Medicaid Provider Taxes
Alison Mitchell
Analyst in Health Care Financing
November 30, 2011
Congressional Research Service
7-5700
www.crs.gov
RS22843
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Medicaid Provider Taxes
Summary
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 care-
related 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.
Congressional Research Service
Medicaid Provider Taxes
Contents
Introduction...................................................................................................................................... 1
States’ Initial Use of Provider Taxes in the 1980s ........................................................................... 2
Federal Statutes and Regulations..................................................................................................... 3
Classes of Providers .................................................................................................................. 4
Hold Harmless........................................................................................................................... 5
States’ Current Use of Provider Taxes ............................................................................................. 6
Provider Tax Revenue ............................................................................................................... 7
During Economic Downturns.................................................................................................... 9
Oversight of Provider Taxes .................................................................................................... 11
Current Issues ................................................................................................................................ 11
Federal Deficit Reduction........................................................................................................ 11
Figures
Figure 1. Provider Tax Example for a State with 60% FMAP Using Nursing Home
Provider Tax Revenue to Increase Medicaid Reimbursement Rates to Nursing Homes .............. 7
Figure 2. General Fund and Other State Funds
as a Percentage of the State Share of Medicaid Expenditures ...................................................... 9
Figure 3. Number of States Taking Action to Generate Additional Provider Tax Revenue........... 10
Tables
Table A-1. State-by-State Provider Taxes, by Type, SFY2012 ...................................................... 13
Appendixes
Appendix. Types of Provider Taxes Used by States ...................................................................... 13
Contacts
Author Contact Information........................................................................................................... 14
Congressional Research Service
Medicaid Provider Taxes
Introduction
Medicaid is a means-tested entitlement program that finances the delivery of primary and acute
medical services as well as long-term care.1 Participation in Medicaid is voluntary for states,
though all states, the District of Columbia, and five territories choose to participate. Each state
designs and administers its own version of Medicaid under broad federal rules, and Medicaid is
jointly financed by the federal government and the states.
States incur Medicaid costs by making payments to service providers (e.g., for beneficiaries’
doctor visits) and performing administrative activities (e.g., making eligibility determinations),
and the federal government reimburses states for a share of these costs.2 The federal government’s
share of a state’s expenditures for most Medicaid services is called the federal medical assistance
percentage (FMAP).3 The FMAP varies by state according to each state’s per capita income. For
FY2012, FMAPs range from 50% to 74%, with the federal contribution covering about 57% of
the total cost of Medicaid in a typical year.
The state share of Medicaid expenditures is funded through a variety of sources. At least 40% of
each state’s share of Medicaid expenditures must be financed by the state, and up to 60% of the
state’s share may come from local governments.4 In state fiscal year (SFY) 2009, states reported
that about 78% of the state share of Medicaid costs was financed by state general funds (most of
which are raised from personal income, sales, and corporate income taxes). The remaining 22%
was financed by other funds (including local government funds, provider taxes, fees, donations,
assessments, and tobacco settlement funds).5
Currently, many states use provider taxes to finance a portion of their state share of Medicaid
expenditures. Federal statute and regulations define a provider tax as a health care-related fee,
assessment, or other mandatory payment for which at least 85% of the burden of the tax revenue
falls on health care providers.6 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). States are not allowed to hold the providers harmless for the cost of the
provider tax (i.e., they cannot guarantee that providers receive their money back).7 In addition,
provider tax revenue is prohibited from exceeding 25% of the state share of Medicaid
expenditures.8
1 For more information about the Medicaid program, see CRS Report RL33202, Medicaid: A Primer, by Elicia J. Herz.
2 For a broader overview of financing issues, see out-of-print CRS Report RS22849, Medicaid Financing, by April
Grady (available from the author).
3 For more information about the FMAP, see CRS Report RL32950, Medicaid: The Federal Medical Assistance
Percentage (FMAP), by Evelyne P. Baumrucker and Alison Mitchell.
4 Section 1902(a)(2) of the Social Security Act.
5 National Association of State Budget Officers, 2009 State Expenditure Report, December 2010.
6 Section 1903(w)(3)(A) of the Social Security Act. 42 C.F.R. 433.55.
7 Section 1903(w)(3) of the Social Security Act. 42 C.F.R. 433.68. These requirements are explained in more detail in
the “Federal Statutes and Regulations” section below.
