State Hospital and Medical Provider Taxes: Not What the Doctor Should Order

December 09, 2009

Fiscal Fact No. 203

Summary

Taxing health care to pay for health care seems counterintuitive, but it is increasingly popular with state governments. Budgets are strained and Medicaid demand is up. In response, states are raising many taxes, and health care providers are an increasingly popular target because the revenue raised from those taxes can be used to obtain a larger amount of federal matching funds. States shift Medicaid revenues to their general funds while shifting Medicaid costs to the federal government.

Twenty-two states have significant health provider or hospital taxes, and six of those have been enacted or expanded within the last year. Four enactments or expansions are pending.

Background and Analysis

Medicaid is financed at both the federal and state levels. When states raise money they plan to spend on Medicaid, they receive matching funds from the federal government depending on the state's level of poverty and unemployment. For example, during Federal Fiscal Year 2009, Mississippi had the highest federal matching fund rate (Federal Medical Assistance Percentages, FMAP) and received $5.10 for each dollar the state spent on Medicaid. For each dollar Wyoming spent on Medicaid, the feds kicked in $1.28-the lowest rate in the country. The American Recovery and Reinvestment Act of 2009 provides increased matching rates for Medicaid during the period October 1, 2008 through December 31, 2010, totaling an additional $87 billion in federal funding. (Table 1 shows data on state health provider taxes and the federal matching that can result.)

Table 1
States with Health Provider Taxes

States

Federal Matching Funds Rate (FY2009 FMAP, ARRA rates)

Federal Contribution for Every State Medicaid Dollar Spent[1]

With Significant Provider or Hospital Taxes

Enacted or Expanded within Last Year

Tax or Expansion Proposed Recently

Alabama

76.6%

$3.28

 

 

 

Alaska

58.7%

$1.42

 

 

 

Arizona

75.0%

$3.00

 

 

 

Arkansas

79.1%

$3.79

X

 

X

California

61.6%

$1.60

X

X

 

Colorado

58.8%

$1.42

X

X

 

Connecticut

60.2%

$1.51

 

 

 

Delaware

60.2%

$1.51

 

 

 

Florida

67.6%

$2.09

X

 

 

Georgia

73.4%

$2.76

 

 

 

Hawaii

66.1%

$1.95

 

 

 

Idaho

78.4%

$3.62

 

 

 

Illinois

60.5%

$1.53

X

 

 

Indiana

73.2%

$2.73

 

 

 

Iowa

68.8%

$2.20

 

 

 

Kansas

66.3%

$1.96

X

 

 

Kentucky

77.8%

$3.50

X

 

 

Louisiana

80.0%

$4.00

 

 

 

Maine

72.4%

$2.62

X

 

 

Maryland

58.8%

$1.42

 

 

 

Massachusetts

58.8%

$1.42

X

 

 

Michigan

69.6%

$2.28

X

 

X

Minnesota

60.2%

$1.51

X

 

 

Mississippi

83.6%

$5.10

X

 

 

Missouri

71.2%

$2.47

X

X

 

Montana

76.3%

$3.21

X

 

 

Nebraska

65.7%

$1.91

 

 

 

Nevada

63.9%

$1.77

 

 

 

New Hampshire

56.2%

$1.28

 

 

 

New Jersey

58.8%

$1.42

 

 

 

New Mexico

77.2%

$3.39

 

 

 

New York

58.8%

$1.42

X

 

 

North Carolina

73.6%

$2.78

 

 

 

North Dakota

70.0%

$2.32

 

 

 

Ohio

70.3%

$2.36

X

X

 

Oklahoma

74.9%

$2.99

 

 

 

Oregon

71.6%

$2.51

X

X

 

Pennsylvania

63.1%

$1.70

 

 

 

Rhode Island

63.9%

$1.76

X

 

 

South Carolina

78.6%

$3.66

X

 

 

South Dakota

68.8%

$2.20

 

 

 

Tennessee

73.3%

$2.73

 

 

 

Texas

68.8%

$2.20

 

 

 

Utah

77.8%

$3.51

 

 

 

Vermont

67.7%

$2.09

X

 

X

Virginia

58.8%

$1.42

 

 

 

Washington

60.2%

$1.51

 

 

X

West Virginia

80.5%

$4.11

X

 

 

Wisconsin

65.6%

$1.90

X

X

 

Wyoming

56.2%

$1.28

 

 

 

Sources: Tax Foundation; Department of Health and Human Services; National Conference of State Legislatures.

