Medicaid Provider Taxes, We Can’t Fix Them This Way
Congress wants to close a loophole that props up Medicaid payments to hospitals and nursing homes using “Provider Taxes”. Who would care about this? But it really matters!
One big item in the proposed Big Beautiful Bill (BBB) is to close a loophole that props up Medicaid payments to hospitals and nursing homes using “Provider Taxes”. The subject sounds really dull and unexciting, who could care about this? But it would have a huge impact and it really matters.
I have been involved in the long term care industry for years. I spent almost 10 years as the CFO of a nursing home chain, was a member of the national eldercare task force of the AICPA, and published an eldercare web site from 1995 until 2017. Because of my background, I hope I can simplify the subject of provider taxes and the potential impact of changing them.
First, some background. Medicaid is a national program that is jointly funded by the federal and state governments. Some of it is paid for by the federal government and some by the state government. Medicaid was created to focus on medical costs for people who can’t otherwise pay for them (“medical” is the origin of “Medi” in the word “Medicaid”, it is aid for medical expenses).
People who go to a hospital might have insurance (through their employer or otherwise), and if so, their costs are paid by insurance. If patients don’t have insurance they either have to pay hospital expenses out of their pockets or they have them covered by some government program. The primary government programs would be Medicare (for the 65+ and disabled population) and Medicaid.
People who go to a nursing home are mostly covered by Medicaid. You might guess nursing home bills would be paid for by Medicare, the program of health insurance for people who are age 65 and older, but Medicare only covers some limited, short term, post-hospital nursing home stays. Hospital insurance is commonly provided through an employer, but long term care insurance is sold to individuals and is much less common. And very few people have enough money to pay expensive nursing home bills out of their own funds. So the vast majority of nursing home bills are only covered by Medicaid. If grandma is in a nursing home, her stay is probably being paid for by Medicaid, no matter where or how she lived when she was young and healthy.
As medical costs have skyrocketed, Medicaid has paid for a larger and larger proportion of hospital costs, and the vast majority of nursing home costs.
Medicaid is funded partly by the federal government and partly by the state. It is set up as a matching program. The state determines what rate they will pay and the federal government matches it. It’s more complicated than that, the federal government does not match dollar for dollar, they pay more in some states and less in others. But what’s important is to understand that the rate is set by the state and matched by the federal government. If the state increases their rate, the federal government will increase the match.
Medicaid is a big and expensive program. Almost every state has grappled with figuring out ways to keep their costs under control. Many years ago states found a way to stretch their budgets by getting the federal government to pay more of the Medicaid bill. What they did is start charging a tax to hospitals and nursing homes, something they called a “Provider Tax”. Then they turned around and used the proceeds from the tax to increase the Medicaid rate they paid to the providers. On its face, the tax is a wash. The provider pays a new tax, but then they get a higher Medicaid rate of the same amount, leaving them whole. But because of the federal match, states can do better than that. If the state increases the provider’s rate by $100 a day, the federal government will also pay more. Depending on the percent of the match, the system might provide $100 a day of additional funding. Some of that extra $100 might go to the provider but some of it could be used by the state to pay for other things.
Doing this is not illegal, it is a loophole. But it was certainly an unintended outcome for the federal government. And its use has spread. Almost every state uses provider taxes to prop up their Medicaid payments.
There have been discussions for years about closing this loophole. The problem is that closing it will reduce the Medicaid rate paid to providers, and many of them could not stay in business if that happened, they just don’t have any way to offset the lost revenue. If hospitals and nursing homes suddenly lost funding, they might have to close, and that is a huge problem.
Remember that most nursing home patients are on Medicaid and a very significant percentage of rural hospital patients are as well. So one big problem in particular is the potential impact on rural hospitals and nursing homes. There is a realistic chance that rural areas could suddenly lose their healthcare services. There are similar risks for hospitals and nursing homes that serve poor inner city populations.
Both versions of the current bill propose putting limitations on the provider tax. One version proposes a freeze on the current provider taxes and one proposes immediately cutting the current taxes.
If the tax is cut, each state will have to make a decision how to react. They might decide to just continue to pay the current Medicaid rates and fund the difference with other budget cuts or tax increases. But every state’s Medicaid budget is huge and it wouldn’t be easy to find that many additional funds in any state. The BBB assumes that states will respond by cutting their Medicaid rates, which will then cut the federal match. (And if states don’t do that the assumed savings in the BBB won’t come to pass.) So we can assume Medicaid rates will be reduced. When will they be cut? It depends on the state, but probably rates will be cut as soon as administratively and legally possible.
As soon as the bill is passed, every provider in every state will have to start figuring out what that will mean to them. They will have to guess how much their rates will be cut. They will have to project how much of a shortfall they will have. And they will have to start scrambling to figure out how they will survive. I would guess the uncertainty alone will put some places out of business, and I would expect to start to hear announcements of closings pretty quickly. There might be some bargain basement M&A sweeping up of hospitals and nursing homes at risk of closing. That will be disruptive as well, not least because there are plenty of examples of poor care in places that undergo changes of ownership. The whole industry will be turned upside down.
To be clear, I never liked the provider tax shell game and would love to see it closed down. But the only way to do that is slowly and carefully over time. It took decades to get into this mess, we won’t get out cleanly in the current fiscal year. That will not provide the immediate savings to the federal government that the BBB wants to count on, but it’s the only responsible way to do it.
Resources
If you want to do any reading on the subject, here are a couple of good articles:
G.O.P. Targets a Medicaid Loophole Used by 49 States to Grab Federal Money, New York Times
What’s the Impact of Eliminating Medicaid Provider Taxes?, Hilltop Institute, UMBC