Provider taxes under fire as Congress looks for Medicaid cuts

Modern Healthcare – Monday, April 28, 2025
By Michael McAuliff 

When Rep. Chip Roy (R-Texas) grudgingly supported the budget that paved the way for renewing President Donald Trump’s tax cuts, he signaled that the price for his vote included targeting an arcane but growing source of state Medicaid funding: provider taxes.

States levy provider taxes to help fund their share of spending in the joint federal-state health program, which effectively shifts a greater portion of Medicaid costs to the federal government. Often, providers volunteer to pay these taxes, or at least don’t loudly protest, because they sustain Medicaid.

The tactic is entirely legal under federal law. And despite halting efforts dating to President George W. Bush’s administration and since to limit provider taxes, states have grown increasingly dependent on them over the decades. That’s made these taxes a target for conservatives such as Roy, who liken them to a criminal enterprise.

When Congress completed the fiscal 2025 budget resolution April 10, Roy made clear that his continued cooperation with GOP leaders is dependent on policies that curb provider taxes. He also declared that Trump is on his side.

“The president committed to a minimum of $1 trillion in real reductions in mandatory spending” including “Medicaid reforms addressing eligibility, waste, fraud, abuse and the disastrous money laundering schemes pervasive in the program,” Roy said in a news release at the time.

The budget resolution proposes cutting at least $1.5 trillion in spending over the next decade to partially offset the $4.5 trillion cost of extending expired and expiring provisions of the Tax Cut and Jobs Act of 2017. Congress returned from a two-week recess Monday and the Republican majority intends to move swiftly on the tax-and-spending-cuts package.

The House Energy and Commerce Committee, which has jurisdiction over Medicaid and Medicare, is responsible for finding up to $880 billion in spending reductions. Trump has declared Medicare off-limits. Excluding Medicare means Medicaid is the likely source for nearly all of those cuts, according to the Congressional Budget Office.

Trump also vowed to veto legislation that cuts Medicaid in an interview with Time magazine last week. “They’re going to look at waste, fraud and abuse,” he said. But provider taxes and other financing mechanisms states use to maximize federal Medicaid outlays plausibly fit under the expansive definition of “waste, fraud and abuse” the GOP has adopted.

‘Really painful cuts’

Curbing or eliminating provider taxes, or healthcare-related taxes as they are also called, could go a long way to reaching the $880 billion goal, Brian Blase, president of the right-leaning Paragon Institute, said during a briefing to congressional aides and reporters on the day the House approved the final budget resolution.

“These are various savings that we expect would come from a full elimination of states ability to tax providers,” Blase said, displaying a chart that described healthcare-related taxes as “money laundering.” According to Blase, this alone would save the federal government at least $700 billion over 10 years.

Limiting or banning provider taxes would reduce federal spending, but it wouldn’t make Medicaid costs disappear.

“Governors and state legislatures are given no choice but to make really painful cuts, really large cuts to their Medicaid programs, because they’re both getting less federal funding than they would under current law, and they would be restricted on their ability to raise revenues,” Georgetown University professor Edwin Park said during a virtual briefing the school’s Center for Children and Families hosted Wednesday.

The concept of provider taxes is not very complicated: They are levies on providers and health insurance companies that states use to finance their share of Medicaid costs while triggering bigger federal payments.

Every state but Alaska has some form of provider tax, according to the health policy research institution KFF. The Government Accountability Office, a nonpartisan investigative arm of Congress, reported the share of state Medicaid funding derived from provider taxes rose from 7% in 2008 to 17% in 2018. It is believed to be higher now.

The money laundering charge is based on the fact that most of the taxes get paid back to providers via Medicaid reimbursements. Providers typically come out ahead on the deal.

Where things get complicated is in how the taxes and payments are defined, measured and regulated. One key restriction is that the taxes must be broad-based. States also may not pay out more than 6% of a provider’s net revenue. And there are complicated statistical measures the Centers for Medicare and Medicaid Services uses to regulate payments.

CMS weighs regulation

CMS may be on the verge of taking action against provider taxes without Congress.

The agency submitted a proposed rule — the text of which is not public — to the White House Office of Management and Budget on April 19 entitled “Preserving Medicaid Funding for Vulnerable Populations — Closing a Health Care-Related Tax Loophole.” The Health and Human Services Department first declared its intention to draft this regulation in the Unified Agenda the OMB published in December, when President Joe Biden still occupied the White House.

“This proposed rule would update existing regulations that govern the process for states to obtain a waiver of the statutory requirements that healthcare-related taxes are broad-based and uniform to ensure that taxes passing the statistical test are generally redistributive,” HHS wrote at the time.

That language suggests the statistical analyses that CMS uses could be at play.

Congress rushes to cut taxes, Medicaid

Big savings, however, would likely have to come from Congress. The juiciest target is the 6% cap. According to the CBO and KFF, lowering that 6% cap to 0% would save the federal government $612 billion over 10 years. Cutting the threshold to 5% would save $48 billion.

States, providers and Medicaid enrollees would be squeezed, said Robin Rudowitz, director of the KFF Program on Medicaid and the Uninsured.

“It would make it more difficult for states to come up with their state share of spending. And if that happens, states have options to basically reduce spending on the program, raise taxes or cut spending from other areas,” Rudowitz said.

Park echoed those sentiments. “States will have to make deep, damaging cuts to their Medicaid programs — not just provider payment rates, but eligibility and benefits,” he said. Providers share these concerns, he said.

Provider taxes and Medicaid financing are legitimate issues to address, but Republicans are hyping these taxes to disguise the real consequences of huge Medicaid cuts, whatever form they may take, Park said. “It allows federal policymakers to misleadingly claim they’re not making explicit cuts to eligibility, benefits and provider payments,” he said.

House Republicans have floated policies that would slash healthcare spending, largely in Medicaid, by trillions of dollars. “These aren’t proposals that are targeted or designed to deal with specific issues that have risen in terms of state compliance with the long-standing provider tax rules that raise concern, but rather they are about generating significant federal savings,” Park said.

House Republican leaders are pressing to extend the Trump tax cuts and reduce federal spending by the end of May. The Energy and Commerce Committee is likely to begin debating specific measures early next month.

Access this article at its original source.