Cuts to State Medicaid Finance Methods Would Limit Access to Care for Everyone

Paragon Health Institute continues their series of misguided and harmful characterizations of Medicaid financing and provider payment, including through two reports “Addressing Medicaid Money Laundering: The Lack of Integrity with Medicaid Financing and the Need for Reform” and “California’s Insurance-Tax Shuffle: How Federal Money Ends Up Paying for Medicaid for Illegal Immigrants.” The timing of this series of reports aligns with the efforts of some policymakers in Congress to further limit states’ ability to finance their Medicaid programs to fund tax cuts for the wealthy.

In their reports, Paragon recommends that Congress pursue several policies that are ultimately harmful to patients and providers, targeting specific state Medicaid programs, such as those in California, North Carolina, Arizona, and Tennessee, without adequate justification. The policies Paragon recommends include:

Eliminating or Reducing Provider Taxes. Provider taxes are a legitimate financing method used by 49 states and the District of Columbia to fund a portion of the non-federal share of their Medicaid programs. There are federal limits, overseen by the Centers for Medicare & Medicaid Services (CMS), including a 6% tax safe harbor threshold. Eliminating provider taxes or reducing the safe harbor threshold likely would result in shifting the tax burden to state residents through higher income taxes, property taxes, sales tax or other state tax structures. Specifically:

• California’s Managed Care Organization (MCO) tax generates general fund revenue, which the state uses to increase already low provider rates and to pay for care to its Medicaid beneficiaries. California’s MCO tax operates under strict federal requirements and oversight of the integrity of its financing arrangement. Even with funds contributed by the federal government, California continues to make state investments in its Medicaid program — at a faster pace than federal spending. California can hardly be accused of taking advantage of the federal government. California pays billions (approximately $83 billion) more in federal taxes than it receives back in federal spending. It’s important to note that a state cannot use federal dollars to pay for undocumented immigrants, and Paragon’s report provides no evidence that federal dollars were used to pay for coverage of undocumented immigrants in the state.
• North Carolina’s provider tax is a financing method the state initiated in 2011 to increase low provider base payments and fund critical Medicaid services, including behavioral health services and postpartum care. Like many states, Medicaid reimbursement without provider taxes and supplemental payments factored in makes it difficult for North Carolina hospitals to continue to serve their communities.

Eliminating or Capping State-Directed Payments (SDPs). Medicaid MCOs’ low provider payments have created the need for additional provider support through state-directed payments, particularly for hospitals that serve disproportionately high rates of Medicaid and other public-payer patients and routinely operate with negative margins. Today, as many SDP programs await approval, some hospitals are already making difficult decisions to cut their workforce, struggling to make payroll and fighting to maintain service lines or stay open entirely amid further financial instability. For example:

• Arizona’s hospital-directed payment program, known as HEALTHII payments, is used to support hospital services, recruit and retain providers in rural communities and keep hospitals open. In Arizona, these payments are a particularly vital source of funding as the state continues to cut inpatient and outpatient Medicaid rates and a significant portion of hospitals face operating losses. Funded in part through provider taxes, if directed payments or finance mechanisms were cut, 69% of hospitals in the state would have a negative operating margin.
• Tennessee’s directed payment program, which is currently awaiting CMS approval, will help sustain the hospital network in a state that has not expanded Medicaid. The directed payment program provides needed funding to improve Medicaid base rates, which cover only half of the cost to provide care to low-income or uninsured residents. Critically, Tennessee has the second highest number of hospital closures in the nation, and without directed payments, that number will only increase.

What most people don’t realize is that cutting provider taxes and directed payments wouldn’t just impact Medicaid patients and providers; it would limit access to care for everyone.

Cutting provider taxes and supplemental payments would worsen the already significant gap between Medicaid reimbursement and the actual cost of providing care to Medicaid patients. In Florida, for example, with directed payments factored in, which are in part financed through provider taxes, Medicaid pays $0.68 for every dollar spent on care. Without these additional payments, reimbursement would drop to $0.48 for each dollar spent on Medicaid beneficiaries. In California, Medicaid pays $0.80 for every dollar spent on care. Without the additional payments financed by California’s provider tax arrangement, payment would decrease to just $0.70 for each dollar spent on Medicaid patients. In the context of specific services, hospitals experienced a -42% Medicaid margin for inpatient obstetrics care and a -44.9% Medicaid margin for outpatient obstetrics care in 2023. The Medicaid shortfall faced by providers is directly linked to the services and sites of care that they can offer to all patients.

Cutting off the financing for a program that is the single largest source of health care coverage in the U.S., while harming providers and patients, is hardly reform. We discourage anyone from trusting attacks on state Medicaid programs that call for unjustifiable federal funding cuts to Medicaid at the expense of Medicaid patients and our communities as a way to finance tax cuts for the wealthy.

We urge Congress to reject cuts to vital Medicaid financing methods, including provider taxes and state-directed payments.