Dive Brief:
The CMS proposed a rule on Monday seeking to overhaul state provider tax polices. If finalized, the rule could upend a decades-long strategy for financing Medicaid coverage.
States use provider taxes to secure higher reimbursement from Washington. However, the CMS and conservative think tanks argue the taxes are used to benefit states and providers while the federal government foots the bill.
The proposal comes just days after House Republicans proposed capping new state directed payment rates at the Medicare payment rate, freezing provider taxes in place at current rates and barring states from implementing new provider taxes.
Dive Insight:
Provider taxes have been around in some form since the 1980s, and every state, except Alaska, now has at least one provider tax in place to help finance Medicaid, according to a March analysis from KFF.
The policies are designed to inflate Medicaid spending on paper to allow states to recoup more federal reimbursement dollars. Providers argue the maneuver is both legal and needed. Even the nation’s wealthiest health systems say they lose money covering Medicaid patients, and the state supplemental payments they receive help them plug holes in their budget.
Still, watchdog organizations have called for greater transparency into how money flows between entities. The taxes and payment programs are especially unpopular among Republicans looking to cut nearly $900 billion in federal spending to fund an extension of President Donald Trump’s first-term tax cuts.
The CMS takes particular issue with states using provider taxes to secure higher federal reimbursements and then allocating funds to initiatives the Trump administration may not support. For example, California has recently extended Medicaid coverage to noncitizens. The Trump administration argues provider taxes are, in a roundabout fashion, financing that coverage.
“States are gaming the system—creating complex tax schemes that shift their responsibility to invest in Medicaid and rob federal taxpayers,” said CMS Administrator Dr. Mehmet Oz in a statement about the proposed rule. “This proposed rule stops the shell game and ensures federal Medicaid dollars go where they’re needed most—to pay for health care for vulnerable Americans who rely on this program, not to plug state budget holes or bankroll benefits for noncitizens.”
The rule would prohibit states from taxing Medicaid businesses at higher rates than non-Medicaid businesses and bar the use of “vague language” that the government says disguises Medicaid-specific taxes.
The CMS also seeks to phase out existing waivers that exempt states from leveraging broad-based taxes.
In total, the CMS says the rule could save taxpayers more than $30 billion over five years.
The proposal comes just days after the House Energy and Commerce Committee also took aim at state supplemental payment programs. The committee is set to review proposals to cut Medicaid on Tuesday.
Since Trump took office in January, providers have been wary of possible disruptions to state supplemental payment programs, especially as program approvals slowed to a crawl.
In a research note published last month, J.P. Morgan noted the Trump administration had only approved three Medicaid supplemental payment programs worth approximately $100 million since January. In comparison, the Biden administration approved 37 programs worth $33.7 billion between Jan. 20, 2024, and April 21, 2024.
Even before this announcement, some healthcare providers were considering how they might diversify revenue streams to be less reliant on state supplemental payments.
“We certainly are not counting on growth in those programs, and it’s certainly possible that we will see some deceleration in those supplemental payments or under Medicaid reimbursement,” said Universal Health Services CEO Marc Miller on a recent call with investors.
On Tuesday morning, Kevin Holloran of Fitch Ratings said the proposed changes to provider taxes “ultimately affects everyone” in the sector, warning that proposed changes would prevent payments from keeping up with population growth or acuity levels, ultimately weakening provider margins.
Still, “it seems there is new information every day, so we are all staying tuned in, and fair to say, everything is subject to change as the process continues forward,” Holloran said.
