMS estimates that states will lose revenues related to the provider tax restrictions under both H.R. 1 and this proposed rule, so the combined impact of the two.

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Edwin Park: by nearly $199 billion over the next 10 years. That's a reduction relative to CMS's

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Edwin Park: Baseline assumptions of about 17%, but notably, by the 10th year, 2035, state revenues related to provider taxes will be more than 27% lower.

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Edwin Park: Now, CMS assumes, also no eligibility cuts, which seems highly consistent with, both the CBO, estimates,

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Edwin Park: Of about 1.1 million increase in the number of uninsured. But also inconsistent with, with…

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Edwin Park: how states behave when they have budget shortfalls. So they have less revenues, from provider taxes.

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Edwin Park: States have to balance their budgets, unlike the federal government, so if states face a budget shortfall, they're either gonna have to find other alternative revenue sources, they're going to have to cut other parts of their budget, like K-12 education, or they're gonna have to cut Medicaid.

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Edwin Park: When states have faced, budget problems, budget deficits.

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Edwin Park: Such as during past recessions, they have, in fact, cut, eligibility or made it harder for eligible people to enroll in or stay enrolled in that coverage, you know, whether it's red tape-related applications, renewals, and so forth.

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Edwin Park: And so there are, eligibility cuts, there are enrollment losses, and certainly that's going to be the case if states are unable, as is likely, to replace the lost revenues from these provider tax changes, including in the proposed rule, and so they're going to cut,

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Edwin Park: Medicaid eligibility and pose more red tape. There are going to be fewer people, enrolled in Medicaid, and CMS

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Edwin Park: Does not, include anything like that in its regulatory impact analysis.

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Edwin Park: The regulatory impact analysis overall, in terms of the federal spending cut, does seem like an underestimate. If you line the budget windows, even if there are differences in

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Edwin Park: underlying data, methodologies, CMS's estimate's only about 5% higher, and as I note.

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Edwin Park: there's a lot of changes here that make HR1's provider tax restrictions that much harsher, and that doesn't seem to be taken into account in the regulatory impact analysis. And also, there's no mention of the spending impact

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Edwin Park: on state health spending outside of Medicaid due to the extension of the provider tax rules and the HR1 restrictions to health insurance taxes, other taxes, and assessments that have nothing to do with the Medicaid program.

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Edwin Park: So, as I mentioned, states have to balance their budgets. This means less

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Edwin Park: revenues for states moving forward due to the combined impact of the proposed rule and the HR1 statutory changes.

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Edwin Park: And these produce federal savings because states can't find that revenue, and they're gonna cut their Medicaid programs. States do have only 3 tools, eligibility, benefits, and provider payments, and it's likely that they're going to make cuts to all of those as a result.

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Edwin Park: Provider rates, optional benefits tend to be the first, and that includes home and community-based services. But Medicaid expansion in some states is explicitly, financed by

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Edwin Park: hospital provider tax increases, that were increases above, some of these phased-down thresholds under HR1, and now various other state health programs and initiatives outside of Medicaid are at serious risk, as well under the rule.

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Edwin Park: Notably, there are other cost shifts facing states under HR1, particularly in SNAP.

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Edwin Park: There are significant cost shifts. States starting October 1st of this year have to pick up three-quarters of administrative costs related to SNAP for administering SNAP, as opposed to the old 50-50 split.

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Edwin Park: And for the first time starting October of next year, states are going to have to share in the cost of SNAP benefits. Right now, SNAP benefits are federally funded.

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Edwin Park: Depending on states' error rates, past error rates, they may have to, finance between 5% and 15% of benefit costs. And so that's another cost shift where states have to either find other revenues, cut other parts of their budget.

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Edwin Park: or make cuts to their, SNAP program, or put even more pressure on the Medicaid program.

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Edwin Park: And vice versa.

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Edwin Park: So this does speak, as we mentioned in our

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Edwin Park: Financing Webinar Part 1 Financing Webinar, about the need for additional state revenues to mitigate these kind of cuts to Medicaid, provider rate cuts, optional benefit cuts, eligibility cuts, red tape.

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Edwin Park: Unless Congress… Reverses, repeals these Medicaid cuts, including those restricting the state use of provider taxes.

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Edwin Park: States will need to find a balanced approach, and that includes finding revenues to replace the revenues being lost from provider taxes, and that may be income taxes, corporate taxes, other taxes and assessments. States have to be creative here.

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Edwin Park: And additional revenues will backfill the risk of other budget cuts, like those SNAP cuts, and allow states to protect, other spending that benefits kids, like K-12 education.

