Medicaid Provider Taxes: The Gimmick that Exposes Flaws with Medicaid’S Financing

Abstract

Since a large share of state Medicaid expenditures are reimbursed by the federal government, states have a strong incentive to create techniques, such as provider taxes, to limit the amount of those expenditures paid by the state tax base. Through provider taxes, states use money raised by healthcare providers in order to extract additional federal tax dollars. States then use the federal money to increase Medicaid payments or other areas of state spending. Both the Bush and the Obama administrations proposed limiting provider taxes, and the bipartisan Bowles-Simpson Commission endorsed phasing them out. This study demonstrates that provider taxes not only shift Medicaid costs from state governments to the federal government but also increase total Medicaid expenditures. Policymakers should consider moving Medicaid to a fixed-payment structure that would incentivize states to obtain greater value from Medicaid spending and would reflect the original intent that federal Medicaid payments be based on state per capita income.