Medicaid Provider Taxes: A “Charade”

February 05, 2013

By: Nicole Kaeding

Medicaid is dominating state budget battles this year. States must decide whether to expand their Medicaid programs to include all individuals making below 138% of the federal poverty level—approximately $30,000 for a family of four. To finance this costly expansion, proponents are relying on gaming the Medicaid system through a highly technical provision known as “provider taxes.”


Medicaid is a joint state-federal program where the federal government pays between 50 percent and 73 percent of all expenses. Provider taxes manipulate this system by maximizing federal contributions while minimizing state contributions.


Here is how the scenario works: Imagine a state that receives a 50 percent match from the federal government and reimburses a hospital $100 for a procedure. The state would pay $50 and the federal government would pay $50. Now, the state increases the reimbursement to the hospital to $106 and inserts a provider tax on the hospital at 6% (the maximum tax rate allowed). The federal and state government are now paying $53 for the same procedure, but the state gets $6 in tax revenue. The state is in essence paying $47, the hospital receives the same $100 and federal taxpayers lost $3. It’s a scam and federal taxpayers are the ones getting hurt. Now imagine this being played out thousands of times a year in a state.


Sadly, abusing the system like this is completely legal. Forty-nine states and the District of Columbia (Alaska is the only exception) use these provider taxes to milk federal taxpayers out of billions of dollars every year.


Politicians across the political spectrum in Washington realize just how badly provider taxes manipulate the system. The President’s last two budgets included provisions that would have eliminated these taxes. In November, Senator Dick Durbin (D-IL) called provider taxes a “charade.” Senator Bob Corker (R-TN) previously introduced legislation to phase-out these harmful taxes.


As states grapple with whether to expand their Medicaid systems, proponents of expansion are pushing provider taxes as a “simple” way for states to finance the increased expenditures. This is the exact strategy adopted by Governor Jan Brewer in Arizona. Governor Brewer’s plan calls for a 6% tax on all hospitals in the state of Arizona. A similar idea is being pushed by providers in South Carolina to encourage Governor Haley to support expansion.


If the last month is any indication, Medicaid will continue to dominate states’ 2013 legislative sessions. Special-interest groups will devise schemes to game this legal, but disingenuous, system to bleed federal taxpayers for unlimited funds. Governors and legislators would be best to ignore these efforts.



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