Volume 25.05
For many years, states have imposed broad-based taxes on healthcare providers. These taxes were used by the respective states to secure additional federal funding to support Medicaid payments to those healthcare providers. These taxes were acceptable to the federal government if the tax met certain requirements.
The tax imposed by the state must generally be broad-based, meaning that the tax is imposed on a class of providers. By using the tax receipts, a state may then draw down additional federal funds to increase Medicaid payments or Medicaid payment rates to healthcare providers serving Medicaid eligible beneficiaries.
States are not required to use health care-related taxes to finance the non-federal share of Medicaid payments even though this is frequently done.
These taxes may be used for other purposes determined by the respective state.
The taxes may only be imposed on certain groups of health care items or services and:
- The tax must broad-based,
- The tax must be applied uniformly, and
- The tax must not have any hold harmless provisions, meaning basically a healthcare provider cannot be assured to recover the tax payments through additional Medicaid or other payments from the state.
Providers that can be charged a healthcare tax are:
- Inpatient hospital services
- Outpatient hospital services
- Nursing facility services
- Services of intermediate care facilities for the mentally retarded
- Physician services
- Home health services
- Outpatient prescription drugs
- Services of managed care organizations
- Others determined appropriate by the Secretary
The problem with the broad-based aspect of the tax is that the tax is equally imposed on healthcare providers not serving or serving limited Medicaid eligible beneficiaries. These providers may not recover the tax paid due to the limited Medicaid eligible beneficiaries served, whereas providers serving high volumes of Medicaid beneficiaries can recover the tax through additional Medicaid payments from the respective state agency.
Certain states have applied for waivers to the broad-based aspect of the tax. These waivers are directed at taxing Medicaid payments to providers at one rate and taxing non-Medicaid payments at a lower rate. According to CMS, the intent of the multiple tax rate is to reduce the financial impact on those providers serving few Medicaid eligible beneficiaries, who previously could not recover the tax payments due to limited services to Medicaid eligible patients even though the respective state was utilizing the taxes to secure additional federal funding for Medicaid programs.
Without a waiver of the broad-based requirement, many healthcare providers were not happy with the tax as it was viewed as a redistribution of money between healthcare providers, money from those serving no or few Medicaid patients to those serving large numbers of Medicaid patients.
The proposed rule, titled “Preserving Medicaid Funding for Vulnerable Populations – Closing a Health Care-Related Tax Loophole Proposed Rule” scheduled to be published on May 15, 2025, would not allow health care-related taxes to be applied on the healthcare provider to be higher based on Medicaid activity than imposed on non-Medicaid activity. The proposed rule can be viewed here.