8 Section 1903(w)(5)(A).
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Medicaid Provider Taxes
States are able to use revenues from provider taxes to help finance the state share of Medicaid
expenditures when certain conditions are met. In FY2012, a vast majority of states and the
District of Columbia are using at least one provider tax to 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 revenue to fund other Medicaid or non-Medicaid purposes.
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 state’s currently use such taxes. The report ends with a
discussion of the provider tax provisions in various deficit reduction proposals.
States’ Initial Use of Provider Taxes in the 1980s
In the mid-1980s, states began using provider taxes along with provider donations9 to help
finance Medicaid. Essentially, Medicaid providers would donate funds or agree to be taxed, and
the revenue from these taxes and donations would be used to finance a portion of the state’s share
of Medicaid expenditures. In some cases, Medicaid providers initiated these provider tax and
donation arrangements because states would often use the provider tax and donation revenue to
raise Medicaid payment rates. Plus, these arrangements were often designed in such a way as to
hold the Medicaid providers harmless for the cost of their taxes or donations.10
Here is an example of how the provider tax arrangements operated in the 1980s. In a state,
hospitals with high Medicaid utilization could agree to pay $10 million in provider taxes, and the
state would increase Medicaid reimbursement rates for hospitals with high Medicaid utilization
by $20 million. Assuming the state had a 60% FMAP, the state would then receive $12 million in
federal Medicaid matching funds (60% of $20 million). In the end, hospitals with high Medicaid
utilization would have gained $10 million ($20 million in increased Medicaid rates minus $10
million in tax payments), the state would have gained $2 million ($22 million from the hospitals
and the federal government minus the $20 million paid to the hospitals), and the federal
government would have paid $12 million.11
Essentially, states were borrowing funds from Medicaid providers in order to draw down federal
funds and increase Medicaid payment rates to the providers that had paid taxes or donated funds.
The providers were often fully reimbursed for the cost of their tax payment or donation. For this
reason, provider tax mechanisms were politically viable for states.
9 Provider donations are any donation or other voluntary payment made to a state or unit of local government by a
health care provider. Section 1903(w)(2) of the Social Security Act.
10 Andy Schneider, Risa Elias, Rachel Garfield, David Rousseau, and Victoria Wachino, The Medicaid Resource Book,
Kaiser Commission on Medicaid and the Uninsured, July 2002.
11 In this example, the provider tax arrangement allowed for hospitals with high Medicaid utilization to receive
increased Medicaid payment rates. Without the provider tax arrangement, the Medicaid payment rates to hospitals with
high Medicaid utilization would have been less.
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Medicaid Provider Taxes
These financing arrangements became a point of contention between the federal government and
the states. While not all states were using these Medicaid financing strategies, some states were
particularly aggressive in their use of provider taxes and donations in financing Medicaid. This
aggressive use of these Medicaid financing strategies motivated congressional action to curb
states’ use of the provider tax and donation arrangements.
Federal Statutes and Regulations
In 1991, Congress passed the Medicaid Voluntary Contribution and Provider-Specific Tax
Amendments (P.L. 102-234) to restrict the use of provider donations in financing Medicaid to
extremely limited situations12 and to limit states’ ability to draw down federal Medicaid matching
funds with provider tax revenue.13
The 1991 law defines a provider tax as any licensing fee, assessment, or other mandatory
payment in which 85% or more of the burden falls upon health care providers. In order for states
to claim federal matching payments for provider tax revenues, the 1991 law
• requires provider taxes to be 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)—in other words, states cannot limit the
provider taxes to only Medicaid providers;
• prohibits taxes that exceed 25% of the state (or non-federal) share of Medicaid
expenditures; and
• prohibits states from a direct or indirect guarantee that providers receive their
money back (or be “held harmless”).
