The importance of the One Big Beautiful Bill Act’s reforms of Medicaid is illustrated by the sad story of Connecticut and so-called health care provider taxes which states levy primarily on hospitals.
The OBBBA shifts Medicaid funding responsibility back toward the states, closer to Medicaid’s original concept of a 50/50 financial partnership between Uncle Sam and the states.
Since states cannot run deficits – most state constitutions require balanced annual budgets, a return to the original arrangement would put a brake on the hyper-growth of the Medicaid program and curtail the dubious behavior of the Center for Medicare and Medicaid Services (CMS).
Most states pay only 33% of Medicaid expense, and, for the Obamacare and the COVID expansions, only 10% of the cost, leaving states little incentive to manage costs. Even these official percentages are inflated by the arcane rules of CMS.
The main driver of the trend toward mostly federal funding has been provider taxes. They are a classic shell game used to siphon money from Uncle Sam. States impose the tax, then, return the tax money labelled “supplemental payment,” which label triggers federal matching money. The returning tax money and any matching funds sent to hospitals is counted as part of the state’s share of the joint federal/state partnership in the financing of Medicaid. Yes, federal money is counted as if it were state funds.
Is CMS on guard against this charade? Quite the opposite. In a February 2023 letter to the states, then-Deputy Administrator Daniel Tsai wrote “CMS remains committed to providing states with technical assistance aiming to ensure that health care-related taxes used to finance the non-federal share of Medicaid expenditures…”
The dysfunctional operation of hospital taxes and the dubious behavior of CMS and states’ voracious hunger for tax revenue is illustrated perfectly by the story of Connecticut. The state and CMS have conspired to use the hospital tax to treat the state’s hospitals as piggybanks. The Connecticut Hospital Association states “For many years, Connecticut used the tax primarily to bolster the state budget – resulting in revenue gains for the state, and overall net losses for hospitals.” CMS has been complicit in the hospitals’ distress by approving waivers about eight years ago for Connecticut to tax its hospitals at a rate of about 9%, or 50% above the so-called safe-harbor level of 6% of net patient revenues below which states are supposed to stay.
Finally, the hospitals filed a lawsuit and a settlement was reached, with the tax scaling down from $900 million in 2020 to $820 million in 2026.
Suddenly, last June, Connecticut jacked up the tax about 50%, or $375 million, to $1.2 billion. When questioned, the state spokesman divulged that recent hospital net revenue was $15.8 billion in FY 2024, meaning that the new tax rate was about 7.4% and the rate beforehand 5.1%.
By law, CMS is required to review and approve (or not) any increase going over the 6% safe harbor level. Yet the Connecticut spokesman said: “The state has not submitted [applied for] a new waiver.” He went on to say “… we expect to receive approval from CMS.” How can the state receive approval of a waiver application that it has not submitted?
There’s another problem. The OBBBA bans any provider tax rate increase after the OBBBA’s July 4th enactment. How can CMS approve a rate increase in September or October?
When pressed about going over the 6% safe-harbor threshold, the state spokesman asserted that “to receive CMS approval, there is a two-step process, first, the 6% safe harbor test, and, if the state fails, the “75/75 test.” CMS is ever-indulgent of tax-hungry states, much like the teacher who offers an alternate test, if the student fails the first.
But it is worse than that. The operative phrase of the “75/75 test” [42 CFR 433.68(f)(1)(i)(B)] reads “if 75 percent or more of the taxpayers in the class [hospitals] receive 75 percent or more of their total tax costs back in enhanced Medicaid payments or other State payments.”
Focus on the last clause: “other State payments.” CMS is saying that state payments to hospitals for anything qualify. Think payments for health care for illegal immigrants. It is illegal to extend federal benefits to non-citizens, so CMS has created a “state funded state benefit” channel to convert federal money into state money for the purpose. Connecticut has a growing program providing health coverage for illegals.
Provider taxes are sleight of hand, wrapped in connivance, inside a shell game.
The OBBBA scales them down, with the safe-harbor limit falling gradually to 3.5% over a few years. This will force states to use actual own-source funds for their share in the federal/state Medicaid partnership. Moving fiscal responsibility back to the states and closer to the people will also curtail the oft-dubious behavior of federal bureaucrats.
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.