Function 550 - Health
Limit States’ Taxes on Health Care Providers
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
|Billions of Dollars||2019||2020||2021||2022||2023||2024||2025||2026||2027||2028||2019-
|Change in Outlays|
|Lower the safe-harbor threshold to 5 percent||0||0||-2||-2||-2||-2||-2||-2||-2||-2||-5||-15|
|Lower the safe-harbor threshold to 2.5 percent||0||0||-11||-12||-12||-13||-14||-15||-15||-16||-35||-108|
|Eliminate the safe-harbor threshold||0||0||-34||-37||-39||-42||-44||-47||-49||-52||-110||-344|
Medicaid is a joint federal-state program that pays for health care services for low-income people in various demographic groups. State governments operate the program under federal statutory and regulatory oversight, and the federal government reimburses a portion of each state's costs at matching rates that generally range from 50 percent to 85 percent, depending on the per capita income of the state and on the share of enrollees (if any) in each state that became eligible for Medicaid as a result of the optional expansion of that program under the Affordable Care Act. The rest of the funding must come from state revenues, either from general funds or from another source. Most states finance at least a portion of their Medicaid spending through taxes collected from health care providers. In the early 1990s, the Congress required states that taxed health care providers to collect those taxes at uniform rates from all providers of the same type (hospitals, for example). Those rules were created because some states were taxing Medicaid providers either exclusively or at higher rates than other providers of the same type with the intention of returning the collected taxes to those providers in the form of higher Medicaid payments. Such "hold harmless" provisions were leading to large increases in federal Medicaid outlays but not to corresponding increases in states' Medicaid spending, despite what would have been expected under Medicaid's matching-rate formula. However, federal law grants a "safe harbor" exception to hold-harmless provisions when a state collects taxes that do not exceed 6 percent of a provider's net patient revenues. Any tax amounts collected from providers that exceed 6 percent of their revenues are deducted from a state's total Medicaid expenditures before determining the amount of federal matching funds.
This option consists of three alternatives, all of which would take effect in October 2020 to allow states time to adjust their tax laws. Under the first alternative, the safe-harbor threshold would be lowered to 5 percent. Under the second alternative, the threshold would be lowered to 2.5 percent. And, under the third alternative, the threshold would be eliminated. Lowering or eliminating the safe-harbor threshold would reduce the amount of taxes that states could collect from providers to finance their share of Medicaid spending.
Effects on the Budget
The Congressional Budget Office estimates that capping the threshold at 5 percent (the first alternative) would reduce mandatory spending by $15 billion between 2021 and 2028 and that capping it at 2.5 percent (the second alternative) would reduce mandatory spending by $108 billion over that period. Eliminating the safe-harbor threshold (the third alternative) would reduce mandatory spending by $344 billion between 2021 and 2028. The growth in savings over that period is a result of CBO's expectation that collections of tax revenues would increase at the rate of growth of overall health care spending for the types of providers that are typically taxed.
The large difference in savings generated by the three alternatives is a result of the distribution of taxes that are imposed on providers by states. Those tax rates vary widely, from under 1 percent to 6 percent. Therefore, the lower the threshold, the more that tax revenues collected from providers would be affected. Lowering the threshold to 5 percent would affect only the taxes collected above that rate, whereas lowering the threshold to 2.5 percent would affect the additional tax revenues collected above that rate. Eliminating the threshold would affect all tax revenues collected from providers.
The amount of savings generated by the option would depend entirely on the extent to which states chose to adjust their Medicaid programs in response to the lower thresholds. Under the new limits, states would need to decide whether to continue spending the same amount—and make up the difference out of other revenues—or to cut spending by the difference in revenues collected under the old and new thresholds. In the first case, states might replace lost revenues by raising additional general revenues or by reducing spending elsewhere in their budgets and transferring those amounts to Medicaid spending. In that case, the federal government would continue to match the same amount of state spending and there would be no change in federal spending. Alternatively, states could decide not to replace the lost revenues and instead cut their Medicaid spending. That choice would reduce federal spending because the matched amounts would be smaller.
CBO expects that different states would respond to a lower safe-harbor threshold in different ways. Most states would probably not replace all of the revenues lost as a result of the lower threshold for the taxation of providers. The health care providers being taxed typically benefit directly from higher Medicaid payment rates, making the imposition of such taxes an easier choice for states than alternative choices for replacing such revenues. However, most states would probably not cut Medicaid spending by the full amount of the lost revenues because they deem other choices to be preferable. CBO anticipates that, on average, states would replace half of the lost revenues, but that estimate is highly uncertain. To the extent that the average state response would be to make larger cuts to Medicaid, the savings would be greater, and to the extent that the average state response would be to make smaller cuts to Medicaid, the savings would be smaller.
One argument for implementing this option is that it would limit or eliminate a state financing mechanism that has inflated federal payments to states for Medicaid beyond the amount the federal government would have paid in the absence of such taxes. An argument against this option is that, to the extent that states cut back spending on Medicaid in response to the lost revenues, health care providers could face lower payment rates that might make some of them less willing to treat Medicaid patients. Moreover, some Medicaid enrollees could face a reduction in services or possibly lose their eligibility for the program if states restricted enrollment to curtail costs.