The Secretary of Heath and Human Services (HHS) is authorized to waive the broad-based and
uniform requirements of provider taxes. In order to waive either the broad-based or uniform
requirement, a state needs to prove that the net impact of the tax is “generally redistributive” and
the amount of the tax is not directly correlated to Medicaid payments.14
“Generally redistributive” is defined as the tendency of a state’s provider tax to derive revenues
from non-Medicaid services in a class and to use these revenues as the state’s share of Medicaid
expenditures. According to the quantitative tests set forth in regulation, a provider tax is perfectly
redistributive if the tax burden for Medicaid providers is the same under a tax without the waiver
12 Provider donations are permissible if they do not exceed $5,000 per year in the case of an individual provider or
$50,000 per year in the case of a “health care organization entity” (42 C.F.R. 433.66(a)(1)). Also, provider donations
are allowed if the donations are made by a hospital, clinic, or similar entity (such as federally qualified health centers)
for the direct costs of state or local agency personnel who are stationed at the facility to determine the eligibility of
individuals for Medicaid or to provide outreach services to eligible (or potentially eligible) Medicaid individuals (i.e.,
outstationed eligibility workers) (42 C.F.R. 433.66(a)(2)). Provider donations for outstationed eligibility workers may
not exceed 10% of a state’s administrative costs for the Medicaid program (42 C.F.R. 433.67).
13 The statute regarding provider taxes can be found in Section 1903(w) of the Social Security Act, and the
accompanying regulations can be found at 42 C.F.R. Part 433.
14 Rural and sole community providers are expressly cited as allowable exemptions to both the broad-based and
uniform requirements with Secretary approval.
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Medicaid Provider Taxes
as under the tax with the waiver. The redistributive nature of a provider tax increases as the tax
burden falls more heavily on providers with relatively fewer Medicaid patients.15
Classes of Providers
The specified 19 classes of providers used to ensure that tax programs are “broad-based” are
those that provide the following: 16
• inpatient hospital services,
• outpatient hospital services,
• nursing facility services,
• services of intermediate care facilities for the mentally retarded,
• physicians’ services,
• home health care services,
• outpatient prescription drugs,
• services of Medicaid managed care organizations (including health maintenance
organizations, preferred provider organizations, and such other similar
organizations as the Secretary may specify by regulation),17
• ambulatory surgical centers,
• dental services,
• podiatric services,
• chiropractic services,
• optometric/optician services,
• psychological services,
• therapist services,18
• nursing services,19
• laboratory and X-ray services,20
15 Health Care Financing Administration, “Medicaid Program; Limitations on Provider-Related Donations and Health-
Care Related Taxes; Limitations on Payments to Disproportionate Share Hospitals,” 57 Federal Register 55118,
November 24, 1992.
16 42 C.F.R. 433.56.
17 The Deficit Reduction Act of 2005 (DRA, P.L. 109-171) modified this class of providers by changing “Medicaid
managed care organizations” to all “managed care organizations.” This change further broadened the group upon which
a tax could be imposed, thereby reducing the potential for abusive tax programs.
18 Therapist services include physical therapy, speech therapy, occupational therapy, respiratory therapy, audiological
therapy, and rehabilitative specialist services.
19 Nursing services include nurse midwives, nurse practitioners, and private duty nurses.
20 Laboratory and X-ray services are defined as services provided in a licensed, free-standing laboratory or X-ray
facility. The definition does not include laboratory or X-ray services provided in a physician’s office, hospital inpatient
department, or hospital outpatient department.
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• emergency ambulance services, and
• other health care items or services for which the state has enacted a licensing or
certification fee.21
Requiring that all providers within a class be taxed, as opposed to only Medicaid providers,
dampened the appeal of provider taxes. Prior to the 1991 law, provider taxes were often imposed
only on Medicaid providers. These provider tax arrangements were agreed to (and sometimes
initiated) by the Medicaid providers because the Medicaid providers could be held harmless from
the cost of the tax through increased Medicaid payment rates. However, because non-Medicaid
providers cannot be as easily held harmless from the cost of the tax, the broad-based requirement
restricted the use of provider taxes because the non-Medicaid providers are more likely to oppose
the imposition of provider taxes.
Hold Harmless
Regulations describe three tests that are applied to provider taxes in order to determine whether
taxpayers are held harmless. Taxes that fail any of these tests are determined to have a hold
harmless provision in violation of the law. The three tests are as follows:
• A positive correlation test is used to determine whether a state or other unit of
government imposing the tax provides directly or indirectly for a non-Medicaid
payment to the taxpayers in an amount that is positively correlated to either the
tax amount or the difference between their Medicaid payment and the tax
amount.22
• The Medicaid payment test is violated if all or any portion of the Medicaid
payment to the taxpayer varies based only on the amount of the total tax
payments.
• The guarantee test is violated if the state or other unit of government imposing
the tax provides directly or indirectly for any payment, offset, or waiver that
guarantees to hold taxpayers harmless for all or a portion of the tax.
