Last year’s federal budget reconciliation law, in addition to introducing nearly a trillion dollars in federal health care spending cuts over the next decade, took aim at a tool state governments consider vital in financing their Medicaid programs: provider taxes.
For years, states have used provider taxes, typically on some aspect of hospital activity, to help finance their share of their Medicaid programs; currently, 49 of the 50 states have such taxes. Among other benefits, using provider taxes in this manner has enabled states to avoid using more general fund money for this purpose.
But the 2025 law imposes new limits on provider taxes. Under the new law, states:
- cannot introduce new provider taxes
- cannot increase their current provider taxes
- face a reduction of their current provider taxes if they expanded eligibility for their Medicaid programs under the Affordable Care Act
For now, states face the immediate challenge of how to compensate for revenue no longer available to finance their share of their Medicaid programs. Do they turn to other state revenue sources? Raise taxes? Reduce the scope of their Medicaid programs by reducing eligibility, provider payments, or covered benefits? A combination thereof?
The decisions states ultimately make could have especially serious ramifications for community safety-net hospitals because those hospitals care for larger numbers and higher proportions of Medicaid patients and therefore face a more serious financial threat if their states reduce their commitment to their Medicaid programs.
KFF takes a closer look at the coming changes in Medicaid provider taxes and at these questions and more in the issue brief “5 Questions and Answers About Medicaid and Provider Taxes.”
