Republican budget cutters are targeting state taxes on hospitals and nursing homes that raise federal Medicaid spending.

An obscure set of state taxes on hospitals and other health providers is in the crosshairs of congressional budget cutters because the levies can lead to higher federal spending on Medicaid.

Known as provider taxes because states impose them on hospitals, nursing homes and other facilities that provide healthcare, the taxes boost a state’s budget for funding Medicaid. That in turn attracts more matching federal dollars to fund the program — money that is ultimately directed back to the hospitals and clinics.

If Congress were to restrict the taxes’ use to finance state Medicaid contributions entirely, it could save more than $600 billion over a decade, according to estimates by the Congressional Budget Office. That would go a long way toward achieving House Republicans’ plans to reduce federal spending by as much as $2 trillion to help offset the impact of extending President Trump’s income-tax cuts.

But the taxes have a strong constituency among state governors and legislators on both sides of the aisle. A big reason: Hospitals often tend to get back more in payments than they shelled out for the original tax, which shores up their ability to care for Medicaid patients.

Cutting the taxes “would be devastating,” said Stacey Hughes, executive vice president for government relations and public policy at the American Hospital Association. “It would certainly create a financial strain on the ability to continue to provide these services.”

Growing source of federal funding

Nearly every state uses provider taxes to raise money to finance their Medicaid health-insurance programs for low-income people and the disabled.

Medicaid, which covers 79 million people, is run by the states and jointly funded with the federal government. Many states that levy provider taxes use the revenue to help cover their share.

Thanks to the taxes, many states are able to pay higher rates to hospitals and other providers than they otherwise could afford with their general funds. And because the U.S. government will cover as much as 90% of extra Medicaid spending under federal matching rules, the provider taxes can help states expand their programs without forking over much more themselves.

Here is an example of how the taxes work: In 2022, Arizona collected $437 million in Medicaid provider tax revenue from nearly 80 hospitals, and used $363 million to increase payments to hospitals. Under the federal matching rules, Arizona was entitled to $1 billion in matching funds from the federal government for the taxes collected.

The state then directed private insurers that operate Arizona’s Medicaid program to make $1.4 billion in extra payments to hospitals in the state. All but two of the hospitals received more money back through extra payments than they paid out in taxes, according to an analysis by the U.S. Government Accountability Office.

States have used provider taxes more heavily because of a change in federal rules starting in 2017 that allowed states, through the private insurance companies that manage state Medicaid programs, to increase payments to hospitals. Sometimes, hospitals can get rates similar to what private insurers pay.

The state-directed payments have taken off. They were projected to surpass $110.2 billion annually as of August 2024, up nearly 60% from $69.3 billion in February 2023, according to MacPac, a congressional research agency.

The federal government is picking up most of the tab, according to the Government Accountability Office, while states pay their share with provider taxes and local government funds.

Soaring federal spending has turned the provider taxes into a prime target for budget hawks, who say states are gaming the system to artificially boost their Medicaid contributions and enrich politically powerful hospitals.

“It’s not a tax, it’s a kickback,” said Brian Blase, a healthcare adviser to Trump during his first term who advised the transition team on health policy prior to Trump’s second term. Blase now helms the Paragon Health Institute, a conservative think tank.

A recent Paragon policy paper derided provider taxes as “money laundering” schemes that essentially borrow money from healthcare providers before funneling it back to them through higher payment rates.

Lawmakers have a range of options for dialing back states’ use of the taxes by law or rules. They could, for example, say the tax revenue isn’t eligible for federal matching, or reduce the amount of tax revenue that is eligible.

Lifeline for hospitals

Defenders say cash-starved hospitals need the extra payments financed by provider taxes, because Medicaid reimbursement isn’t enough to cover costs.

Even then, the additional reimbursement still isn’t enough to cover hospitals’ costs, said Ryan Cross, vice president of government affairs at Franciscan Missionaries of Our Lady Health System, which operates 10 hospitals in Louisiana and Mississippi.

“If you end provider taxes, you’re going to shift that burden to the state, either harming Medicaid patients and healthcare-provider reimbursement, or leading to higher state and local taxes,” Cross said.

