Setting the Record Straight: Beware of Opinions Masquerading as Facts
For health care organizations that care for the 70 million Medicaid patients in the U.S., provider taxes are a life vest that keep state Medicaid programs afloat and allow them to continue providing critical health care services for their communities. While policymakers in Congress look to finance an extension of the 2017 tax cuts, some are advocating for further limits on states’ ability to use provider taxes to help finance their Medicaid programs.
Some new reports have displayed a gross misunderstanding of both the legitimacy of various Medicaid financing arrangements and the consequences of stripping those resources from states trying to provide health care access to their most vulnerable residents. For example, a recent report from the Paragon Health Institute, “Addressing Medicaid Money Laundering: The Lack of Integrity with Medicaid Financing and the Need for Reform” recycles misguided opinions.
Medicaid is not a money laundering scheme. Medicaid is a complex program that takes into account state and federal priorities to provide coverage for children, older adults, people with disabilities, and low-income adults. Let’s be clear: Any suggestion that provider taxes are anything but longstanding, legally vetted, state and federally approved tax arrangements, is dishonest and a distraction from what these proposals truly are — a way to cut the Medicaid program.
The primary way states generate revenue to pay for state programs, including Medicaid, is through taxes — this includes income tax, sales tax or, in the case of Medicaid, provider taxes. All are legally permissible ways for states to raise money to pay for their portion of the Medicaid program.
Provider taxes are a longstanding, legitimate and heavily regulated tax arrangement which states can levy on health care organizations, including hospitals and health systems, nursing facilities, and managed care organizations to pay for their portion of the Medicaid program. Nearly every state (49 states and the District of Columbia) uses some form of provider taxes, and many have done so for decades. In most cases, for a state to implement a provider tax, state legislators are required to first vote on provider tax arrangements. They then must be reviewed and approved by the federal government. Once established, the taxes are then overseen by both state and federal regulators. As an example of the federal oversight, Congress limits these taxes to no more than 6% of net patient revenue.
Nearly every state Medicaid program would be hurt by lowering the limit on provider taxes, and state residents would be put in the crosshairs of these cuts. States with strained budgets will need to shore up funding from elsewhere, either by raising taxes on their residents or cutting health care coverage and benefits for some of our most vulnerable people. For many states, a budget gap of this magnitude simply could not be backfilled through other funding sources.
For providers, this also could mean steep reimbursement cuts and increased uncompensated care. Even with provider tax financing, state Medicaid programs do not cover the cost of caring for Medicaid patients. Nationally, the Medicaid shortfall — the difference between the hospital's cost of serving Medicaid patients and the payments it receives for services — was $27.5 billion in 2023. These numbers underscore that further strain on hospital revenue would likely require them to reduce or eliminate service offerings, reduce staffing, or — to an entire community’s loss — close altogether.
Provider taxes are fundamental to the Medicaid financing structure in nearly every state. The accusation by some that these carefully reviewed, legitimate tax mechanisms are fraudulent is false and a distraction. Just because someone does not like a law, it does not mean that those adhering to the law are committing “money laundering.” Attacks on provider taxes are an attempt to disguise unjustifiable federal funding cuts to Medicaid, which will be devastating to Medicaid patients and our communities.
Medicaid provider taxes protect access to care for everyone. We urge Congress to protect Medicaid and reject efforts to mislead and distort the facts about the legitimate use of provider taxes to care for patients.
Ashley Thompson is AHA’s Senior Vice President, Public Policy Analysis and Development.