Under the guarantee test, the existence of an indirect guarantee is determined through a two-
prong test. The first prong of the guarantee test relates to the rate at which taxpayers are taxed.
That is, if the provider tax is applied at a rate less than 6%23 of the net patient service revenues
received by the taxpayer, the tax is permissible under the guarantee test.24
21 The licensing or certification fee must be broad-based and uniform. In addition, the payer of the fee cannot be held
harmless for the cost of the fee. Also, the aggregate amount of the fee cannot exceed the state’s estimated cost of
operating the licensing or certification program.
22 An example of a violation of the positive correlation would be if a state gave a portion of the tax revenue to private
pay patients in the form of grants in order to compensate the patients for the tax added to their bill from the provider.
23 For the period of January 1, 2008, through September 30, 2011, the Tax Relief and Health Care Act of 2006 (P.L.
109-432) changed the threshold to 5.5% of net patient service revenues. On October 1, 2011, the threshold reverted to
6% of net patient service revenues.
24 42 C.F.R. 433.68(f)(3)(i)(A). Some interpret this provision as a waiver of the hold harmless tests when the tax is
applied at a rate below the 6% threshold. For this reason, the threshold has been referred to as a “safe harbor.”
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The second prong of the guarantee test is the “75/75 rule,” which is applied to provider taxes
imposed at a rate greater than the threshold amount specified in the first prong of the guarantee
test (currently 6%). When the provider tax produces revenue in excess of the threshold amount,
the tax is considered to hold the taxpayers harmless (i.e., violate the hold harmless test) if more
than 75% of the taxpayers in the provider class receive 75% or more of the cost of the tax back
through enhanced Medicaid payments or other state payments.25
In other words, a state can impose a provider tax above the threshold amount (currently 6%) and
draw down federal matching funds on the tax revenue, as long as the state can prove that the
“75/75 rule” has not been violated (i.e., more than 75% of the taxpaying providers do not receive
more than 75% of the cost of the tax back through enhanced Medicaid rates).
If a state imposes a provider tax above the threshold amount and violates the “75/75 rule” (i.e.,
more than 75% of the taxpaying providers receive more than 75% of the cost of the tax back
through enhanced Medicaid rates), then the full amount of the tax revenue would be offset from
the state’s Medicaid expenditures. This means the provider tax revenue could still be used to fund
Medicaid, but the state would not be able to draw down federal Medicaid matching funds on the
provider tax revenue. Specifically, the revenue from provider taxes that do not meet federal
requirements would be deducted from the state’s Medicaid expenditures prior to the calculation of
the federal financial participation.26
To date, no state has imposed a provider tax at a rate above the threshold amount specified in the
first prong of the guarantee test.
States’ Current Use of Provider Taxes
States’ use of provider tax revenue varies from state to state, but states often use provider tax
revenue to draw down federal Medicaid matching funds in order to increase Medicaid payment
rates for the same providers that are responsible for paying the tax.27 A simple example of this is
illustrated in Figure 1. In this example, a state with a 60% FMAP imposes a provider tax on all
nursing homes in the state, and the state collects $10 million in tax revenue through this provider
tax. The state then increases Medicaid reimbursement rates to nursing homes, which means
nursing homes with Medicaid enrollees receive an additional $8 million. With these Medicaid
expenditures, the state draws down $4.8 million (60% of $8 million) in federal Medicaid
matching funds. In this example, the state was able to increase Medicaid payment rates to nursing
homes without the use of any state general funds, and the state is left with $6.8 million to use for
other Medicaid or non-Medicaid purposes.28
25 42 C.F.R. 433.68(f)(3)(i)(B).
26 42 C.F.R. 433.70.
27 Congressional Budget Office, Budget Options Volume I: Health Care, December 2008.
28 In this example, the provider tax arrangement allowed for nursing homes to receive increased Medicaid payment
rates. Without the provider tax arrangement, the Medicaid payment rates to nursing homes would have been less.
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Figure 1. Provider Tax Example for a State with 60% FMAP
Using Nursing Home Provider Tax Revenue to
Increase Medicaid Reimbursement Rates to Nursing Homes
Source: Teresa A. Coughlin and Stephen Zuckerman, States’ Use of Medicaid Maximization Strategies to Tap
Federal Revenues: Program Implications and, Urban Institute, June 2002. Based on Figure 1.