Take one of the system’s hospitals, Our Lady of the Angels Hospital in Bogalusa, La. Some 45% of its patients are on Medicaid. The hospital gets paid $13 million a year less than the cost of caring for them and uninsured patients, Cross said.

Our Lady of the Angels pays about $2 million a year in provider taxes, and receives $11 million in extra state-directed payments, leaving it with a net shortfall of $4 million, Cross said.

Another of its hospitals, St. Francis Medical Center in Monroe, La., pays about $8.5 million a year in provider taxes, receives $24 million in extra payments — and was still $7.8 million underwater for its costs of caring for Medicaid patients.

“Reducing provider taxes is really a Trojan horse by the likes of Paragon to disguise and distract from their real goal of cutting Medicaid payments,” Cross said.

Data: NASHP

At least 15 states have taken up proposals to set new guardrails for the 340B discount drug program this year, with Congress still gridlocked on overhaul measures.

Why it matters: Legislators say there’s a need to ensure that low-income patients benefit from a safety net program that’s been mired in litigation, with drugmakers, hospitals and other providers accusing one another of gaming the system.

State of play: A review of a National Academy for State Health Policy tracker and local coverage shows the bills fall into three broad categories:

• Nine states are aiming at the practice by manufacturers, PBMs or insurers of limiting the availability of discounted drugs at certain pharmacies, which supporters say discriminates against 340B-covered entities.
• Six states want 340B providers to report more information about drug costs, payment information and how program savings are being used, including for charity care.
• Three states are mandating how hospitals and clinics in the program are reimbursed for drugs.

Zoom in: Several state bills call for significant changes to how 340B providers can operate in their state.

• A Colorado bill that’s passed the state Senate would prevent hospitals from using 340B savings for more than 35% of the annual compensation to their boards of directors, or for lobbying or public relations.
• It would also mandate that hospitals apply 340B savings to help with charity care for low-income patients.
• North Carolina is weighing legislation that would prohibit providers from charging more than the acquisition cost of the 340B drug to administer it to a patient. The bill has been referred to a Senate committee.

Two states have already enacted measures as legislative sessions begin to wind down.

• Idaho this month required providers to submit annual reports on certain 340B information to the state, making it the fourth state to add transparency measures in recent years.
• Utah’s new law prohibits drug manufacturers from discriminating against 340B-covered entities.

What they’re saying: “States typically are quicker to pass new laws than Congress is,” Darbin Wofford, deputy director of health care at Third Way, told Axios.

• “They aren’t as politically gridlocked, and legislatures must act on tighter deadlines. On 340B, they are more willing to enact new laws on both sides of the issue.”

• The Senate’s 340B working group was supposed to release draft legislation last year after putting out requests for information, but the bill’s release kept getting pushed back over partisan disagreements.
• That Senate bill has yet to materialize, though the working group recently announced three new members: Sens. Tim Kaine, Markwayne Mullin and John Hickenlooper.

Senate HELP Chair Bill Cassidy has said he wants to take action this session.

• On the House side, one of the main proponents of provider transparency in the program, Rep. Larry Bucshon, retired from Congress last session. No one has yet publicly taken up the cause.

What we’re watching: Some of the biggest battles over the 340B program are playing out in courts.

• And the Trump administration recently weighed in, defending the Biden administration’s decision to reject three drugmakers’ changes to how safety net providers can get discounts under the program.

Hospitals, health systems and other providers are struggling to maintain business as usual amid a cavalcade of executive actions, including a huge restructuring the Health and Human Services Department commenced under Secretary Robert F. Kennedy Jr. last week. The new administration has upended longstanding practices, means of communications with regulators, rulemaking procedures and bureaucratic chain of command, leaving healthcare providers uncertain about how to adapt.

Related: ‘Go wild.’ 60 days of healthcare under Trump

Health systems have paused construction projects. Medical facilities are scrambling to acquire critical supplies as costs balloon under steep new tariffs. Hospitals are preparing to pare back services that don’t generate profits, such as and labor and delivery units. Medical schools and universities are laying off employees as they confront a deluge of funding cuts. Lobbyists worry mass layoffs at federal agencies will bring critical functions to a halt.

