Senate budget bill tightens Medicaid provider tax rules and limits payment rates

The latest version of the budget reconciliation bill moving through Congress would cut Medicaid more aggressively than the House-passed version — primarily through provider taxes and state-directed payments (SDPs).

On June 16, the Senate Finance Committee introduced its version of the healthcare portion of the budget reconciliation tax cut package that is moving through the Senate. An earlier version was passed by the House May 22 with many similar provisions.

Key differences in the new Senate version include:

• Lower provider tax safe harbor from 6% to 3.5%
• Tighten provider tax rules
• Lower limits for existing SDP rates to Medicare rates   
• Require CMS actuary to certify 1115 demonstrations would not increase spending

Provider tax impact

The new language tightening the use of provider taxes may have the largest financial effect on hospitals. Budget projections have not yet been created for the Senate version of the budget bill but lowering the safe harbor from 6% to 2.5% would save the federal government $241 billion over 10 years, according to previous Congressional Budget Office projections.

Details of the provision include:

• Bars non-Medicaid expansion states from increasing provider taxes
• Cuts safe harbor for expansion states over 3.5% by 0.5% annually, starting in 2027
• Requires reached 3.5% safe harbor by 2031
• Exempts nursing or intermediate care facilities from 3.5% safe harbor

“The Senate just made a bad bill worse,” Chip Kahn, president and CEO of the Federation of American Hospitals, said in a written statement when the provisions were released. “The Senate’s slashes to important state Medicaid programs will further threaten access to care for millions of hardworking Americans.”

A group of 13 state hospital associations wrote to Senate Majority Leader John Thune (S.D.) the same day the latest version of the bill was introduced and urged Republicans to stick with the Medicaid provisions included in the House-passed bill. That version did not reduce the safe harbor or affect already-approved SDP amounts.

The provider tax and SDP provisions in the House-passed bill “reflect a balanced approach that recognizes the vital role Medicaid directed payments play in sustaining access to care, including a much-needed grandfather clause to allow continuation of existing state programs as well as those awaiting CMS approval,” wrote the hospital groups.

SDPs provide many hospitals, especially those in rural and underserved areas, up to 20% of their revenue, said the hospital groups.

Hospital taxes were the most popular type of Medicaid provider tax — among the various provider taxes used by state, according to a Congressional Research Service report. Forty-six states and Washington, D.C. use hospital taxes (not using them are Alaska, Delaware, North Dakota and South Dakota). Additionally, 47 states and Washington, D.C. have at least one provider tax higher than 3.5%, according to Modern Medicaid Alliance.

The taxes are used to help finance the state share of Medicaid expenditures. Federal statute and regulations limiting states’ use of provider taxes bars guaranteeing providers they will receive Medicaid payments equal to the amount of taxes they pay. The exception to that limit is for taxes that fall below 6% of net patient revenue, which is known as the “safe harbor threshold.”

More provisions’ details

The SDP payment rate provision would roll back 2024 Biden era rule changes that formally allowed provider rates in SDPs to reach the average commercial rate. The new bill would cap provider rates in future SDPs to Medicare rates in Medicaid expansion states. In non-expansion states, rates would be capped at 110% of Medicare rates.

The bill would cut existing SDP payment limits by 10% annually until the allowable Medicare-related payment limit is reached. The House-passed bill did not apply its limits to already approved SDPs.

Another provision would limit the ability of CMS to waive requirements that provider taxes be broad-based and uniform if the net impact of the tax is generally redistributive and the amount of the tax is not directly correlated to Medicaid payments. Specifically, it would limit the definition of generally redistributive used to qualify for a waiver of the uniform requirement. Provider taxes would not be considered generally redistributive if either:

• The tax rate is lower for providers with a lower volume or percentage of Medicaid taxable units
• The tax rate on Medicaid taxable units is higher than the tax rate imposed on non-Medicaid taxable units

The bill would tighten budget neutrality requirements for Medicaid Section 1115 demonstration projects. CMS currently has broad authority to waive federal Medicaid requirements and allow waivers that increase spending. Instead, the bill would require the CMS actuary to certify that the total federal spending would not exceed what would otherwise have been spent under Medicaid without the demonstration project. Additionally, HHS would need to develop methodologies for applying savings generated under a project to allowable expenditures in any extension of a project.

SDP update

The latest legislative move to tighten SDPs comes as CMS has stepped up approvals of both new and extensions of existing SDPs, which must be reapproved annually. Hospital executives said approvals of new SDPs and reapprovals of existing ones were initially suspended in the first months of the Trump administration.

The latest group of CMS approvals for hospital-focused SDPs, on May 28, included:

• $424 million for Hawaii
• $240 million for two Illinois SDPs
• $2.7 billion for three Washington SDPs

“The approval allows badly needed payments for services delivered to Medicaid patients to flow to hospitals,” said Cassie Sauer, CEO of the Washington State Hospital Association (WSHA). “The news came at a critical time when many of our state’s smallest hospitals were down to only days’ worth of cash on hand and cuts in services were already being made at hospitals large and small.”

The approval came after months of advocacy by WSHA with support from Washington’s Congressional delegation, she said.

Sauer said the new SDP brings Medicaid payment rates in the state near Medicare rates, of 80% to 85% of the cost of care.

WSHA estimated looming state taxes and payment cuts and enrollment cuts from federal legislation would cost hospitals and other providers more than $1 billion annually.