Medicaid taxes target of coming regulations

A rule to change as-yet-undisclosed taxes in Medicaid is undergoing final review by the White House.

The Office of Management and Budget (OMB) at the White House received a proposed rule from CMS titled “Preserving Medicaid Funding for Vulnerable Populations — Closing a Health Care-Related Tax Loophole.” OMB conducts final reviews of rules before they are publicly released.

It’s unclear if the rule refers to provider taxes or managed care taxes in Medicaid, which are used to fund the state share of the state-federal match underlying Medicaid finances. But provider advocates worried it will target their taxes, including those that help fund state directed payments (SDPs).

“It makes one wonder if [Trump administration officials] are willing to do something fairly dramatic by regulations, as opposed to be statute,” said Susan Feigin Harris, an attorney and co-head of Healthcare for Norton Rose Fulbright. “And whether they are going to implement some of these reductions via tightening up on [SDP] programs and how you implement [SDPs].”

If the Trump administration rule restricts the provider taxes, like those that help fund SDPs, the move could cut federal spending by $48 billion to $630 billion over 10 years, according to CBO estimates.

Potential changes under the coming rule that Feigin Harris was watching for included reducing the 6% safe harbor protection for provider taxes, even though that is set by statute.

“I’m looking at [the coming rule] with great interest and a little bit of trepidation on behalf of providers who rely so heavily on this as the funding mechanism for making up significant shortfalls” in Medicaid, Feigin Harris said.

Republican priority

Increased federal spending on Medicaid in recent years and $8.6 trillion in projected federal spending over the next 10 years has drawn increasing criticism from members of Congress and the Trump administration. Republicans have been similarly critical of the increase in SDP, which in 2024 was projected to reach $110 billion, up from a cumulative $69 billion by February 2023.

“We are a seeing a number of Republican senators come out and say [SDPs] are akin to money laundering,” Feigin Harris said. “Because it’s not well-understood, it can be misunderstood.”

Paragon Health Institute, the conservative think tank at which the leaders have ties to Trump’s first administration, recently published a report describing the system of SDPs as being a component in a “money laundering” scheme to increase the share of Medicaid funding that comes from the federal government.

The American Hospital Association (AHA) fired back in a blog post published April 3, writing, in part, “In their reports, Paragon recommends that Congress pursue several policies that are ultimately harmful to patients and providers … ”

Additionally, congressional Republicans have advanced a budget that would cut about $2 trillion in federal spending over the next 10 years. As much as $880 billion could come out of the projected $1.6 trillion increase in Medicaid spending over the next 10 years. The budget blueprint did not specify what Medicaid cuts could provide those savings, but some observers said they could include cuts to provider taxes.

A regulatory effort to cut allowed Medicaid provider taxes could presage Congress putting that cut in statute, Feigin Harris said.

At the April 18 swearing in of Mehmet Oz as administrator of CMS, he listed his leading priority as controlling Medicaid spending.

“The states are having a big problem [funding Medicaid] and that’s with the federal government paying most of the bill,” Oz said.

Oz also criticized the use of Medicaid funding for “non-medical purposes.”

Shortly before Oz was sworn in, CMS discontinued federal funding for certain Medicaid programs, specifically designated state health programs (DSHPs) and designated state investment programs (DSIPs). The change limited states’ use of federal Medicaid funds for programs that address health-related social needs.

SDP outlook

Potential rule changes affecting SDP funding come amid continuing questions about whether CMS will provide annual re-approvals needed to continue existing SDPs, as well as if it will approve new such arrangements.

Health system leaders said the Trump administration has not yet approved requests from several states, including New Mexico and Tennessee, to launch new SDPs. However, in recent weeks CMS has started to issue annual reapprovals for existing SDPs.

Those delays in re-approvals of existing SDPs led Community Health Systems’ (CHS’s) leaders to note in an April 24 earnings call that the organization failed to garner expected revenue from SDP approvals that it had anticipated would come in the first quarter of 2025.

The financial benefits for health systems from SDPs and Medicaid supplemental payments are significant. For example, CHS said it had planned on $100 million to $125 million in new revenue just from the pending SDPs for New Mexico and Tennessee.

“So, it does appear that things are moving and that there’s not a complete moratorium on these plans that I would tend to believe is a positive, absent anything else,” said Kevin Hammons, CFO for CHS. “But we’re still in a wait and see. As we sit here today, we know of no reason they will not be approved going forward.”

It remains to be seen whether further state expansions of new SDP proposals under consideration in states like Alabama, Arkansas and Indiana ultimately will garner approval from the Trump administration, he said.

SDPs “and supplemental payment programs aim to get Medicaid providers closer to their costs,” said Feigin Harris. “I’m worried cuts will ultimately impact access to care.”