“It’s been a little over 60 days. It’s felt like a year,” said Jacquelyn Bombard, assistant vice president and chief federal government affairs officer at Renton, Washington-based Providence Health and Services. These weeks have been “very challenging,” she said.

The Trump administration has narrowed opportunities for the private sector to weigh in on rulemaking, pulled funding from research institutions and instituted an aggressive immigration enforcement operation that has reached inside hospitals. The administration has canceled advisory meetings, wiped swathes of health data from federal websites, slashed the federal workforce, frozen approved funding, backed congressional efforts to eliminate billions in healthcare spending, and limited new regulations.

Healthcare executives and their agents in Washington say this torrent of change puts immense strain on the sector, which is accustomed to smooth working relationships with federal agencies to help them navigate day-to-day operations.

“There’s the velocity with which these cuts are happening, and there’s the volume of them,” said Dr. Jonathan Jaffery, chief healthcare officer for the Association of American Medical Colleges. “It’s just overwhelming.”

The administration has also provoked apprehension about speaking out. Some industry leaders declined to comment, while others spoke on background because they fear retaliation from Trump and his lieutenants if they criticize the administration.

The White House and HHS did not respond to requests for comment.

Staffing and communications

An ongoing HHS communications freeze, weakened public notice and comment processes for policy announcements, layoffs at HHS and other departments, aborted public meetings, and the disappearance of troves of health data combine to make healthcare interests worry they won’t be able to make their voices heard on policies that affect them.

“The sheer volume of communication has changed tremendously, and the way that it’s communicated. A lot of these things are coming fast and furious, and so it’s been very difficult to keep up,” said Brian Frazee, CEO of the Delaware Healthcare Association, which represents hospitals. “Not only are we seeing new policies come down from the federal administration on a near daily basis, but then they change.”

Medicaid waiver applications and other actions regarding the program could grind to a halt because of the upheaval at HHS, said Beth Feldpush, senior vice president of policy and advocacy for America’s Essential Hospitals, which represents safety-net providers.

LeadingAge, which represents long-term care providers, slammed the HHS communications freeze, saying it leaves its members without clarity on technical assistance, vaccine development and public data sharing.

“This ban on communications is disruptive, obstructive and contradictory to the secretary’s commitment to ‘radical transparency,’” LeadingAge President and CEO Katie Smith Sloan wrote Kennedy on March 11, referring to the promise he made about departmental activities the day the Senate confirmed him. “The directive must be rescinded immediately, and federal agencies must be permitted to resume communication with the public they serve.”

The communications freeze is already having a concrete impact in at least one area, LeadingAge said in a statement. CMS is supposed to redistribute the fines it collects from rule-breaking skilled nursing facilities to support nursing home programs, but it can’t because federal workers are forbidden to talk to their state counterparts, according to the trade association.

Grants and contracts

The administration withdrew funding and grants for hospitals, research institutions, and medical schools. The White House justifies many of these cuts by claiming waste. But experts say these cuts complicate the recipients’ ability to budget, limit access to care and stymie research.

The prospect of massive cuts to Medicaid funding and other polices emerging from the GOP-led Congress has some providers preparing to reduce services and costs to protect core operations.

“There’s no way you maintain any kind of margin, so you start cutting things. You start cutting services,” Jaffery said.

Moreover, gutting funding will decimate American innovation as laid-off researchers pursue career opportunities in other countries, which would slow medical advances and threaten patient care, Jaffery said.

The National Institutes of Health withdrew hundreds of millions of dollars for public health research from Johns Hopkins University, for instance, which has since announced more than 2,200 layoffs. Other medical schools and academic research institutions are in similar positions.

“It’s about the pipeline of discovery, all the things that result in life-changing therapies, medications, other therapeutics. It all starts in academic medicine,” Jaffery said. “We’ve got a generation lost by cutting back on this, and people are genuinely, immediately losing jobs because their funding is cut off.”