A tactic used by some states for bridging their budgetary gaps is to tax health care providers, use the collected revenue to qualify for additional matching funds from the federal government, and then use those federal dollars to compensate Medicaid providers. Medicaid is an entitlement program, and so long as states meet eligibility criteria, federal matching is open-ended. As states get more federal funds for Medicaid, the federal government must tax or borrow to pay for this spending increase.

In 2009, Wisconsin Governor Jim Doyle signed into law a state budget including a 20% increase in the health provider tax enacted just three months earlier. The increase would result in federal Medicaid matching funds increasing from $635 million to $796 million. It is estimated that $292 million of that amount will be used for non-Medicaid purposes.[2] In 2004, the U.S. government's General Accounting Office (now the Government Accountability Office) reported that intergovernmental transfers-transfers of funds from one government agency to another-have enabled states to funnel Medicaid matching funds into state general coffers.[3] Table 2 shows recent estimates for the "returns" on hospital taxes.

Table 2
Recent Estimates on Return from Hospital Tax ($Millions)

States Provider Tax Revenue ($Millions) Federal Matching Funds ($Millions)
Arkansas $40 $100
California $2,000 $2,300
Colorado $600 $600
Michigan $300 $525
Missouri* $1,100 $1,800
Ohio $718 $1,800
Oregon $700 $1,000

* Reported from previous year, State FY 2008

It might seem strange to see doctors or hospital associations cheering taxes of health providers, but they often benefit because states increase payments to providers of Medicaid services along with the tax. While a hospital may pay a new tax to the state, it often receives an identical or larger amount in additional reimbursements for services provided. The ultimate purpose of the entire mechanism appears to be just obtaining additional federal funds.

Some health care providers may be harmed by these taxes, however. Generally, when hospital taxes are reimbursed by greater state Medicaid support, the benefits are dependent on the quantity of Medicaid-covered services a doctor or hospital provides. Those that provide little in Medicaid services must pay the tax without much reimbursement. The Ohio Hospital Association opposes their assessment, noting they will not be fully reimbursed from Ohio's $718 million 2009 hospital tax and that most hospitals have had to cut expenses to break even.[4]

Those states most likely to adopt this scheme of enacting or expanding hospital taxes as a way of obtaining federal funds are likely to be the states facing serious budget troubles, especially involving Medicaid payments. These conditions are present in many states recently. With the American Recovery and Reinvestment Act of 2009 increasing the federal matching rate by an average of 8.7%, states have even more incentives to take advantage of hospital taxes. Ultimately, however, health provider taxes are a short-term solution that can undermine health care providers, and rely on the tenuous continued existence of a dysfunctional Medicaid matching fund system.


[1] If the matching rate is 80% for a state, this means that if $1.00 is spent on Medicaid the state spends $.20 and the federal government spends $.80.

[2] Brien Farley, "Wisconsin Seeks More Medicaid Money to Heal Sick State Budget," Budget & Tax News (Dec. 2009), at www.heartland.org/article/26299/Wisconsin_Seeks_More_Medicaid_Money_to_Heal_Sick_State_Budget.html.

[3] "Medicaid: Intergovernmental Transfers Have Facilitated State Financing Schemes," U.S. General Accounting Office (Mar. 18, 2004), at http://www.gao.gov/new.items/d04574t.pdf.

[4] "New State Hospital Tax: Extra Burden in a Failing Economy," Ohio Hospital Association, at http://www.ohanet.org/SiteObjects/57AEE3CFB2585F16682EF98E1BBE3B48/State%20Budget%20Survey%20Report.pdf.

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