Reining in provider taxes is not an unreasonable way to achieve some Medicaid savings
As the House Energy and Commerce Committee begins its debate over Medicaid cuts to hit an $880 billion spending cut bogey, the issue of provider taxes is sure to be raised and galvanize a great deal of controversy.
GOP leaders in each chamber and President Trump have given commitments publicly that Medicaid coverage will not be cut. That seems to take off the spending cut table a massive restructuring of Medicaid (maybe, as some rightists still want this) as well as overt reductions in percentage reimbursement to states (maybe, again some rightists still want this). But the GOP is arguing that it will take a bite out of the size of Medicaid by eliminating fraud, waste, and abuse (FWA).
Whether you use estimates by government authorities or external think tanks, the FWA and imporer payments numbers are huge. External parties tend to think FWA, overpayments, and related eligibility errors are much greater than what government calculates. For example, the Paragon Health Institute says that improper payments under Medicaid could be as much as $1.1 trillion over ten years, while the Centers for Medicare and Medicaid Services (CMS) estimates improper payments are $543 billion over ten years.
But here is where it gets tricky, and the debate will ensue. The GOP may very well include reforming the levying of provider taxes in its cost-cutting efforts, arguing the current framework is abusive in Medicaid. And the GOP is being fed some interesting viewpoints from the Paragon Health Institute and others to back up its efforts overall on healthcare.
Paragon is an extremely powerful think tank with the ear of the Trump administration and some in Congress. Paragon President Brian Blase served as an advisor in Trump 45. Many of his staff and fellows are now serving in key White House, CMS, and other government posts.
I do not agree with everything Paragon concludes. I tend to be much more pro-coverage and supportive of government programs than the think tank. I am more forgiving of the excess in government programs as upfront care is good, however inefficient and lacking programs can be. But Paragon does excellent analysis and is sound in its approach. To its credit, it is being creative in its analyses and recommendations of where healthcare can be cut, perhaps with less impact than not. While some of its proposals would directly impact coverage, others point more to reducing waste, excess, and what you might call ending gimmicks and perversities in government program healthcare financing. I would also note that some of what Paragon endorses is also supported by centist groups, such as The Third Way.
On provider taxes, it is hard to look at Paragon’s and others’ views and not think they have some good points here. Over time, Congress and various administrations have authorized all sorts of creative ways for states to finance their parts of Medicaid and it is hard to keep up with what is out there, what has been done, and the real costs of all this. Paragon is accounting for all this.
Let’s dive into the provider tax issue.
How is Medicaid financed?
Medicaid is a state-federal partnership. Both the federal government and states fund portions of the overall program. The amount a state receives is dependent on relative wealth, with a floor of 50% right now for federal reimbursement. While reimbursement has been higher at points, including during COVID times, the federal reimbursement ranges from 50% to just over 77% in the poorest state, Mississippi. Note that the Obamcare care Medicaid expansion populations are funded at 90% in all states.
What are provider taxes in Medicaid?
Simply, Medicaid allows states to levy taxes on providers to essentially raise state match funding in the Medicaid program. These taxes are most often levied on hospitals, nursing homes and health plans. The provider taxes have certain rules (described below). The rules also allow intergovernmental revenue transfers from local government taxes to the state to match Medicaid dollars as well. In short, the ability to levy taxes allows states a way to fund its Medicaid expenditures needed to gain an equal or greater federal dollar match for healthcare spending.
Medicaid also allows states to certify certain public healthcare expenditures to meet state match requirements to leverage federal match in Medicaid.
All but one state has at least one provider tax to help finance Medicaid in their states. All but a handful of states levy a hospital and nursing home provider tax.
What do states think?
States like the flexibility of provider taxes because they know it generates additional federal match that can go toward supporting Medicaid. Because every state receives a match that is at least what the state puts in (50%), levying a tax and using the dollars to match the federal reimbursement means dollars are at least doubled. But since most states receive a greater than 50% match, most states obtain more than a doubling of dollars.
As a state budget director in Connecticut in the late 1990s and early to mid-2000s, I, too, used provider taxes to help generate revenue to support state match to gain the state a 50% match from the feds. In Florida, where I was on a Medicaid reform commission, I watched as hospitals used intergovernmental revenue to maximize federal matching dollars going to them.
What do providers say about such taxes?
While such taxes are not universally applauded, generally providers have been supportive of the matching schemes and often come up with the machinations to generate the federal matches. Providers have created a cottage industry to stay within federal rules but create the greatest impact for themselves.
Provider taxes have been reined in over time
Over the decades, the provider tax scheme became very abusive and the federal government did reform and tighten rules. Currently, the following rules generally apply to the levy of provider taxes:
- Provider taxes must be broad-based and uniform. They must apply consistently to all providers in a certain category and cannot be limited to Medicaid providers.
- Providers cannot be guaranteed to receive Medicaid payments equal to the amount of taxes they pay. There is a safe harbor rule that is an exception to this rule.