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Edwin Park: So with that, I'll stop. I know that was a lot to cover, but, we'll take, questions now.

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Kelly Whitener: Thank you, Edwin. It's always…

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Kelly Whitener: instructive to listen to you go through these complicated rules. We do have a few questions, and I'll start trying to group them. I want to start with this one. Maybe you can provide a little context about how states are able to set provider payment rates, both in fee-for-service and managed care, and kind of give a little more background there. So the question is.

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Kelly Whitener: Why do states need the ability to make supplemental payments to providers through Medicaid? Can't they just increase their provider payment rates instead?

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Edwin Park: So, you know, states have traditionally had base payment rates that are well below that of Medicare, and of course, well below that of commercial private insurance, employer-sponsored insurance.

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Edwin Park: Some states have tried to increase… improve access by adding supplemental payments, whether through the Disproportionate Shared Hospital Program, fee-for-service supplemental payments, and then, as states have shifted to managed care.

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Edwin Park: state-directed payments. Now, states have tended to want to, shift to supplemental payments rather than base payment rates because, they consider them, potentially maybe more temporary. They may be, tied to some of these state financing arrangements, provider taxes, other…

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Edwin Park: Financing intergovernmental transfers. But states have been reluctant, unfortunately, to increase base payment rates.

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Edwin Park: But, you know, states, could increase base payment rates as these restrictions on state-directed payments, take effect, not only under HR1, but in the proposed rule, if finalized.

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Edwin Park: But there's still a financing issue, where if states are less able to raise revenues for Medicaid, whether it's paying providers through supplemental payments or through base payments.

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Edwin Park: It's gonna be a lot harder for states to do so, and it's more likely that states are going to be cutting base payment rates and supplemental payments as a result of these financing changes, unless

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Edwin Park: the Medicaid cuts are reversed at the federal level, or states are able to identify other revenues, to offset the loss of dollars from these provider tax changes.

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Kelly Whitener: Thank you. As you can see, these things are all interconnected. So next question, and we have a few questions in this vein, getting at, kind of, CMS overreach here in the proposed rule. How does CMS have any regulatory authority over non-Medicaid providers or entities and state taxes that don't fund Medicaid?

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Edwin Park: So, the statute is relatively broad. The original statutory, requirements related to provider taxes were enacted in the early 1990s, 1991. You know, they technically, you know.

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Edwin Park: apply to provider taxes that have an incidence of at least 85% on healthcare-related entities. But…

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Edwin Park: Despite that, that's not how CMS has ever implemented these

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Edwin Park: The rules, the regulations, the practice, the enforcement, compliance actions, state understanding has never been,

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Edwin Park: has never encompassed these non-Medicaid,

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Edwin Park: taxes, assessments, and fees, and in fact, CMS in its preamble admits that it hasn't started asking any information about any of these kind of assessments till late last year, likely in anticipation or in advance of the,

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Edwin Park: this pretty radical extension in H.R. 1. So, you know, I think that, you know, no state ever understood that those kind of tax assessments, which have nothing to do with Medicaid, that

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Edwin Park: haven't been reported to CMS. CMS hasn't required reporting related to provider taxes, since the only taxes reported were those showing the state share, what provider taxes they have in place to finance Medicaid. And,

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Edwin Park: CMS is actually…

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Edwin Park: been aware, at least other aspects of CMS have been aware of some of these assessments. For example, state-based marketplace user fees are reported to,

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Edwin Park: other parts of CMS, CSIO, that, that, oversee the marketplaces. So.

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Edwin Park: Well, they're, you know… so, you know, this is really a major departure from what states understand, how CMS has,

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Edwin Park: has, been implementing,

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Edwin Park: these provider tax requirements. Again, these are requirements that have been around for decades. The main statutory framework, the main regulatory framework, were put in place in 1991, and the regulations in 1991 and 1992.

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Kelly Whitener: Thank you. Now, getting into a couple of more nitty-gritty questions on provider taxes, this question is.

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Kelly Whitener: Hospitals in some states contribute to privately administered pools, for example, overseen by a state trade association, that redistribute some revenues to offset provider tax burdens on certain providers. When states are required to report providers' net patient revenues, are they required to take these offsets into account and report them?

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Edwin Park: So the net patient… there's two things. One, net patient revenues are… all the net patient revenues of the entire class of providers that are,

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Edwin Park: subject to the tax, even if individual providers are not taxed. The proposed rule continues that long-standing practice of how net patient revenues are calculated. So there's no change in that, so if you are taxing,

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Edwin Park: Hospitals, you report net patient revenues from all the hospitals.

