Medicaid Provider Tax Changes in ACA Expansion States Could Cut Funding and Coverage

The House recently passed the One Big Beautiful Bill Act, which aims to reduce federal Medicaid spending by $793 billion over 10 years. A significant portion of these savings, over 10%, comes from provisions impacting provider taxes, including a moratorium on new or increased state provider taxes.

The Senate Finance Committee expanded this provision to include a gradual reduction in existing provider taxes for states that have adopted the Affordable Care Act (ACA) Medicaid expansion. Specifically, the safe harbor limit on these taxes, currently 6%, would be reduced by 0.5% annually until reaching 3.5%, exempting nursing and intermediate care facilities. This impacts 22 states with ACA expansions, potentially cutting a crucial source of Medicaid funding from hospitals and managed care organizations. Provider taxes, used by nearly all states except Alaska to finance the state share of Medicaid, must comply with federal laws, including a cap (safe harbor) designed to prevent states from guaranteeing providers will recoup taxes paid through higher Medicaid payments. Past estimates by the Congressional Budget Office suggest lowering this safe harbor limit could yield substantial federal savings. However, the reduction may lead to lower hospital payment rates or cuts in Medicaid eligibility and coverage in expansion states.

The House bill is estimated to increase the number of uninsured individuals by 10.9 million, with provider tax provisions contributing to 400,000 additional uninsured. Reduced access to provider tax funding may force states to make policy decisions with negative impacts on coverage and reimbursement. This analysis highlights the financial and policy implications of proposed Medicaid provider tax changes for ACA expansion states, signaling potential challenges to state Medicaid financing, provider reimbursement, and coverage levels.