Republicans Say States Are Pulling A Fast One On Medicaid

Republicans in Congress see a way around the $880 billion budget shortfall they need to fill to extend President Donald Trump’s tax cuts set to expire at the end of the year.

States aren’t going to like it.

To qualify for federal Medicaid dollars, states must also kick in their own matching funds. GOP lawmakers want to stop states from taxing insurers and health care providers to raise that money, a maneuver that would leave states with a $612 billion hole in their budgets over the next decade.

Republican leaders, who are under pressure from some of their rank and file to protect Medicaid, say getting rid of the taxes would not be a funding cut, but elimination of a loophole. They argue that states are inflating Medicaid costs because they kick back the taxes to providers and insurers through higher payment rates — and also sometimes spend the money on items unrelated to Medicaid.

“States and providers scheme so that the provider gets an enormous flow of federal dollars with no state cost exposure,” said Brian Blase, who served in President Donald Trump’s first administration and has pitched restrictions on the state taxes at his think tank, the Paragon Health Institute.

House Energy and Commerce Chair Brett Guthrie (R-Ky.), who’s in charge of finding the $880 billion in savings by the time Republicans plan to vote on their budget bill in April, told POLITICO that he’s looking closely at the state taxes.

The levies became even more of a target after Speaker Mike Johnson said Congress would not use two other methods the GOP had considered to raise revenue: imposing caps on federal payments based on Medicaid enrollment in states or reducing the percentage of state spending the federal government matches.

Medicaid is funded jointly by states and the federal government. States can draw upon a variety of funding sources, including their general funds. States have used the provider taxes to juice their federal matching funds since the mid-1980s.

Barring states from drawing federal matching funds for the taxes would hit red and blue states. Every state except for Alaska levies provider taxes.

Republicans are already getting pushback.

Last week, New Jersey Gov. Phil Murphy, a Democrat, released a report detailing the potential blow to his state’s budget if Republicans cut funding to the states, including by restricting matching funds for provider taxes.

“It’s crucial for stakeholders, advocates, policymakers, and recipients to fully understand the potential repercussions on health care and services if these proposals are enacted into law,” said Sarah Adelman, New Jersey’s human services commissioner, in a statement to POLITICO. “We urge Congressional leaders to protect the integrity of Medicaid and uphold the commitment to those who rely on it every day.”

Advocates for Medicaid patients say Republicans are wrong to call the taxes abusive.

“This is just an attempt to cut a critical source of state share that states use by inaccurately calling it money laundering to disguise a cut to Medicaid,” said Joan Alker, executive director and co-founder of the Center for Children and Families at Georgetown University, during a media briefing on Tuesday.

And hospitals, which pay the taxes and are also speaking out forcefully against Medicaid cuts, say the taxes help boost the quality of care and access to it.

“States would have to make difficult decisions about how to fill the gaps, including raising taxes on residents, reducing eligibility for some Medicaid populations such as children, elderly, or disabled individuals, or reducing Medicaid benefits,” said the American Hospital Association in a statement.

But the reason hospitals don’t mind paying the taxes, Republicans say, is because states are manipulating the way federal matching funds are set to increase payment rates to providers — essentially directing the taxes back to them.

In 2022, 27 percent of states’ Medicaid share was funded by outside sources like provider taxes, according to an analysis from the National Association of State Budget Officers. A state can also rely on contributions from local governments to help cover its share of Medicaid funding.

The federal government pays its share of Medicaid funding based on a matching rate — covering a minimum of 50 percent of states’ Medicaid costs.

Republicans have yet to detail how they might set limits on state taxes.

There already are several restrictions on them. A state can only tax up to 6 percent of a provider’s revenue and has to levy the tax on providers who both do and do not participate in Medicaid.

The House Budget Committee earlier this year released a list of programs that could be subject to cuts in the upcoming budget bill. One of the proposals was to phase down the cap on taxes from 6 percent to 3 percent by 2028, leading to $175 billion in savings over a decade.

A 2022 report from the Congressional Research Service, a nonpartisan budget scorekeeper, found that getting rid of the taxes altogether could create savings of $612 billion over 10 years, making up the majority of the $880 billion in cuts Energy and Commerce needs to make.

For now, the panel is figuring out its next steps and what can get support from Republicans’ narrow House majority.

Rep. Buddy Carter (R-Ga.), chair of the Energy and Commerce Health Subcommittee, told POLITICO that the state taxes are in the mix.

“With Medicaid, we're concentrating on waste, fraud and abuse,” he said. “If it's waste, fraud and abuse, then it's in danger of being cut.”

Kelly Hooper and Daniel Han contributed to this report.