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.
Medicaid Maneuver by States Faces the Ax
wsj.com
April 15, 2025 5:40 pm
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.