Tariffs

The 10%-25% tariffs Trump instituted in January have raised prices for products from Canada, Mexico and China. Delaware hospitals are rushing to buy supplies such as personal protective equipment, blood pressure cuffs, stethoscope covers, needles and syringes, and anesthesia instruments before costs get any higher, Frazee said.

Health systems such as Providence Health and Services are constrained from planned expansions and renovations because the tariffs have inflated prices for building materials, Bombard said. “It’s hundreds of millions of dollars that it could cost the health system,” she said.

“We can’t build a clinic overnight,” Bombard said. “Most of these take several years to build, and we’re concerned that this could cost five times the amount of money than we originally committed to.”

That will contribute to health systems seeking to make up for higher expenses by demanding rate increases from health insurance companies and government programs, said Paul Kidwell, senior vice president of policy for the Connecticut Hospital Association. “If there’s consequences of macroeconomic policies, then that’s something hospitals will feel and will build on what we’re already experiencing,” he said.

“Hospitals are the aggregators of expense and cost. We need to purchase pharmaceuticals, we need medical supplies, we operate resource-intensive inpatient facilities. You try to be as efficient as you can in those areas. But at the end of the day, you need to acquire those things to provide patient care,” Kidwell said.

Immigration and staffing

Healthcare providers had difficulties finding employees before Trump launched a nationwide purge of immigrants, which includes authorizing Immigration and Customs Enforcement to search hospitals for people to detain.

Stricter policies on work visas also hamper healthcare companies’ ability to recruit clinicians, nurses and other workers from abroad. Absent international talent, providers may turn to domestic staffing agencies. Demand for those workers would make them costlier, Bombard said.

“Reliance on visas and workers coming from different countries has honestly been essential, especially as we have historic workforce shortages from both our nurses and our physicians. And we do have concerns of what that could mean and how that could further exacerbate some of the recruitment and problems that we have, especially for our nurses,” Bombard said.

WASHINGTON—Health and Human Services Secretary Robert F. Kennedy Jr. is set to significantly cut the size of the department he leads, reshaping the nation’s health agencies and closing regional offices, according to documents viewed by The Wall Street Journal.

Kennedy is set to announce Thursday the planned changes, which include axing 10,000 full-time employees spread across departments tasked with responding to disease outbreaks, approving new drugs, providing insurance for the poorest Americans and more. The worker cuts are in addition to roughly 10,000 employees who opted to leave the department since President Trump took office, through voluntary separation offers, according to the documents.

The voluntary departures and the plan, if fully implemented, would result in the department shedding about one-quarter of its workforce, shrinking to 62,000 federal health workers. It will also lose five of its 10 regional offices. The documents viewed by the Journal say essential health services won’t be affected.

Key to the reorganization is a plan to centralize the department’s communications, procurement, human resources, information technology and policy planning—efforts currently distributed throughout the health department’s divisions and even their branches. Doing so will change how the health agencies function. In the past, leaders of major health agencies within HHS—such as the Centers for Disease Control and Prevention, the Centers for Medicare and Medicaid Services and the Food and Drug Administration— considered themselves somewhat independent from the White House and even the health secretary.

Kennedy came into office as a frequent critic of the health department he was tasked with leading, taking issue with its Covid-19 performance as well as its support of vaccines. In a social-media post in the fall, he warned FDA employees to “pack your bags.”

As part of the reorganization, Kennedy is creating a new subdivision called the Administration for a Healthy America, which will combine offices in HHS that address addiction, toxic substances and occupational safety, among others, into one central office that will focus on chronic disease prevention programs and health resources for low-income Americans, according to the documents viewed by the Journal.

“We are realigning the organization with its core mission and our new priorities in reversing the chronic disease epidemic,” Kennedy said in a statement. He ran for president as an independent on addressing chronic disease in the country, especially among children, and pledging to eliminate chemicals in food and water. When Kennedy endorsed Trump in August, the two vowed to “make America healthy again.”

