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