Seeking spending cuts, GOP lawmakers target a tax hospitals love to pay

CBS News

07-05-2025

On the eastern plains of Colorado, in a county of less than 6,000 people, Lincoln Health runs the only hospital within a 75-minute drive. The facility struggles financially, given its small size and the area's tiny population.
But for over a decade, the Hugo, Colorado-based health system has remained afloat partially thanks to a surprising source: special taxes on the state's hospitals.
The taxes Lincoln pays help cover the state's Medicaid costs and — because the federal government matches a portion of what states spend on Medicaid — enable Colorado to claim more federal money. That generally leads to more dollars for the hospital. The tax proceeds also have helped Colorado expand Medicaid under the Affordable Care Act to cover 400,000 more low-income adults, significantly reducing the number of people showing up at hospital doors without insurance.
Last year, Lincoln paid $500,000 in provider taxes but netted more than $3.6 million extra from Medicaid, accounting for about 15% of its budget, said Lincoln CEO Kevin Stansbury.
"These dollars allow me to care for patients who are enrolled in Medicaid and to break even rather than lose money," he said. "Without them, it would significantly impact our ability to survive."
Every state except Alaska uses at least one provider tax to boost its federal Medicaid dollars.
But Republicans who control Congress are looking for potential cuts in the nearly $900 billion Medicaid program to help fund an extension of President Trump's tax cuts — and have sought to portray provider taxes as malicious, sometimes even deriding them as "money laundering." Lawmakers say they may curtail or eliminate provider taxes as part of legislation to enact Mr. Trump's domestic agenda.
"It's infuriating," Stansbury said.
Medicaid and the closely related Children's Health Insurance Program together cover roughly 79 million low-income and disabled people and are jointly financed by states and the federal government.
Federal dollars match state payments with no limit. While the split varies based on a state's per capita income, the federal match ranges from 50% to 77% for children, pregnant women, and people with disabilities, who make up most of the enrollment.
States started using provider taxes in the 1980s to help pay their share and gain additional Medicaid funds from the federal government.
Brian Blase, a former Trump health policy adviser who leads the conservative Paragon Health Institute, sees provider taxes as one of the highest forms of waste in Medicaid. States and their hospitals, nursing homes, and other providers aren't held accountable for how the tax money is used, reducing incentives for states to control Medicaid spending, he said.
"This has been a feature of the program for four decades, and it is a feature that is getting worse," Blase said.
The Congressional Budget Office estimates eliminating provider taxes would save the federal government more than $600 billion over a decade.
Rep. Brett Guthrie (R-Ky.), who chairs the House committee that oversees Medicaid, has said provider taxes are on the menu for potential cuts.
Other changes Republicans are considering to cut federal Medicaid spending include requiring adult enrollees to prove they're working as a condition of eligibility, as well as ending higher payments for adults enrolled as part of the Affordable Care Act's expansion of the program.
Since 2014, more than 20 million nondisabled adults in 40 states and Washington, D.C., have gained coverage under the expansion.
House Republicans have set a Memorial Day deadline to come to an agreement on spending cuts, which would help pay for extending about $4 trillion in tax cuts passed during Mr. Trump's first administration and set to expire at the end of this year.
The Government Accountability Office and the Medicaid and CHIP Payment and Access Commission, a congressional advisory board, have raised concerns about the provider taxes, which effectively saddle federal taxpayers with state expenses. Republican and Democrat presidents have criticized or proposed curtailing the use of Medicaid provider taxes — including Mr. Trump in his first term, Barack Obama, and Joe Biden while serving as vice president.
But opposition from hospitals, nursing homes, and states snuffed out any move to limit or end the arrangements.
Colorado and other states often use the money to maintain or increase payments to providers, which are often paid less by Medicaid than by Medicare, the federal program primarily for people 65 or older, or private insurers.
States have added provider taxes to help generate federal money to cope with economic downturns and budget constraints.
Hospitals in Idaho last year began paying an additional provider tax to increase pay to hospitals and home- and community-based providers. The tax came as Idaho's Republican-controlled legislature sought to add many conditions that threatened to end the state's Medicaid expansion — which would also eliminate a key source of increased federal funding.