A vast majority of states use at least one provider tax to help finance Medicaid. While federal
requirements allow states to impose taxes on 19 classes of 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. Details regarding the types of provider taxes used by each state is provided in
Table A-1 of the Appendix.
Provider Tax Revenue
The full amount of provider tax revenues used by states to help finance the state share of
Medicaid expenditures is unknown. The Center for Medicare & Medicaid Services (CMS)
collects some information from states regarding the amount of provider tax revenue through data
included on the CMS-64 form,29 but this information is underreported. The National Association
of State Budget Officers (NASBO) augments the information collected by CMS, but the NASBO
information is also incomplete.
29 States submit the CMS-64 form to CMS on a quarterly basis, and the CMS-64 form is a statement of expenditures for
which states are entitled to federal Medicaid matching funds. States are required to provide supporting documentation
for total Medicaid expenditures. The provider tax information is reported in section CMS-64.11A of the form, and the
provider tax information is provided to CMS for informational rather than reimbursement purposes.
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A portion of the CMS-64 form collects information regarding the provider donations, taxes, fees,
and assessments collected by states. While states are required to provide this information to CMS
for informational purposes, states report this information inconsistently, and the provider tax
information is likely underreported. For example, in FY2010, 13 states did not report any
provider tax revenue on the CMS-64 form, even though 45 states and the District of Columbia
reported having at least one provider tax during that period of time.30
NASBO publishes an annual state expenditures report31 that provides information regarding the
state and federal shares of Medicaid expenditures. The report specifies the sources of the states’
share of Medicaid expenditures as either state general funds or “other state funds,” which are
revenues collected by the state that are restricted by law for particular governmental functions or
activities. Provider taxes comprise a significant portion of “other state funds,” while tobacco tax
revenue, donations, and local funds are also common sources of “other state funds.”
The primary source for NASBO’s “other state funds” information is the CMS-64 expenditure
data, but NASBO augments this data. Specifically, NASBO collects detailed information from
some states regarding the amount of provider taxes, fees, donations, assessments, and local funds
used to finance the state share of Medicaid expenditures. However, NASBO acknowledges that
its State Expenditure Report does not capture 100% of the provider taxes, fees, assessments, and
local funds used to finance the state share of Medicaid expenditures.
The available data (shown in Figure 2), while limited, indicate a trend showing that states’ use of
“other state funds” has increased significantly as a percent of the state share of Medicaid
expenditures since SFY1990. Also, during the most recent recession, the data indicate that states’
use of “other state funds” increased from 20% to almost 28% of the state share.32
30 Vernon K. Smith, Kathleen Gifford, Eileen Ellis, et al., Hoping for Economic Recovery, Preparing for Health
Reform: A Look at Medicaid Spending, Coverage and Policy Trends, Results from a 50-State Medicaid Budget Survey
for State Fiscal Years 2010 and 2011, Kaiser Commission on Medicaid and the Uninsured, September 2010.
31 National Association of State Budget Officers, State Expenditure Report: Fiscal Year 2009, fall 2010.
32 Ibid.
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Figure 2. General Fund and Other State Funds
as a Percentage of the State Share of Medicaid Expenditures
(SFY1990 to SFY2010 estimate)
Source: National Association of State Budget Officers, State Expenditure Report.
Note: SFY = state fiscal year.
During Economic Downturns
Because all states (except Vermont) have balanced budget requirements, funding Medicaid
expenditure growth during economic downturns can be challenging. Medicaid spending is
countercyclical, which means Medicaid enrollment expands and expenditures grow when the
economy is weak. At the same time, states’ tax collection ability can be strained, making it more
difficult for states to maintain funding for all state programs. For these reasons, states are more
likely to impose or increase provider taxes during economic downturns in order to generate
additional revenue to finance Medicaid.
For example, during the most recent recession (December 2007 to June 2009), a number of states
took action to generate additional provider tax revenue. Figure 3 shows the number of states that
took at least one action to generate additional provider tax revenue in each year, since SFY2009.
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Figure 3. Number of States Taking Action to Generate
Additional Provider Tax Revenue
(SFY2009 to SFY2012 proposed)
Source: National Association of State Budget Officers, The Fiscal Survey of States.
Note: SFY = state fiscal year.
