As budget reconciliation negotiations play out in Washington, an influential conservative thinktank is shining a spotlight on provider taxes and state directed payments as an avenue for Medicaid reform and reducing federal spending.
The Paragon Health Institute, in a report released Wednesday, describes these mechanisms as “gimmicks” and a “legalized money laundering apparatus.”
It points to rapid growth among approved directed payment arrangement cost projections, which the independent Medicaid and CHIP Payment and Access Commission (MACPAC) last October clocked at $110.2 billion a year—up from the $69.3 billion estimate of early 2023 and well beyond the $25.7 billion it estimated under 2020 approved payments.
The growth, Paragon wrote, is incentivized by federal Medicaid dollars that scale with the amount states are able to budget. Levying higher provider taxes allows states to boost their federal Medicaid funding that eventually makes its way back to healthcare providers and in some cases can be added to a state’s general fund, the report reads.
Most states have long had provider taxes in place. According to KFF, there are currently 45 states with these in place for hospitals, 46 for nursing facilities, 20 for managed care organizations, 17 for ambulance providers and 11 for other types of providers.
Limits on these and other state Medicaid funding policies outlined in the report could improve spending efficiency, refocus the program on providing care “for the truly needy” and reduce federal taxpayer burden, the authors wrote.
“As Congress debates Medicaid reform, we provide policymakers with a menu of options to refocus Medicaid on efficient health care and improved patient outcomes, enhance program integrity and rebalance the state and federal share of costs,” they wrote.
The Paragon Health Institute has a line into the White House, as two of its directors were selected by President Donald Trump for policy advisory positions.
Hospital groups have pushed back on Paragon’s characterization of the Medicaid funding practices and its proposals, which they say would gut hospitals’ finances.
“Let’s be clear: provider taxes and state directed payments provide the means to offset the crippling underpayment by Medicaid for critical care that meets the medical needs of so many kids, mothers, disabled, and seniors,” Federation of American Hospitals President and CEO Chip Kahn said in an emailed statement. “It would be a step backward if Congress took away States’ prerogatives to tax providers. It is critical path to protect access to care and assure federal dollars are returned to communities to ensure Medicaid services are available and communities are kept healthy.”
House Republicans have tasked the Energy and Commerce Committee with finding $880 million in budget cuts, which would almost certainly involve reductions in Medicaid spending. Polling suggests that doing so is unpopular among voters, leading Republican leaders to repeatedly characterize the likely impending cuts as a search for efficiencies and fraud.
Proposals circulated by lawmakers outline some of Paragon’s suggestions—unwinding a Biden administration final rule that raised the ceiling for state directed payments, and a reduction to the current 6% “safe harbor” on provider taxes—as potential options.
For the latter, a Congressional Budget Office report from December estimates that lowering the threshold to 5% would decrease the deficit by $14 billion over five years, while a 2.5% threshold would decrease it by $71 billion and eliminating the threshold wholesale would decrease it by $182 billion.
Paragon’s report calls for Congress to adopt a 3.5% safe harbor threshold “at a minimum.” It would prefer a cap to overall Medicaid funding states receive from the federal government, which it acknowledged is “unlikely,” or bans on the use of provider taxes as a means to fund states’ Medicaid costs, an approach it noted some Democrats had supported roughly a decade or so ago.
Among the provider taxes it underlined, the group described taxes on managed care organizations as “particularly nefarious” because “it always results in additional revenue for the state’s general fund.”
Paragon’s report also called for the elimination or caps on state directed payments and lump sum supplemental payments so that effective Medicaid payment rates do not exceed Medicare rates.
Other groups including independent advisors and government watchdogs have called for greater transparency into state directed payment arrangements. That was also one of the goals of a rule finalized last year under the Biden administration—which Paragon wrote has “some constructive provisions that limit abuse” despite its larger call for repeal due to other aspects with “large fiscal costs.”
Paragon’s calls for change, which are shared by other conservative fiscal advocacy groups like the Committee for a Responsible Federal Budget, are vehemently opposed by the hospital industry.
A spokesperson for the American Hospital Association, in response to queries on the report, said “any suggestion that provider taxes are anything but a longstanding, legally vetted, state and federally approved tax arrangements is dishonest and a distraction from what these proposals truly are—a way to cut the Medicaid program.”
The spokesperson reiterated that Medicaid reimbursement is well below the costs hospitals spend on its beneficiaries, even with additional lump sum supplemental payments, and said that the public would suffer from Paragon’s proposals.
“Eliminating or reducing these taxes and payments will force nearly every state to choose between cutting healthcare access or services or raising taxes on residents,” they said. “There's a difference between making healthcare work better and simply cutting services that vulnerable people depend upon. These proposals are nothing but blunt force instruments to take money from programs that help those in our country who have the least to pay for tax cuts for those who have the most.”