The House version of the “one big beautiful bill” started to clean up a financing scheme that lets states abuse the Medicaid program for extra money. The Senate version is poised to finish the job.
Forty-nine states use so-called healthcare provider taxes to siphon money from the federal Treasury, supposedly to fund health coverage for the poor. (Alaska is the lone exception.) Under Medicaid law, Washington matches a percentage of benefits paid out by states. Healthcare provider taxes let states collect federal matching dollars for money they didn’t actually spend.
How does it work? State governments tax providers—mainly hospitals—but return much of the money right back to the hospitals, labeling it a “supplemental payment.” Under this label, the returning money triggers a federal matching payment.
The federal matching funds that states extract under the arcane scheme have financed both Medicaid’s explosive growth and state spending unrelated to the program. Connecticut used federal funds from provider taxes to close its enormous state budget deficit in 2017. Since then, the state has continued to rely heavily on the gimmick.
The scheme is expansionary and unbalanced. The more that states tax providers, the more federal money they can obtain, the faster and larger the Medicaid program grows, and the more the balance between actual federal and state funding responsibility shifts to Uncle Sam. The Government Accountability Office began warning about this dynamic more than a decade ago.
Congress is to blame for allowing the scheme to persist. By law, the Centers for Medicare and Medicaid Services can’t take enforcement action against a state if it keeps its provider taxes below a threshold of 6% of providers’ “net patient revenues.” Most states stay below this safe-harbor level and do whatever they want with the taxes and money extracted from Uncle Sam. CMS doesn’t collect data on how much states receive through the gimmick, apparently seeing no need to track activity it can’t regulate.
The House bill would set a moratorium on the creation of new forms of provider taxes and on increases in existing provider tax rates. This would have little effect, however. Forty-nine states have already established most of the potential forms of provider taxes. Forty-six states tax nursing homes, 45 tax hospitals, and 38 impose at least one provider tax with a rate over 5.5%, according to the Kaiser Family Foundation. The Congressional Budget Office scored the moratorium’s savings at a mere $9 billion annually—about 1% of Medicaid’s current approximate $900 billion spending. Still, the moratorium is important because it would remove CMS’s power to approve provider tax increases above the 6% safe-harbor threshold.
The Senate version would retain the moratorium and go further, reaching to the heart of the matter. It would reduce the safe-harbor threshold by half a percentage point a year beginning in 2027 until 2031 when it would reach 3.5%, a level at which the expansionary dynamic would have a much smaller effect. The threshold reduction would apply only to the 40 states which have expanded Medicaid under ObamaCare, exempting the 10 that haven’t. Thus, the bill’s focus is where rapid Medicaid expansion and explosive state spending have taken place—as is appropriate for a bill intending to reduce spending.
The CBO hasn’t yet scored the Senate version of the bill. When it does, it undoubtedly will conclude that reduction of the safe-harbor threshold would produce major savings and a significant reduction in Medicaid enrollment.
Congress should pursue both goals. Federal deficits and debt are out of control, and savings are sorely needed. The enrollment reduction is long overdue. Medicaid is intended to be a program for the poor. Only about 37 million Americans live below the poverty line, yet Medicaid currently enrolls nearly 70 million, including many illegal immigrants in 14 states—1.6 million in California, according to Kaiser. Senators concerned that rural hospitals would be hurt by the safe-harbor reduction should pass special support for rural hospitals. The Senate bill’s larger reforms would help return Medicaid to its original and proper mission.
Many states have become overreliant on this scheme. Some appear to be in denial. Connecticut, whose provider tax rate already exceeds 5.5%, increased its tax rate by nearly a third in its new budget adopted earlier this month, hoping to get in before the moratorium takes effect. That can happen only with the help of CMS, which would have to rush to approve the state’s over-threshold plan.
Government programs should be straightforward, transparent and cost-effective. The provider tax scheme is the opposite. The reforms in the Senate bill would save money, return Medicaid to its original mission, and move states in the direction of good government.
Red Jahncke is a nationally recognized columnist, who writes about politics and policy. His columns appear in numerous national publications, such as The Wall Street Journal, Bloomberg, USA Today, The Hill, Issues & Insights and National Review as well as many Connecticut newspapers.