A Government Accountability Office (GAO) analysis33 found that, during the period of February
2009 through July 2010, 10 states and the District of Columbia reported implementing 28
different provider tax actions to generate additional revenue. These actions consisted of 15 new
provider taxes and 13 increases to existing provider taxes. States concentrated their actions on a
few classes of providers, with hospitals and nursing facilities accounting for 21 of the 28 tax
actions.
Traditionally, states have used provider tax revenue to maintain or increase Medicaid provider
payment rates. For example, during the recession in the early 2000s, many states were able to
avoid reducing Medicaid reimbursement rates to nursing homes by increasing nursing home
provider tax revenue along with other funding sources, such as tobacco settlement funds, budget
stabilization funds, and cigarette taxes.34 However, during the most recent recession, the revenue
from provider taxes was not always used to preserve or increase the reimbursement rates of the
providers being taxed. In GAO’s 2010 analysis, it found that states reduced or froze Medicaid
payment rates for at least half of the providers that experienced new or increased provider taxes,
which means states used the additional provider tax revenue to fund other Medicaid or non-
Medicaid purposes.35
33 Government Accountability Office, Recovery Act: Opportunities to Improve Management and Strengthen
Accountability over States’ and Localities’ Uses of Funds, September 2010, GAO-10-999.
34 Government Accountability Office, Medicaid Nursing Home Payments: States’ Payment Rates Largely Unaffected
by Recent Fiscal Pressures, October 2003, GAO-04-143.
35 Government Accountability Office, Recovery Act: Opportunities to Improve Management and Strengthen
(continued...)
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Oversight of Provider Taxes
CMS is responsible for determining whether states abide by the statutory and regulatory
requirements pertaining to provider taxes. States are not required to receive CMS approval for
provider taxes that adhere to the federal requirements. However, states seeking waivers from the
broad-based and uniform requirements do need CMS approval.
Current Issues
Federal Deficit Reduction
In a typical year, the federal government funds roughly 57% of the total cost for Medicaid,36 and
these federal Medicaid expenditures account for almost 8% of all federal spending.37 In FY2011,
federal Medicaid payments to states are estimated to amount to $275 billion.38 Federal Medicaid
payments are anticipated to grow significantly beginning in FY2014 due to the expansion of
Medicaid eligibility provided in the Patient Protection and Affordable Care Act (ACA, P.L. 111-
148, as amended).39 As a percentage of gross domestic product (GDP), federal Medicaid
expenditures are expected to increase from about 1.9% of GDP in FY2011 to 2.5% of GDP in
FY2021.40 As a result, controlling federal Medicaid spending has been a focus of federal deficit
reduction proposals, and further limiting states’ use of provider taxes in financing Medicaid is
often identified as a way to reduce federal Medicaid spending.
The President’s deficit reduction proposal includes a provision to phase down the Medicaid
provider tax threshold from the current level of 6% to 3.5% from FY2015 to FY2017. The Office
of Management and Budget estimates this proposal would reduce federal Medicaid expenditures
by $26 billion from FY2015 through FY2021.41
The National Commission on Fiscal Responsibility and Reform recommended restricting and
eventually eliminating states’ use of provider taxes. The commission estimated this provision
would reduce federal Medicaid expenditures by $44 billion from FY2012 through FY2020.42
(...continued)
Accountability over States’ and Localities’ Uses of Funds, September 2010, GAO-10-999.
36 Office of the Actuary, 2010 Actuarial Report on the Financial Outlook for Medicaid, Centers for Medicare and
Medicaid Services, December 2010.
37 Office of Management and Budget, Historical Tables: Budget of the U.S. Government, Fiscal Year 2012.
38 Congressional Budget Office, Spending and Enrollment Detail for CBO’s March 2011 Baseline: Medicaid, March
18, 2011.
39 Historically, Medicaid eligibility was generally limited to low-income children, pregnant women, parents of
dependent children, the elderly, and people with disabilities; however, ACA requires Medicaid coverage for individuals
under the age of 65 with income up to 133% of the federal poverty level. For more information about the ACA changes
to Medicaid, see CRS Report R41210, Medicaid and the State Children’s Health Insurance Program (CHIP)
Provisions in PPACA: Summary and Timeline, by Evelyne P. Baumrucker et al.
40 Congressional Budget Office, The Budget and Economic Outlook, FY2011 to FY2021, January 2011.
41 Office of Management and Budget, Living Within Our Means and Investing in the Future: The President’s Plan for
Economic Growth and Deficit Reduction, September 2011.
