Medicaid Provider Tax Cap

Author: Richard Stern

TOPLINE:

The One Big Beautiful Bill (OBBB) reins in provider tax schemes, in which states exploit a loophole in the Federal Medical Assistance Percentage (FMAP) to funnel in extra federal tax dollars.

BACKGROUND:

Medicaid requires states to pay for a portion of total program costs with the remainder being paid for with federal tax dollars. The federal share is the FMAP. The FMAP is higher for states with higher poverty levels and differs for different covered populations. Currently, these rates are between 50% and 77% , meaning that the federal government will generally give states an extra $1 to $3.35, respectively, for each $1 a state contributes. This creates a loophole whereby states could tax healthcare providers, contribute that money to Medicaid spending, and then receive extra money from the federal government to ultimately pay healthcare providers more than what they just paid in provider taxes. States began taking advantage of this scheme in the mid-1980s and then Congress moved to limit this abuse. This loophole became even more lucrative for providers to the Affordable Care Act (ACA) expansion population (able-bodied adults without dependents), for whom the FMAP is 90% (meaning that the federal government will contribute $9 for every $1 spent by states).

What OBBB Did:

• Prevents states and localities from taking additional federal matching funds if they impose new or increased provider taxes only to return the funds back to the providers through higher Medicaid contributions.
• Reduces the maximum provider tax for states with existing provider taxes from 6% of net patient revenue to 3.5%, by 0.5% increments between 2028 and 2032.

Why It Matters?

• Many state governments have used this loophole to game the FMAP and inappropriately rake in tens of billions of taxpayer dollars. Limiting provider taxes undoes this loophole and protects taxpayers.
• Recently, the provider tax loophole has been used mostly to increase federal taxpayer dollars going to able-bodied adults without dependents, as opposed to focusing on the vulnerable populations Medicaid was created to service.

Where Can I Find Changes?

OBBB Section 71115 ; 42 U.S.C. § 1396b (w)(4).

BOTTOMLINE:

When states can push off all the cost of Medicaid expansions onto federal taxpayers, they have little incentive to contain waste, fraud, and abuse.

This memo is part of the One Big Beautiful Booklet , a collection of more than 60 memos that examine and summarize the major aspects of the One Big Beautiful Bill – the signature legislative achievement of President Trump and the 119th Congress.