Congress considers cutting billions in Medicaid spending by eliminating reimbursements to states for 'provider taxes'

The provider tax helps most states fund their
Medicaid programs. (Adobe Stock photo)

Congressional budget hawks could trim billions in federal Medicaid spending by restricting the use of a state tax on medical providers, reports Joseph Walker of The Wall Street Journal. "The levies can lead to higher federal spending on Medicaid."

The tax, which is commonly known as the "provider tax," is levied by states on hospitals, nursing homes and other facilities that provide medical care. When medical providers pay the provider tax, states funnel the payments into their Medicaid budgets. Because federal Medicaid dollars often match state dollars, the tax increases federal Medicaid costs.

If Congress ended the ability to use the provider tax to "finance Medicaid contributions entirely, it could save more than $600 billion over a decade," Walker explains. "That would go a long way toward achieving House Republicans’ plans to reduce federal spending by as much as $2 trillion to help offset the impact of extending President Trump’s income-tax cuts."

But the change could prove devastating for medical providers and Medicaid recipients. Walker reports, "Hospitals often tend to get back more in payments than they shelled out for the original tax, which shores up their ability to care for Medicaid patients. . . . Nearly every state uses provider taxes to raise money to finance their Medicaid health insurance programs for low-income people and the disabled."

Republican budget cutters have "turned the provider taxes into a prime target.. [They say] states are gaming the system to artificially boost their Medicaid contributions and enrich politically powerful hospitals," Walker adds. "Defenders say cash-starved hospitals need the extra payments financed by provider taxes, because Medicaid reimbursement isn’t enough to cover costs."

President Trump promised during a February interview that there will be no cuts to Medicaid. Some lawmakers see the elimination of the provider tax as a possible go-around to cut Medicaid spending by more indirect means.

Medicaid decisions matter for small-town America where in 2023, 40.6% of children were enrolled in Medicaid/CHIP compared to 38.2% in metro areas. Any reductions would also hurt rural non-elderly adults covered by Medicaid.