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Edwin Park: Related to patient care, so non-patient care revenues will not be counted for that.

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Edwin Park: So that's, that's how that's calculated. In terms of that, those private arrangements, those private arrangements are subject to a managed care rule, Medicaid managed care rule, that was finalized in the Biden administration that requires

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Edwin Park: States to ensure that providers, sign affidavits so they're not participating in, you know, these kind of, arrangements, that the question raises.

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Kelly Whitener: Thank you. And next, about the 75-75 test. Shouldn't the 75-75 test be a better assessment of whether or not the tax is actually a healthcare-related tax that should be regulated under the Medicaid statute, as opposed to whether or not the tax meets hold harmless requirements?

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Edwin Park: I mean, the reason the 75-75 test was put in place was to indicate that, you know, there isn't a whole harmless because, you know, the tax-paying providers, you know, it's…

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Edwin Park: not the vast majority of them, and they're not receiving, you know, the benefits of… potential benefits of that tax if it's financing certain provider payment increases or other spending. And so that's why it was put in place as a reasonable way to comply. You know, a…

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Edwin Park: non-Medicaid tax should satisfy the 75… 75 prong, but

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Edwin Park: you know, 75-75 prong is being eliminated in the proposed rule, but also there are other parts of the provider tax rules, again, that states had no understanding that provider tax rules apply to these kind of tax assessments that are unrelated to Medicaid, and CMS has never told them that.

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Edwin Park: That, they wouldn't satisfy other parts of the Medicaid provider tax requirements. For example, the uniformity and broad-based.

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Edwin Park: You can be non-uniform, you can be non-broad-based if you have a waiver, but As I mentioned earlier.

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Edwin Park: States would have never known to apply to waiver, and… For attacks to have been…

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Edwin Park: considered imposed, and therefore grandfathered. Cms does clarify that,

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Edwin Park: A state doesn't have to have an approved waiver as of July 4th, 2025.

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Edwin Park: Which is, how the original guidance talked about it. But states would have had to apply… at least apply for such a waiver

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Edwin Park: before October of last year. Well, if a state has a health insurer tax that's just on state-based marketplace issuers, they never would have applied for that waiver because they never thought that the Medicaid provider tax rules applied to things like state-based marketplace user fees. And so, as a result.

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Edwin Park: That wouldn't be a grandfather tax and wouldn't be allowable, and the way, H.R. 1's restrictions on that are enforced, is the safe harbor threshold is set at zero. And so the tax, would be considered,

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Edwin Park: wholly non-compliant, and either the state would have to get rid of that user fee, or, lose federal Medicaid dollars attached to the equivalent amount of, revenues raised by that tax, or user fee.

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Kelly Whitener: Thank you.

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Kelly Whitener: One more question before we get to, kind of, your crystal ball of what you think states are going to do with this rule if it were finalized. If states were to increase base payment rates, that typically benefits fee-for-service providers reimbursed by the state directly, correct?

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Kelly Whitener: It may not directly lead to provider payment increases if they are capitated.

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Edwin Park: So, you know, I think it depends. A lot of… states…

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Edwin Park: In a lot of states, managed care and payment rates.

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Edwin Park: are piggybacking off… The… Payment rates that are in fee-for-service.

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Edwin Park: And… Because there are fee-for-service supplemental payments.

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Edwin Park: The whole purpose of state-directed payments, as there's been a greater shift in managed care, has been to create an equivalent of those fee-for-service supplemental payments in managed care, and that's why we have state-directed payments, which are being, significantly cut by HR1. So…

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Edwin Park: You know, I think it depends on individual states, how they set capitation rates, what's,

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Edwin Park: States and plans are assuming, but if states do increase the base payment rates.

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Edwin Park: It should increase payment rates, on a… in managed care, but it may not.

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Edwin Park: And I think it's gonna be a state-specific… Fact.

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Edwin Park: And also, you know, how…

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Edwin Park: States and managed care plans negotiate rates, particularly in a time of incredible uncertainty, where actuaries will

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Edwin Park: Be, you know, very worried about…

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Edwin Park: Volatility in terms of healthcare costs per enrollee. If there's major losses, particularly among those who are healthier, you know, then cost per enrollee will go up.

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Edwin Park: Other changes to, ensure adequate provider networks that are needed because, if providers are closing, they're facing revenue losses across the board due to increased uncompensated care costs.

