Federal proposals pose a risk to provider taxes, a crucial funding source for Medicaid in states, potentially impacting healthcare services.
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GOP initiatives to clamp down on special taxes used to fund Medicaid programs could leave states billion-dollars short in healthcare fundingfor the needy.
California would face an extra financial hit on top of proposed Medicaid cuts by the state's Democrats due to a whopping $12-billion deficit.
Republican moves to cap taxes on hospitals, health insurers, and other healthcare providers could take a massive chunk out of state coffers, potentially shrinking access to healthcare services for the nation's poorest and most vulnerable populations, according to analysts, advocates, and Democratic leaders.
No state stands to lose more than California, home to nearly 15 million residents on Medi-Cal, the state's version of Medicaid. That's double the number of New York residents and three times more than Texas.
A proposed rule by the Centers for Medicare & Medicaid Services, mirrored in the Republicans' House reconciliation bill, could significantly limit the federal matching funds many states draw from provider taxes. Although the exact amount is uncertain, the revenue at stake is substantial. California, for example, brought in an estimated $8.8 billion this fiscal year from its managed care plan tax and around $5.9 billion last year from hospitals.
With California Democrats already grappling with a $12-billion deficit and under fire for scaling back healthcare policies such as full coverage for undocumented immigrants, a loss of provider tax revenue could add billions more to the deficit, necessitating even more unpopular cuts to Medi-Cal benefits.
"If the GOP pushes this radical MAGA plan through, millions will lose coverage, hospitals will close, and safety nets may crumble under the weight," California Governor Gavin Newsom, a Democrat, warned in a statement, alluding to Donald Trump's "Make America Great Again" movement.
The proposals pose a threat to Proposition 35, a California ballot initiative backed by voters last November to keep the managed care organizations tax in place and earmark some funds to improve pay for healthcare providers treating Medi-Cal patients.
Almost every state except Alaska levies some form of provider tax on managed care plans, hospitals, nursing homes, and other healthcare businesses. This tax generates billions in federal funds annually, helping providers maintain lower Medicaid reimbursement rates while enabling states to withstand economic downturns and budget constraints.
States like New York, Massachusetts, and Michigan would also suffer major blows alongside California from the GOP's drive to restrict provider taxes, which could help states boost their share of Medicaid spending to draw increased federal Medicaid funds.
In a May 12 statement announcing its proposed rule, the Centers for Medicare & Medicaid Services likened the "loophole" to money laundering and claimed that California used the proceeds from its managed care organizations tax to cover more than 1.6 million "illegal immigrants." The Center estimated its proposal would save over $30 billion over five years.
"This proposed rule calls an end to the shell game and ensures federal Medicaid funds go where they're truly needed - to pay for healthcare for vulnerable Americans, not to patch state budget holes or bankroll benefits for noncitizens," Mehmet Oz, the Centers for Medicare & Medicaid Services administrator, stated.
While Medicaid allows coverage for legally present noncitizens who have been in the country for at least five years, California uses state funds to cover almost all Medi-Cal coverage for undocumented immigrants.
California, New York, Michigan, and Massachusetts account for over 95% of the "federal taxpayer losses" due to the provider tax loophole, the Centers for Medicare & Medicaid Services stated. However, nearly every state would feel some impact, especially under the Senate's more restrictive provisions compared to the CMS proposal.
Michigan's Department of Health and Human Services, under Democratic Governor Gretchen Whitmer's orders, found that a reduction of revenue from the state's hospital tax could destabilize hospital finances, particularly in rural and safety-net facilities, raising the risk of service cuts or closures. Losing revenue from the state's managed care organizations tax would likely necessitate substantial cuts, tax increases, or reductions in coverage and access to care, the report stated.
The Centers for Medicare & Medicaid Services did not respond to questions about its proposed rule. The Republicans' House-passed reconciliation bill also bans new provider taxes or increases to existing ones.
The American Hospital Assn., representing nearly 5,000 hospitals nationwide, stated that the moratorium on new or increased provider taxes could force states "to make significant cuts to Medicaid to balance their budgets, including reducing eligibility, eliminating or limiting benefits, and lowering already low payment rates for providers."
As provider taxes attract federal matching funds, Washington plays a role in their implementation. Republicans, who control the federal government, aim to spend less on these funds.
In California, insurers reimbursed for a portion of the managed care organizations tax paid on their Medi-Cal enrollment. This explains why the tax rate on Medi-Cal enrollment is higher than on commercial enrollment, with insurers recovering almost all the tax paid due to their Medi-Cal business.
The imbalance, which the Centers for Medicare & Medicaid Services describes as a loophole, is a key focus of Republican efforts to alter the rules. If the CMS rule or corresponding provisions in the House reconciliation bill were enacted, states would be required to levy provider taxes equally on Medicaid and commercial business to draw federal funds.
California might be unable to raise commercial rates to the level of the Medi-Cal ones due to state law constraints on the Legislature's ability to raise taxes. Compliance with the rule would then require lowering the Medi-Cal tax rate, leading to decreased revenue.
The Centers for Medicare & Medicaid Services has warned California and other states for years about potential changes to managed care organizations and other provider taxes, but these warnings have not materialized. However, some experts believe the risk may be higher this time due to the proposed changes' alignment with the House-passed reconciliation bill and broader Republican strategies to cut Medicaid spending by nearly $800 billion.
According to January estimates, California's managed care organizations tax is expected to generate $13.9 billion over the next two fiscal years, while the hospital tax is projected to bring in nearly $9 billion this year, up significantly from last year.
Kayla Kitson, a senior policy fellow at the California Budget & Policy Center, noted: "Losing a significant portion of that revenue, combined with other Medicaid cuts in the House reconciliation bill, all adds up to potentially a serious impact on Medi-Cal and California's overall state budget." The pain isn't just for California; as Park, a research professor at Georgetown University's McCourt School of Public Policy, stated: "All states will be hurt by this."
Wolfson writes for KFF Health News, a national newsroom focusing on in-depth reporting on health issues and operated by KFF - an independent source for health policy analysis, polling, and journalism.
Additional Reading
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Voices - Latino legislative caucus decries Newsom's proposed Medi-Cal cuts
Voices - Chabria: California isn't backing down on healthcare for immigrants, despite Trump threats
- The immigration debate in California, particularly regarding healthcare coverage for undocumented immigrants, is intensifying due to the potential loss of provider tax revenue as a result of proposed Republican policies.
- The intended Republican clampdown on special taxes used to fund Medicaid programs could have severe implications for immigration law and justice, potentially leaving millions without coverage.
- The finance sector in California could face a significant challenge due to the double whammy of proposed Medicaid cuts by state Democrats and the potential loss of provider tax revenue from the GOP's healthcare initiatives.
- The ramifications of the proposed rule by the Centers for Medicare & Medicaid Services, mirrored in the Republicans' House reconciliation bill, extend beyond healthcare, impacting policy-and-legislation, politics, and general-news.
- In the midst of this, business sectors, such as health-and-wellness and science, stand to suffer due to potential hospital closures and reduced access to healthcare services for vulnerable populations.
- California's current fiscal deficit and the proposed scaling back of healthcare policies add to the urgency for solutions, as the loss of provider tax revenue could exacerbate California's deficit and necessitate even more unpopular cuts to Medi-Cal benefits.
- The proposed reforms threaten the continuation of initiatives like Proposition 35, a California ballot initiative aimed at maintaining provider taxes and improving pay for healthcare providers treating Medi-Cal patients.
- The implications of these proposed changes extend far beyond California, affecting states like New York, Michigan, and Massachusetts, as well as nearly every state, in terms of health, law, and finance.