- At least 40% of the non-federal share must be financed by the state and up to 60% may come from local governments. In reality, about 68% of state funds came from state general revenues, 12% from local governments, 17% from taxes and 4% from other sources.
- Levies must be approved by state legislatures in most cases.
How do states and providers justify the taxes?
The proponents of provider taxes have a number of arguments they use:
- States and providers argue provider taxes and intergovernmental transfers allow states to meet state match requirements and ensure adequate funding for providers to care for those on Medicaid.
- They say restrictions on provider taxes could lead to cuts in Medicaid spending, potentially impacting eligibility, benefits, and access to care.
- They counter arguments that the tax is not a state match. Sure it is, they say. It is a deliberate policy decision to tax and spend by the state.
- As important, proponents say that the taxes and transfers help promote equity and aid safey-net providers.
- They also say it helps ensure an adequate number of providers in Medicaid.
What are the arguments questioning provider taxes’ role, including what Paragon says?
Arguments on the other side are that, even with some of the reforms of the past, the use of provider taxes and intergovernmental transfers creates a major excess in the Medicaid system.
- The schemes incentivize states to maximize federal Medicaid funds and minimize state contributions.
- The targeted taxes minimize what states put in from general taxes.
- The taxes and transfers are driving the share paid by the federal government higher as well as expenditures overall. The provider taxes help shift costs to the federal level.
- Even with changes, the provider taxes are abusive. Studies show that Medicaid in some states reimburse hospitals more than Medicare and are close to commercial rates.
- The schemes are creating a huge unaccountable program and mean hospitals and other providers are not incentivized to become more efficient. The Third Way has found that hospitals can make a profit on Medicaid and Medicare rates as long as hospitals have efficient operations.
- Many of the provider taxes and transfers are creating supplemental reimbursement programs to hospitals, adding to base Medicaid payments. These can be separate from Medicaid managed care or directed by the state through managed care plans. MACPAC says directed payments (approved as of August) totaled more than $110 billion in 2024. This is a 60% increase over the projections for such arrangements approved as of early 2023. These programs create a slush fund for hospitals. They don’t really meet the intent of the Medicaid program and again do not promote efficient operations.
My views
I see some of the opponents’ views. I think the provider tax and intergovernmental transfers can amount to gimmicks and effort by providers to drive revenue and not be efficient. I would note, too, that I am sympathetic to the concept of stopping very progressive states from driving ever-increasing costs by building Medicaid programs that are outliers from what might be characterized as reasonably comprehensive coverage populations and benefits. I fear that provider taxes and intergovernmental transfers in part encourage this.
I would also say that these schemes also may dissuade some states in the South from expanding Medicaid. I think upfront care is important but the ongoing taxes and transfers flow dollars to hospitals to care for Medicaid and uninsured residents in very expensive ways. You see this in Florida and Texas.
So, would I totally eliminate provider taxes and intergovernmental transfers to fund state matches? Likely not. Or, if I did, it would be a slow phaseout over a number of years.
I might do the following:
- Lower the allowable tax percentage from a maximum of 6% to 5% or 4.5%.
- Close some of the safe harbors in the current law.
- Stop new provider taxes and intergovernmental transfers.
- Cap existing match in states with existing provider taxes and transfers.
Provider tax reform overall would save anywhere from about $50 billion over ten years for modest reforms to over $600 billion over the timeframe if you did eliminate these schemes altogether in one fell swoop.
Conclusion
In my mind, government programs in general are on a crash course. They are fiscally unsustainable over time. Reform is needed. We just might have to look at these types of changes as well as broader ones over time. The alternative is no Medicaid or deep Medicaid cuts down the line. Would these changes impact coverage? Yes, but again, the current program needs change.
Hospitals might face a double whammy coming out of the budget reconciliation process. Some reform could be made to provider taxes and intergovernmental transfers. As well, given the size of the spending cut bogey, lawmakers may look at Medicare as well and a leading candidate for reform in that program is instituting site-neutral payments. This, too, has the potential to save hundreds of billions overly roughly a decade as well as lower commercial and employer coverage costs.
Both provider tax reform and site-neutal-payment implementation would impact the very powerful hospital lobby. So implmenting these changes will be a battle. But this is the right signal to send to hospitals. They are desperately in need of reform. Instead of driving costs in the system, they need to become more efficient.
https://paragoninstitute.org/medicaid/brian-blase-and-ryan-long-quoted-in-axios-february-14-2025/
https://www.axios.com/2025/02/14/medicaid-republicans-hospitals-revenue-states
https://www.thirdway.org/report/tale-of-two-hospitals-why-some-hospitals-succeed-and-others-do-not
https://www.thirdway.org/report/same-service-same-price-tackling-hospitals-add-on-facility-fees
#medicaid #coverage #providers #hospitals #fwa #budgetreconciliation #spending
— Marc S. Ryan