42 The National Commission on Fiscal Responsibility and Reform, The Moment of Truth, December 2010.
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The Congressional Budget Office (CBO) provided a budget option to gradually reduce the
provider tax threshold to 3% over a period of three years. CBO estimated this budget option
would reduce federal Medicaid expenditures by $48 billion from FY2010 through FY2019.43
Lowering the threshold for provider taxes would limit states’ ability to use provider taxes in
financing the state share of Medicaid expenditures, which would decrease federal Medicaid
payments to states.44 This would effectively shift more of the Medicaid program’s growing costs
to the states.45 As a result, states would have to weigh the impact of maintaining current Medicaid
reimbursement and/or service levels against other state priorities for spending. They could choose
to constrain Medicaid expenditures by reducing provider payment rates, limiting benefit
packages, or restricting eligibility. These types of programmatic changes could also affect access
to and the quality of medical care for Medicaid enrollees. For example, if states reduced the
Medicaid reimbursement rates to providers, such as hospitals, physician, and nursing homes,
these providers may be less willing to accept Medicaid patients.
43 Congressional Budget Office, Budget Options Volume I: Health Care, December 2008.
44 Ibid.
45 Ibid.
Congressional Research Service
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Medicaid Provider Taxes
Appendix. Types of Provider Taxes Used by States
A vast majority of states use provider taxes to finance Medicaid. As shown in Table A-1, 47 states
and the District of Columbia used at least one provider tax in SFY2012. The three states without
any provider taxes in SFY2012 were Alaska, Delaware, and Hawaii.
Nursing home taxes were the most popular type of provider tax, with 41 states using a nursing
home tax. Hospital and ICF-MR/DD provider taxes were used by a majority of states, with
hospital taxes in 39 states and ICF-MR/DD taxes in 34 states. In addition, 9 states had managed
care taxes, and 12 states had other types of provider taxes.
Table A-1. State-by-State Provider Taxes, by Type, SFY2012
Type of Provider Tax
No
Provider
ICF/MR-
Nursing
Managed
State
Tax
Hospital
DD
Home
Care Other
Alabama
X X X
Alaska
X
Arizona
X
Arkansas
X
X
X
California
X
X
X
Colorado
X X
Connecticut
X
X
X
Delaware
X
District of Columbia
X
X
X
X
Florida
X
X
X
Georgia
X X
Hawaii
X
Idaho
X
X
X
Illinois
X
X
X
Indiana
X
X
X
Iowa
X
X
X
Kansas
X X
Kentucky
X
X
X
X
Louisiana
X X X
Maine
X
X
X
X
Maryland
X
X
X
X
Massachusetts
X X
Michigan
X X
Minnesota
X
X
X
X
X
Mississippi
X
X
X
Missouri
X
X
X
X
Montana
X
X
X
Nebraska
X X
Congressional Research Service
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Medicaid Provider Taxes
Type of Provider Tax
No
Provider
ICF/MR-
Nursing
Managed
State
Tax
Hospital
DD
Home
Care Other
Nevada
X
New
Hampshire
X X
New Jersey
X
X
X
X
X
New
Mexico
X
New York
X
X
X
X
North Carolina
X
X
X
X
North Dakota
X
Ohio
X
X
X
Oklahoma
X X
Oregon
X X
Pennsylvania
X
X
X
Rhode
Island
X X X
South Carolina
X
X
South Dakota
X
Tennessee
X
X
X
X
Texas
X X
Utah
X
X
X
Vermont
X
X
X
X
Virginia
X
Washington
X
X
X
West Virginia
X
X
X
X
Wisconsin
X
X
X
X
Wyoming
X X
Number of States
3
39
34
41
9
12
Source: Vernon K. Smith, Kathleen Gifford, Eileen Ellis, et al., Moving Ahead Amid Fiscal Challenges: A Look at
Medicaid Spending, Coverage and Policy Trends, Results from a 50-State Medicaid Budget Survey for State Fiscal Years
2011 and 2012, Kaiser Commission on Medicaid and the Uninsured, October 2011.
Notes: SFY = state fiscal year; ICF-MR/DD = Intermediate care facilities for individuals with mental retardation
or developmental disabilities.
Author Contact Information
Alison Mitchell
Analyst in Health Care Financing
amitchell@crs.loc.gov, 7-0152
Congressional Research Service
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