Federal statute and regulations define a provider tax as a health care-related fee, assessment, or other mandatory payment for which at least 85% of the burden of the tax revenue falls on health care providers. States are not allowed to hold the providers harmless for the cost of the provider tax (i.e., they cannot guarantee that providers receive their money back). Many of these states use the provider tax revenue to increase Medicaid payment rates for the class of providers, such as hospitals, responsible for paying the provider tax. This financing strategy allows states to fund increases to Medicaid payment rates without the use of state funds because the increased Medicaid payment rates are funded with provider tax revenue and federal Medicaid matching funds. States also use provider tax revenue to fund other Medicaid or non-Medicaid purposes. This report provides background regarding states' use of provider taxes in the 1980s and describes the relevant federal statutes and regulations, which were mostly established in the early 1990s. The report explains how states use provider taxes to help finance Medicaid and provides information regarding the extent to which states currently use such taxes. The report ends with a discussion of the provider tax provisions in past and present proposals that would impact Medicaid provider taxes. In order for states to claim federal matching payments for provider tax revenues, the 1991 law
requires provider taxes to be broad-based (i.e., imposed on all providers within a specified class of providers) and uniform (i.e., the same tax for all providers within a specified class of providers)—in other words, states cannot limit the provider taxes to only Medicaid providers; and prohibits states from a direct or indirect guarantee that providers receive their money back (or be "held harmless"). States' Current Use of Provider Taxes

States' use of provider tax revenue varies from state to state, but states often use provider tax revenue to draw down federal Medicaid matching funds in order to increase Medicaid payment rates for the same providers that are responsible for paying the tax. While federal requirements allow states to impose taxes on 19 classes of providers, the classes of providers that are most often taxed include nursing facilities, hospitals, and intermediate care facilities for individuals with intellectual disabilities (ICF/ID). Number of Provider Taxes

States' use of Medicaid provider taxes has increased in recent years. Current Issues

Limiting or eliminating states' use of provider taxes in financing Medicaid has been identified as a way to reduce federal Medicaid spending. A few years ago, there were a few proposals to limit or eliminate states' use of provider taxes, but provider tax proposals had not been discussed in the past couple years. However, recently, the House Energy and Commerce Committee marked up a bill ( H.R. 4725 ) that includes a Medicaid provider tax provision. Types of Provider Taxes Used by States

A vast majority of states use provider taxes to finance Medicaid.
States are able to use revenues from health care provider taxes to help finance the state share of Medicaid expenditures. Federal statute and regulations define a provider tax as a health care-related fee, assessment, or other mandatory payment for which at least 85% of the burden of the tax revenue falls on health care providers. For states to be able to draw down federal Medicaid matching funds, the provider tax must be both broad-based (i.e., imposed on all providers within a specified class of providers) and uniform (i.e., the same tax for all providers within a specified class of providers). Also, states are not allowed to hold the providers harmless for the cost of the provider tax (i.e., states cannot guarantee that providers receive their money back).
A vast majority of states use at least one provider tax to help finance Medicaid. Many of these states use the provider tax revenue to increase Medicaid payment rates for the class of providers, such as hospitals, responsible for paying the provider tax. This financing strategy allows states to fund increases to Medicaid payment rates without the use of state funds because the increased Medicaid payment rates are funded with provider tax revenue and federal Medicaid matching funds. States also use provider tax revenues to fund other Medicaid or non-Medicaid purposes.
States first began using health care provider taxes to help finance the state share of Medicaid expenditures in the mid-1980s. Some states were particularly aggressive in their use of provider taxes. As a result, in the early 1990s, the federal government imposed statutory and regulatory limitations on states' use of health care provider tax revenue to finance Medicaid.
While federal requirements allow states to impose provider taxes on 19 classes of health care providers, the classes of providers that are most often taxed include nursing facilities, hospitals, and intermediate care facilities for individuals with intellectual disabilities (ICF/ID). States' use of Medicaid provider taxes has increased in recent years.
Limiting or eliminating states' use of provider taxes in financing Medicaid has been identified as a way to reduce federal Medicaid spending. A few years ago, there were a few proposals to limit or eliminate states' use of provider taxes, but provider tax proposals had not been discussed in the past couple years. However, recently, the House Energy and Commerce Committee marked up a bill (H.R. 4725) that includes a Medicaid provider tax provision.
This report provides background regarding states' use of provider taxes in the 1980s and describes the relevant federal statutes and regulations, which were mostly established in the early 1990s. The report explains how states use provider taxes to help finance Medicaid and provides information regarding the extent to which states currently use such taxes. The report ends with a discussion of past and present proposals that would impact Medicaid provider taxes.