April 27, 2016

The US House of Representatives Energy and Commerce Committee voted on March 15th to approve HR 4725, named the Common Sense Savings Act. The bill now goes to the full House for consideration. Among a variety of provisions within the bill, HR 4725 would reduce the Medicaid provider tax hold harmless safe harbor level from 6% to 5.5% starting in fiscal year 2018. In this brief, we provide an explanation of provider taxes and additional information about HR 4725.

Provider Tax Basics

Medicaid programs are financed with a combination of funds from both the federal and state governments, and a state pays anywhere from 26% to 50% of the cost for its Medicaid programming depending on a state’s per capita income. In those states that have opted to expand Medicaid under the Affordable Care Act, the states pay even less than 26% of the total costs because the federal government is paying 100% from 2014-2016 of the costs for the expansion population.

One way states may raise funds for their share of Medicaid spending is with a provider tax (also called a fee or assessment). Currently 49 states (all but Alaska) and the District of Columbia use at least one provider tax. When states use the revenue from these taxes to finance Medicaid programs, the federal government provides a matching payment, thus enabling the state to fund more services and/or increase reimbursement rates as they see fit.

Provider taxes are permitted by federal law and regulation. The Medicaid Voluntary Contribution and Provider-Specific Tax Amendments was signed into law to restrict the use of provider donations in financing Medicaid to limit states’ ability to draw down federal Medicaid matching funds. Provider taxes must 1) be broad-based, 2) be uniformly imposed on a class of providers, and 3) they cannot hold providers harmless, meaning providers can’t be guaranteed their tax payment will be paid back. By regulations, there are 19 different types of providers that can be subject to provider taxes, including inpatient and outpatient hospital services, physician services, and nursing facilities. There is a safe harbor tax rate of 6%, meaning when taxes collected are at or below that percentage of patient revenues, the state is considered “safe” from the hold-harmless test. No states operate a provider tax higher than 6%.

For additional information about provider taxes, you can check out this fact sheet from Kaiser Family Foundation.

About HR 4725

HR 4725 would lower the hold-harmless threshold to 5.5%. The Congressional Budget Office (CBO) assumes states would not impose provider taxes above the safe harbor level. The CBO estimates that reducing the tax to 5.5% would save the federal government $1.8 billion over 2018-2021 and $4.6 billion over 2018-2026. The CBO also assumes that states as a whole would replace only half of the lost provider tax revenue with other state general revenues, making the assumption that states would increase the state share of Medicaid spending by roughly $1.3 billion over 2018-2021 and $3.4 billion over 2018-2026 to mitigate half of the federal cut.

Although the focus of this brief is to provide some clarity about the effect of the bill on provider taxes, there are other provisions in the bill. HR 4725 would change the treatment of lottery winners for determining Medicaid eligibility, eliminate the enhanced match for prisoners eligible for Medicaid under ACA, sunset the enhanced match for CHIP program, and repeal the prevention fund. The full text of the bill, which was sponsored by Rep. Joseph Pitts (R-PA) is available online.

Proponents of the bill have stated that they are attracted to cost savings the legislation would provide to the federal government. The change in the provider tax hold-harmless threshold is being opposed by some health related organizations, including those that provide Medicaid-financed services, who say that the change will cause states to reduce spending and would ultimately result in fewer individuals being able to access services.

Sellers Dorsey has a deep understanding of the Medicaid program, having consulted on a range of financing, policy, and operational projects. Some clients of Sellers Dorsey and other individuals are keenly interested in the potential effect of this bill if it were to become law. Sellers Dorsey will continue to monitor HR 4725 and provide updates on significant changes in its status. If you would like to discuss this topic or have questions about other subject matter in which our staff can offer knowledge or assistance, you may contact us by phone at 215.564.3014 or by email at info@