Download Fiscal Fact 203: Medicaid and State Health Provider Taxes
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.)
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Table 1 |
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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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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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