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Senate Bill Makes It Harder for States to Maintain — Let Alone Raise — Their Medicaid Spending

The Senate health bill not only shifts huge costs to states by capping and cutting federal Medicaid funding — thereby forcing states to raise taxes or cut other areas like education to maintain their Medicaid programs — but makes it harder for states just to sustain their current Medicaid spending by restricting state taxes on health care providers. Every state except Alaska uses provider taxes to help finance Medicaid. (See Table 1.)

Critics have called for the federal government to curtail or bar these taxes, arguing that states use them to manipulate federal Medicaid financing: states can levy a tax on providers, the argument goes, use the revenue to qualify for more federal matching funds, and then return the tax revenues to the providers in the form of higher Medicaid reimbursements. But the federal government has clamped down on those abuses. Today, states can only impose a provider tax if it’s “broad based,” meaning that it applies to all providers in a given category (e.g., all hospitals or all nursing homes). And a state must apply such a tax on a “uniform basis,” by which each provider pays the same rate regardless of whether the provider serves many, few, or no Medicaid beneficiaries.

While meeting the “broad-based” and “uniform basis” requirements, states can’t structure the provider tax to hold providers harmless from the tax (meaning they’d receive as much from the state in higher Medicaid payments as they paid in tax). There’s an exception: taxes that collect less than 6 percent of the net revenues that providers receive from treating patients aren’t subject to the hold-harmless test. The Senate bill would phase down this limit each year starting in fiscal year 2021 until it reaches 5 percent in fiscal year 2025.

That would have a significant effect on states. Twenty-eight states have at least one provider tax that exceeds 5.5 percent of net patient revenues, which means that starting in fiscal year 2023, these states would have to find another way to raise funds for Medicaid. More states would be affected as the threshold phases down to 5 percent by fiscal year 2025.

This provider tax limit would hit states even as, also under the Senate bill, they faced growing federal Medicaid funding cuts from the proposal to convert Medicaid financing to an annual per capita cap that did not keep pace with rising Medicaid costs. States could not likely replace all the lost revenue from their provider taxes by raising their income taxes, for example. That means states couldn’t maintain their current Medicaid spending, let alone raise it to offset federal funding cuts. As a result, states would have to make even deeper cuts to Medicaid eligibility, benefits, and provider payments.

  Has at Least One Provider Tax Have at least 1 Provider Tax Over 5.5% of Net Patient Revenue
Alabama X X
Arizona X  
Arkansas X X
California X X
Colorado X  
Connecticut X X
Delaware X  
District of Columbia X  
Florida X X
Georgia X X
Hawaii X  
Idaho X  
Illinois X  
Indiana X X
Iowa X  
Kansas X  
Kentucky X  
Louisiana X  
Maine X  
Maryland X X
Massachusetts X X
Michigan X  
Minnesota X  
Mississippi X X
Missouri X X
Montana X  
Nebraska X X
Nevada X X
New Hampshire X  
New Jersey X X
New Mexico X  
New York X  
North Carolina X X
North Dakota X X
Ohio X X
Oklahoma X X
Oregon X X
Pennsylvania X X
Rhode Island X X
South Carolina X  
South Dakota X  
Tennessee X X
Texas X  
Utah X X
Vermont X X
Virginia X  
Washington X X
West Virginia X X
Wisconsin X X
Wyoming X X
Total 50 28