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Cassidy-Graham’s Restrictions on Provider Taxes Threaten State Medicaid Programs

Like the bill to repeal the Affordable Care Act (ACA) that the Senate rejected in July, the bill from Senators Bill Cassidy and Lindsey Graham radically restructures Medicaid financing by converting federal funding to a per capita cap starting in 2020. But Cassidy-Graham actually goes further than the prior repeal bill by entirely repealing the ACA’s Medicaid expansion in 2020. It also goes further by making it harder for states to sustain their current Medicaid spending due to its sharper restrictions on state taxes on health care providers. Every state except Alaska uses provider taxes to help finance Medicaid. (See Table 1.)

As we’ve written, critics have urged the federal government to curtail or bar these taxes, arguing that states have used them to help the states secure higher federal Medicaid financing for their Medicaid programs. But federal policymakers already have clamped down on those abuses. States must now tax all providers in a given category (e.g., all hospitals or all nursing homes), and each provider must pay the same tax rate regardless of whether it serves many, few, or no Medicaid beneficiaries.

Also, states can’t structure the provider tax to hold providers harmless (meaning they’d receive as much from the state in higher Medicaid payments as they paid in tax). But 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. Cassidy-Graham, however, would phase down this limit each year starting in fiscal year 2021 until it falls to 4 percent in 2025. That’s steeper than the reduction to 5 percent in the prior Senate bill.

This would have a significant adverse effect on state finances. 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 2022, these states would have to find another way to raise funds for Medicaid. Many more states would likely be affected when the threshold phases down to 4 percent by 2025, since 44 states have at least one provider that exceeds 3.5 percent of revenues.

Since states likely couldn’t replace all the lost revenue from their provider taxes by raising income taxes, they likely couldn’t maintain their current Medicaid spending. That’s why the Congressional Budget Office estimates that lowering the threshold to 4 percent would cut federal Medicaid spending (which is a set share of each state’s overall Medicaid spending) by $40 billion over ten years.

This provider tax limit would hit states even as they faced growing federal Medicaid cuts from the per capita cap — cuts that by themselves would total $175 billion between 2020 and 2026. And those cuts would grow even larger in coming decades as the gap between states’ capped funding and their actual spending needs for Medicaid widened dramatically. As a result, Cassidy-Graham’s limit on provider taxes would force states to make even deeper cuts to Medicaid eligibility, benefits, and provider payments over time.

Table 1
State Provider Taxes
  Has at Least One Provider Tax Have at least 1 Provider Tax Over 5.5% of Net Patient Revenue Have at least 1 Provider Tax Between 3.5% and 5.5% of Net Patient Revenue
Alabama X X X
Arizona X   X
Arkansas X X  
California X X  
Colorado X   X
Connecticut X X X
Delaware X   X
District of Columbia X   X
Florida X X  
Georgia X X  
Hawaii X    
Idaho X   X
Illinois X   X
Indiana X X X
Iowa X   X
Kansas X    
Kentucky X   X
Louisiana X    
Maine X    
Maryland X X X
Massachusetts X X  
Michigan X   X
Minnesota X   X
Mississippi X X  
Missouri X X X
Montana X    
Nebraska X X  
Nevada X X  
New Hampshire X   X
New Jersey X X  
New Mexico X   X
New York X   X
North Carolina X X X
North Dakota X X  
Ohio X X  
Oklahoma X X  
Oregon X X X
Pennsylvania X X X
Rhode Island X X X
South Carolina X    
South Dakota X   X
Tennessee X X X
Texas X   X
Utah X X X
Vermont X X  
Virginia X   X
Washington X X X
West Virginia X X X
Wisconsin X X X
Wyoming X X  
Total 50 28 30