Republicans in Congress want to restrict states’ ability to tax health care providers such as hospitals, a move that would squeeze state Medicaid budgets and make it harder to manage rising program costs.
An omnibus budget bill that the U.S. House could vote on as early as Wednesday would freeze current provider taxes imposed by almost all states, prohibit states from imposing new provider taxes, and eliminate some taxes altogether.
The bill would deprive state leaders of a go-to tool for financing Medicaid, the public health insurance program for low-income people jointly funded by states and the federal government.
Barred from raising taxes on providers, lawmakers would have to make more painful decisions — such as raising other taxes, cutting benefits or reducing enrollment — to balance state budgets this year or in the future.
“States could face an immediate shortfall, or they’ll be unable to close future budget shortfalls or finance aspects of their Medicaid program, because they’ll be limited on what they’ll be able to do on taxes,” said Edwin Park, research professor at the McCourt School of Public Policy at Georgetown University.
The federal budget bill also would force state leaders to spend more on Medicaid, he noted, by requiring them to administer strict new work and eligibility rules.
“From a state budget perspective, you are hamstringing state funding of Medicaid at the same time that you are mandating states spend a ton administratively to comply with these new requirements,” Park said.
Every state except Alaska imposes at least one tax on hospitals, nursing homes and other providers to help fund its Medicaid program, according to KFF, a health policy research nonprofit.
States use the tax collections to augment their Medicaid spending and pull down more federal matching funds. The maneuver can help states fill budget gaps while driving payments to providers that offset what they pay in provider taxes.
National data on provider taxes is limited, but it suggests states have become more reliant on the tax.
Almost a third of the money states spent on Medicaid last fiscal year came from outside their general funds — including from provider taxes and fees, payments from local governments, and other money held outside their main spending account, according to survey data from the National Association of State Budget Officers, a membership group based in Washington, D.C.
Advocates for hospitals and other providers support the financing scheme, arguing that it helps keep more people insured while funding services communities need. But the taxes have been criticized for years by federal leaders on the left and right. Some conservative analysts call the taxes “Medicaid money laundering.”
The federal budget bill would ban states and cities from imposing new provider taxes or raising the rate of existing taxes starting the day the bill becomes law. It also would make technical changes that would abolish certain provider taxes altogether.
The Trump administration has proposed a similar technical change, through regulation, that would rescind federal approval for taxes on health care plans — often known as managed care organization taxes, or MCO taxes.
California, New York, Michigan and Massachusetts would be among the states affected, the Center for Medicare and Medicaid Services said in a press release last week.
Freezing provider taxes would save the federal government almost $90 billion through 2034, according to preliminary estimates from the Congressional Budget Office. That’s the amount analysts would expect states to receive under current law.
Yanking federal approval for taxes on health care plans would save the federal government billions more, while opening up a major hole in affected states’ budgets.
California’s MCO tax raised about $7.6 billion in net revenue for the state’s Medicaid program last fiscal year, according to the Legislative Analyst’s Office, a nonpartisan team that advises the California legislature.
Lawmakers have used the money to pay for Medicaid services and, more recently, fund health care workforce training and pay providers more for serving Medicaid patients.
California voters last year approved a ballot measure, championed by unions and health care groups, that made the tax permanent.
Without federal permission to tax health care plans, California lawmakers would have to raise other taxes — such as income taxes — to continue funding Medicaid at the same level, said Adriana Ramos-Yamamoto, senior policy analyst at the California Budget and Policy Center, a Sacramento-based nonprofit.
“The need for that investment will continue,” she said, “even if all the rules around provider taxes change and we’re no longer able to draw down this really large amount of funds from the federal government.”