HHS is the latest of many departments the Trump administration has targeted for cuts. Efforts by the Elon Musk-led Department of Government Efficiency, or DOGE, have resulted in thousands of layoffs across the federal government— though several lawsuits have challenged the administration’s ability to make such cuts.

As part of the 10,000 workers to be let go, the Trump administration plans to cut:

3,500 full-time employees from the Food and Drug Administration—or about 19% of the agency’s workforce

• 2,400 employees from the Centers for Disease Control and Prevention—or about 18% of its workforce
• 1,200 employees from the National Institutes of Health—or about 6% of its workforce
• 300 employees from the Centers for Medicare and Medicaid Services—or about 4% of its workforce

The CDC will be “returning to its core mission” of preparing for and responding to epidemics, according to the document viewed by the Journal. The CDC cuts wouldn’t come from divisions focused on infectious disease, an HHS official said. Republicans have charged the CDC in the past with straying from its mission by researching topics such as the health impacts of gun violence.

The documents said the cuts won’t affect the FDA’s inspectors or drug, medical device or food reviewers. Many FDA probationary workers in the medical devices division were rehired a week after they were cut last month.

Under the new plan, the Administration for Strategic Preparedness and Response, which oversees the Strategic National Stockpile and much of the nation’s pandemic preparedness planning, will move under the CDC, the documents said. Currently, it is its own operating division in HHS.

Kennedy’s new Administration for a Healthy America will include the Office of the Assistant Secretary for Health, the Substance Abuse and Mental Health Services Administration and the Health Resources and Services Administration, as well as two groups that currently reside within the CDC: the Agency for Toxic Substances and Disease Registry and the National Institute for Occupational Safety and Health.

In addition, several offices related to adjudicating or investigating disputes related to Medicare or other areas of HHS will move under a new Assistant Secretary of Enforcement.

The health department’s small agency known well to healthcare researchers seeking key data, the Agency for Healthcare Research and Quality, will merge with the Assistant Secretary for Planning and Evaluation to form a new Office of Strategy, the documents said.

And critical programs for older adults currently under the Administration for Community Living will move to other divisions of HHS, including CMS.

ACL was created in the last major reorganization of HHS in 2012, when the Obama administration formed it from three offices focused on elderly and disabled Americans.

The cuts and major reorganization come shortly after the Senate confirmed two new leaders for the FDA and NIH, Dr. Marty Makary and Dr. Jay Bhattacharya, respectively.

The nation’s public health agencies have faced criticism from Republicans over their handling of the Covid-19 pandemic. Many Americans chafed under the agencies’ recommendations for social distancing, masks, vaccines and school closures.

“The Covid-19 pandemic and our government’s heavy-handed response inflicted immeasurable harms on the American people, the economy and our freedoms,” said Sen. Ron Johnson (R., Wis.) earlier this month as part of the launch of a new Senate working group aimed at improving the CDC.

The cuts are likely to face opposition from public health advocates, who have argued that federal agencies need more funding and personnel, not less.

“Reform should strengthen, not undermine, our ability to protect Americans from health threats,” said former CDC Director Dr. Tom Frieden, who hadn’t seen the Trump administration’s specific plans but was addressing the prospect of CDC cuts generally earlier this month.

Trump’s current director of the Office of Management and Budget, Russell Vought, who is working hand-in-hand with DOGE to cull the federal workforce, singled out the CDC in a panel discussion in September at Michigan’s Hillsdale College.

“Look at CDC,” Vought said, according to a recording posted online. “Most of them don’t even do public health. They are researchers that publish material. Who knows if it’s even relevant or not? They even themselves had to admit they were a failure in the public health crisis that comes once in a generation.”

• Supplemental state payments to providers that bump reimbursements above standard Medicaid rates have ballooned in recent years. GAO projected the payments reached at least $38.5 billion in 2022 and would continue to grow.
• States often tax providers, instead of using general funds, to pay for their share of state-directed payments, most of which go to hospitals.

What they’re saying: “We definitely have to look at the continuing expansion of state-directed payments. I’m not sure where we’re going to go with it, but it’s something we have to talk about,” Guthrie told Axios on Tuesday.

