More clarity re the Medicaid whammy
Senate Finance Committee targets provider taxes
One of the financial threats to Duke University finances is any policy that reduces Medicaid spending. Any university with a health care delivery system (hospitals, clinics, doctors) will be impacted, but Duke University quite directly because of the long history of Duke’s health system investing excess revenue into the research mission of the university ($1.6 Billion over the past 10 years). The responsibility to care for the people or Durham and North Carolina will not go away even if Medicaid coverage does, or payment rates decline.
The Senate Finance Committee is expanding its look for cost reductions as they try and finalize their portion of the Big, Beautiful Bill. Like the House, they want the tax cuts, say they are worried about the federal budget deficit and have therefore returned like nesting sea turtles to the familiar place of looking to cut, cap or eliminate the use of state Medicaid provider taxes to curtail federal spending on Medicaid. However, the politics of Medicaid have shifted with numerous Republican Senators wary of harming hospitals in their state. State governments use Medicaid provider taxes (levied primarily on hospitals) to expand coverage and payment levels in their state in a way that shifts these extra costs to the federal government. Every state except Alaska uses Medicaid provider taxes, and the Senate finance committee is discussing greatly reducing their ability to do so. This would shift costs back to states, reducing coverage and harming the hospital bottom line.
This is only a higher education financing story because Duke owns a health system and has longed supported the university research mission when more money came in than went out. University’s like Penn and Northwestern will be similarly affected. Princeton does not have a medical school nor health system so misses out on this aspect of the current moment.
First the repetitive politics, brief version. Talking about Medicaid provider taxes is a bit like the movie “50 First Dates” except when you re encounter this issue for the first (or tenth) time it is not a joyful experience and no one falls in love. Below I link discussions of this issue from numerous points in the past 13 years, and describe nearly the exact same debate. We did this in:
2012 In the run up to the so-called ‘fiscal cliff’ tax-mageddon standoff between President Obama’s second election and his second inauguration.
2016 we returned to the issue late in the Obama administration, and there are plenty of Dems in the Senate that probably don’t love the expansive use of provider taxes….but they love them more than rural hospitals closing and the hospital association in their state pointing out job losses to come in the hospital sector.
2017 as Trump 1.0 sought to repeal Obamacare, there was a discussion of decreasing and phasing out the so-called safe harbor provisions of Medicaid provider taxes that would limit the ability of hospitals and other providers to pay the tax and benefit from the expanded payment. This would make Medicaid expansions more expensive to states.
2019 Republicans in the North Carolina General Assembly and the Democratic Governor finally worked out a deal to both expand insurance coverage via Medicaid expansion while also beginning a comprehensive transformation of the program. Yep, Medicaid provider taxes were a key part of it.
2022 expansions of the use of Medicaid provider taxes were ways that states provided extra money to hospitals and nursing homes who had been decimated financially by the pandemic.
2025 this was bubbling in the run up to the Big, Beautiful Bill, and the House sought to address this only cosmetically, but the Senate is now talking about serious cuts. Republican Senators were “stunned” to find substantial cuts in their version of the BBB (at least they read it); Hospitals are super pissed and talking about closures in rural areas and they hate talking about this because it is so convoluted; and sausage season is in full swing as Senator Thune floats a ‘rural hospital fund’ to allow them to undo provider taxes and give the money back under a different name.
We have had this debate at least five time in full, and several times in truncated form. This is why I gave up health policy blogging. I could never keep straight which of the same debates we were having when and how many folks had changed sides….but really what this odd esoterica of health care finance tells us is a story of a great nation that cannot seem to decide if we will provide basic health care coverage to everyone or not? We cannot quite bring ourselves to do it in a straightforward manner, but neither can we turn our backs on our fellow man. And when we have these large fiscal moments, we open the box and look inside and say “Ew, that is nuts.” As someone who altered their Ph.D. dissertation topic in 1993 because I thought that we were on the cusp of universal health insurance coverage….this all makes me doubt my life choices, but hope springs eternal.
You said it had something to do with the whammy?
Yes, sorry, recall that in the quadruple whammy coming for Duke, Medicaid cuts were just about the only spending reductions in the House BBB, and this greatly effects Duke University because it greatly effects Duke Health System that has consistently invested its excess revenue ($1.6 Billion over past 10 years) into the research mission of the university. The House BBB Medicaid provisions would result in more people losing Medicaid and becoming uninsured, while the Senate version of BBB is shaping up to reduce payments to hospitals for Medicaid. Both will be big picture bad for Duke, but things are fluid and I cannot provide a comparative estimate of impact. A large enough change in state Medicaid provider taxes could undo Medicaid expansion in North Carolina and greatly impact the number of uninsured. And remember, after we have the Senate BBB, then the House and the Senate and the President have to find a unified BBB that can get 50 votes + the VP in the Senate, a majority in the House (normally 218 but there are several vacancies) and 1 in the White House.
There will be no one who has read it all when it finally passes.
Following is a simple version of how provider taxes work if anyone is left reading. There is a strong argument for not reading further and simply saying “they are just doing another iteration in a big Monte Carlo simulation and we will have a final answer on universal coverage or not in 2079.” If you are a glutton for punishment, or having trouble sleeping:
Medicaid is a joint federal and state insurance program created in 1965 that covers persons whose income and sometimes assets fall below a given level (83 Million nationally). There are some aspects of Medicaid that are required to be covered by the federal government, with states having discretion to go further. Both in who is covered, what services are covered and how much providers are paid. There are some minimum payment amounts for some things (to hospitals, doctors) but most state pay more, sometimes lots more than the minimum.
The financing of Medicaid is shared by the state and federal governments. The feds pay at least half of each state’s Medicaid program by law (California, New York and 8 others), and can pay up to 83%, but Mississippi has the highest current match rate 77%. North Carolina is 65% and South Carolina 69% and the rates are based on measures of relative poverty by state. Roughly speaking, the more that a state puts into Medicaid either through covered services or payment rates, the more federal money they leverage into their state.
Provider taxes operate as pass throughs that raise the amount of federal Medicaid money coming into a state, by leveraging the federal match for a given state. A common example is a so-called ‘baby tax’ that a hospital would pay based on number of deliveries in the previous year. The State puts this baby tax money into payments for baby deliveries, thus leveraging more federal money into the state to increase payment rates for delivering babies. Sticking with this example, if a state with a 70/30 federal/state match collected $100 in baby taxes, put that $100 into increasing payment rates to hospitals for delivery, then that would leverage $170 more federal dollars into the State’s Medicaid program. The hospitals would get more revenue than they would have had sans the baby tax. All states except for Alaska has at least one provider tax in operation in their Medicaid program. And these types of leveraging of the federal match to get more dollars into states is four decades old.
For our purposes of thinking about the impact of the BBB on higher education, the Senate opening this can of worms seems to increase the likelihood of substantial cuts to Medicaid of some sort, and ones that focus on hospitals. Duke health system will be profoundly affected, which in turns means that Duke University will be too. There will be many distributional impacts to watch, we will need more details. And yet again, we will see a great nation that cannot decide whether to have a system or universal health insurance coverage, or not, and accept the consequences.