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Edwin Park: They may be, you know, withdrawing from Medicaid, reducing the number of Medicaid patients they see, and so forth. So I think it's a, it's probably a, you know.

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Edwin Park: A very big unknown, but certainly, the risk of a very bad outcome is high.

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Kelly Whitener: So you've started to touch on this already, but we have a question. Is there any indication as to whether states will reduce Medicaid benefits, eligibility, or provider reimbursements to balance new budget constraints based on these provider tax restrictions?

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Edwin Park: So the…

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Edwin Park: you know, the biggest provider tax restriction, which is the phase down and the permissible size of provider taxes in expansion states, again, doesn't take effect until October of next year. So.

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Edwin Park: even though state revenues have been slowing, and spending has increased, and states were starting to face budget deficits in this current fiscal year, which started in most states on July 1st, states mostly kicked their can down the road.

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Edwin Park: And we'll be really addressing these budget shortfalls, for the upcoming fiscal year, which in most states, again, starts July 1st of 2027. State budgets from governors will be issued probably at the beginning of next year.

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Edwin Park: So we'll see a lot of the cuts starting to appear as a way of states to close their deficits. Again, not just through the Medicaid cuts, not just the provider tax restrictions, but other cautious, like in SNAP.

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Edwin Park: And… Historical experience shows that states usually cut optional benefits first, things like, vision, dental,

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Edwin Park: for adult Medicaid enrollees, home and community-based services are particularly cut. Home and community-based services is optional, while nursing home care is a mandatory benefit in Medicaid.

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Edwin Park: And that, those will be the first cuts that states look to when they face budget deficits. And then after that.

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Edwin Park: would be, eligibility and enrollment. So those could be eligibility cuts for, non-mandatory populations. This could be more red tape beyond the red tape, required by HR1, whether it's work reporting requirements, more frequent renewals.

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Edwin Park: states would be making it harder for applying,

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Edwin Park: to enroll in Medicaid, and

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Edwin Park: renewing that coverage, I think is something that states tend to turn to next, looking at experience when states have faced major budget deficits, like in past recessions. So, certainly, there will be an order, but I think as more and more states face serious budget problems.

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Edwin Park: Particularly with this upcoming fiscal year, you'll see more of these really damaging proposals.

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Edwin Park: And that was, certainly one of the intents of H.R. 1, was to avoid some accountability for the H.R. 1 Medicaid cuts by, making the cuts in part by shifting costs to states so that governors, state legislatures, will have to make the really tough choices to balance their budgets, again, unlike

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Edwin Park: unlike the federal government, which doesn't have to balance the budget, and the blame being attributed to those state policymakers, rather than to the federal policymakers that were involved with H.R. 1.

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Kelly Whitener: You mentioned that home and community-based services are optional and often a place where states tend to look to cut, even if they don't want to, if they don't have very many tools at their disposal. So Sargun will post into the chat a link to a tracker from GW,

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Kelly Whitener: Where they're trying to monitor those types of changes as they're being proposed and implemented.

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Kelly Whitener: Next question. How should employers, especially health and human services providers, think about Medicaid employer fees, like fees on employers whose low-wage employees participate in Medicaid, like the one recently implemented in New Jersey?

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Edwin Park: Yeah, you know, some states have been looking at this proposal, which was an older proposal that was looked at, you know, maybe 15, 20 years ago.

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Edwin Park: to,

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Edwin Park: tax or impose fees on employers, whether it be, like, an Amazon or Walmart, that have large numbers of their low-wage workers enrolled in Medicaid. I think the concern with these kind of fees, depending on how they're structured, is does that create

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Edwin Park: Unintended consequences in terms of hiring, decisions, retention decisions, firing decisions, where employers might,

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Edwin Park: Employer behavior might be…

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Edwin Park: trying to not hire workers that they think would be on Medicaid, or no longer retaining those workers to avoid any liability under that fee or tax.

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Edwin Park: And again, it will depend on the structure of these proposals, how they're designed, how they're intended to be implemented, but certainly that's always been a concern that, it may result in

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Edwin Park: the people who most benefit, who most need Medicaid, and other, safety net

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Edwin Park: program benefits, will be penalized, by, effectively, where they, lose their employment, because, employers are trying to get out of that fee.

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Kelly Whitener: Thank you. We didn't get to quite all of your questions, but we are at time, so I want to thank Edwin for helping us understand these very complicated policies today. Thank you all for joining us.

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Kelly Whitener: The slides and the recording will be posted to our website as soon as they're available, and we'll also continue to post on our blog as some of these developments evolve over time. Thank you so much for joining us today.