• “We’re still looking at everything. I’ve been talking to hospitals in my area.… They’ve been able to do it by doing the provider tax.”
• “Medicaid has always been premised on, states have skin in the game, federal government has a bigger skin in the game.… When states just put a provider tax on and use that for their state dollars, it almost becomes an open-ended checkbook in some ways.”
• “That’s one of the things that we want to fix. We’re not talking about taking anybody’s benefits away.”

Guthrie acknowledged that it’s possible the $880 billion number that Energy and Commerce was instructed to generate in reconciliation savings could change as the House and Senate negotiate parameters of the package.

• “The Senate could go higher, they could go lower. Until we get a Senate number, I couldn’t give you an answer [on whether it will change]. The Senate has got to decide and then we’ve got to sit down and negotiate.”

• Paragon president Brian Blase says that the practice could be deemed “waste and abuse” within Medicaid — the only categories that President Trump has said he is OK with touching in the program.
• MacPac estimated that directed payments approved as of August totaled more than $110 billion in 2024, which was almost a 60% increase from 2023 cost projections.

The other side: Hospital systems and providers would likely push back against any overhaul of state-directed payments, which they say help close gaps in reimbursements between Medicaid and other payers.

Speaker Mike Johnson has ruled out some of the biggest potential cuts to Medicaid for Republicans’ party-line package to enact President Donald Trump’s agenda.

The House has targeted at least $880 billion in savings from the Energy and Commerce Committee, a task that is expected to require significant reductions to Medicaid spending. That has spurred significant concern among centrist Republicans, many of whom have a lot of Medicaid recipients in their districts.

In an interview with CNN’s Kaitlin Collins Wednesday night, Johnson ruled out putting per-capita caps on Medicaid in the eventual budget reconciliation bill. Those caps would mean the federal government would pay a share of states’ Medicaid costs based on their population, instead of the program being an open-ended entitlement. He also said that changes to the Federal Medical Assistance Percentage are off the table — a move that would cut into the share of federal payments for Medicaid, a joint state-federal program.

Both of those are options that could produce some of the most significant potential savings from the Medicaid program — but they also would have shifted significant costs to states and led to benefit cuts.

“We’re not going to cut into those programs that way,” Johnson said when asked if he would cap federal funding or reduce match rates. “We’re talking about finding efficiencies in every program, not cutting benefits for people who rightly deserve them.”

Energy and Commerce Chair Brett Guthrie (R-Ky.) has told POLITICO that he wasn’t sure if per capita caps would get enough votes to become law, and GOP lawmakers have gotten assurances behind closed doors about protecting certain services. But Johnson’s red line Wednesday was the most definitive Republican leaders have been publicly so far about not entertaining specific major Medicaid changes. They’ve mainly said any reductions would go after fraud, waste and abuse.

GOP leaders this month told senior Republicans that Trump wasn’t yet on board with significant Medicaid cuts. Republicans have been increasingly eyeing other potential options to fund the president’s agenda, including extending Trump-era tax cuts.

The speaker also said in the interview that he does not expect the Senate to make changes to the House’s budget resolution, which was barely adopted by the House’s slim Republican majority Tuesday night. But senators have already noted there will be issues on components like the debt ceiling, the current proposed spending reductions and tax cuts.

“I don’t think they will,” Johnson said when asked if he thinks the Senate would change the budget resolution. “I think they understand the necessity of letting the House lead on this. We’ve got a smaller margin than they do for the first time in the modern era.”

Ahead of the March 14 government funding deadline, Johnson noted that Congress will likely have to pass a stopgap funding bill, known as a continuing resolution or a CR, in place of individual appropriations bills. Spending negotiations have stalled, and Johnson called Democrats’ requests to rein in Trump and Elon Musk’s power over federal funding in exchange for support on appropriations bills “crazy.”

Johnson added that he expects it to be a clean continuing resolution “but with some of those changes to adapt to the new realities here,” including some of the federal funding changes from the Department of Government Efficiency.

“It may be an entire year-long CR, with some anomalies on it,” Johnson said. “It’s not what we prefer, we would like to do individual appropriations bills.”