Medicaid Provider Taxes

Alison Mitchell
Analyst in Health Care Financing

States are able to use revenues from health care provider taxes to help finance the state share of Medicaid expenditures. Federal statute and regulations define a provider tax as a health carerelated fee, assessment, or other mandatory payment for which at least 85% of the burden of the tax revenue falls on health care providers. In order for states to be able to draw down federal Medicaid matching funds, the provider tax must be both broad-based (i.e., imposed on all providers within a specified class of providers) and uniform (i.e., the same tax for all providers within a specified class of providers). Also, states are not allowed to hold the providers harmless for the cost of the provider tax (i.e., they can not guarantee that providers receive their money back).

A vast majority of states use at least one provider tax to help finance Medicaid. Many of these states use the provider tax revenue to increase Medicaid payment rates for the class of providers, such as hospitals, responsible for paying the provider tax. This financing strategy allows states to fund increases to Medicaid payment rates without the use of state funds because the increased Medicaid payment rates are funded with provider tax revenue and federal Medicaid matching funds. States also use provider tax revenues to fund other Medicaid or non-Medicaid purposes.

States first began using health care provider taxes to help finance the state’s share of Medicaid expenditures in the mid-1980s. Some states were particularly aggressive in their use of provider taxes. As a result, in the early 1990s, the federal government imposed statutory and regulatory limitations on states’ use of health care provider tax revenue to finance Medicaid.

While federal requirements allow states to impose provider taxes on 19 classes of health care providers, the classes of providers that are most often taxed include nursing facilities, hospitals, intermediate care facilities for individuals with mental retardation or developmental disabilities (ICF-MR/DD), and managed care organizations. During the most recent recession, a number of states took action to generate additional provider tax revenue, and these actions mainly involved hospital and nursing facility taxes.

Even with the statutory and regulatory limitations, provider taxes continue to cause tension between the federal government and the states. As a result, some deficit reduction proposals include a recommendation to limit states’ ability to use provider taxes to finance the state share of Medicaid expenditures. This limitation would decrease federal Medicaid payments to states.

This report provides background regarding states’ use of provider taxes in the 1980s and describes the relevant federal statutes and regulations, which were mostly established in the early 1990s. The report explains how states use provider taxes to help finance Medicaid and provides information regarding the extent to which states currently use such taxes. The report ends with a discussion of the provider tax provisions in various deficit reduction proposals.

Date of Report: March 15, 2012
Number of Pages: 17
Order Number: RS22843
Price: $29.95

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