Brian Whitlock, president and CEO of the Idaho Hospital Association, said funding from the hospital tax helps boost Medicaid payments to about 80% of Medicare's rates instead of 60%.
"We still lose money on every Medicare and Medicaid patient," he said. "The state recognizes that this money helps offset the losses we take under Medicaid reimbursement."
While hospitals and nursing homes have been the main beneficiaries of provider tax proceeds, ambulance services have also paid and benefited from Medicaid taxes. States increasingly have also approved Medicaid taxes on private insurers that operate their Medicaid programs to gain more federal funds.
California's Medicaid managed care tax began in 2009 and is expected to generate nearly $9 billion in net revenue for the 2024-25 fiscal period — or about 5% of the state's Medicaid budget, according to the California Legislative Analyst's Office.
In recent years, California has extended full Medicaid coverage to immigrants lacking permanent legal status. Federal law prohibits federal Medicaid dollars from being used to cover people in the country without authorization, but states can use their own money.
At a presentation to congressional staffers in April, Blase cited California's strategy as an example of provider tax abuse and claimed the state is effectively laundering federal funds to cover people living in the country illegally.
In practice, the tax has been a kind of fiscal pressure valve generally offsetting state spending. A ballot measure that passed in November now requires that much of the money from California's tax specifically be used to increase Medicaid reimbursement to doctors, hospitals, and other providers.
Hospital officials and state Medicaid leaders argue the term "money laundering" is an inaccurate way to describe provider taxes, since they are allowed by federal law. But Blase said calling the levies a "tax" is misleading, pointing out that most businesses don't typically advocate to pay one.
Jamie Whitney, chief legal officer for Texas-based Adelanto HealthCare Ventures, a consulting firm, said that provider taxes are a politically neutral way to help states pay for Medicaid and that curtailing their use would harm them all. "This is not a red-state, blue-state issue," she said.
Colorado is one of more than a dozen states that have funded an ACA Medicaid expansion using provider tax money. Others include Arkansas, Louisiana, Missouri, North Carolina, Ohio, and Virginia.
Colorado implemented its Medicaid provider tax effort in 2009. In the 2024 fiscal year, about $5 billion of the state's $15 billion Medicaid program was funded by provider taxes, according to the state.
The money helps the state pay higher Medicaid reimbursements to hospitals, which reduces their need to charge higher rates to private insurers, said Kim Bimestefer, executive director of the Colorado Department of Health Care Policy and Financing, which oversees Medicaid.
Some of the extra payments are dependent on hospitals meeting certain quality and patient-safety metrics, such as reducing readmission rates after patients are discharged — a requirement state officials say improves care for everyone.
The provider taxes also fund a program allowing working residents with disabilities to buy into Medicaid coverage even if their income is as high as 300% of the federal poverty level, or $46,950 for an individual. About 20,000 people are enrolled in the program.
Among them is Alison Sbrana, 31, of Fort Collins, Colorado, who has a type of chronic fatigue syndrome and relies on Medicaid to cover long-term home care.
"It would be devastating if the benefit went away," said Sbrana, who works as a researcher and activist for those with the same disorder. "I would be forced to stop working to keep my income low enough to qualify."
The state's provider taxes also pay for a $60 million fund to support rural hospitals, helping them add telehealth services, recruit surgeons, and hire paramedics, according to a state report.
Konnie Martin, CEO of San Luis Valley Health, a two-hospital system based in Alamosa, Colorado, said her nonprofit paid $5.4 million in provider taxes last year and gained about $15 million in benefits from higher Medicaid payments and the rural grants.
She said the money helps her hospital maintain obstetrical services, so residents don't have to drive 120 miles to the nearest maternity hospital. Without the birthing center, the entire region would suffer, she said.
"It also would gut the economy of the community, because young people will move away," she said.
KFF Health News correspondent Bernard Wolfson contributed to this report.
KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF — the independent source for health policy research, polling, and journalism.