The Trump administration is seeking to end a controversial tax on Medicaid providers that has allowed New York to draw down billions in federal dollars, putting hospitals and nursing homes at risk of losing money.
The U.S. Centers for Medicare and Medicaid Services proposed a rule on Monday to end a type of health care provider tax that allows states to place a levy on hospitals, nursing homes or health plans, increase federal Medicaid matching funds and pocket whatever money is left over after reimbursing the providers they taxed.
The federal rule specifically targets states that impose a higher tax on Medicaid providers than non-Medicaid providers – a mechanism that was recently used by New York’s so-called managed care organization, or MCO, tax to secure $3.7 billion in federal funding over the next two years. CMS referred to such a mechanism as “money laundering,” echoing rhetoric circulated by the conservative think tank Paragon Health Institute in attempts to crack down on provider taxes.
Provider taxes have been in the spotlight in recent weeks as federal lawmakers seek to achieve massive spending reductions in the Medicaid program. Congressional Republicans released a draft plan of a budget bill on Sunday to reduce federal Medicaid spending by at least $715 billion, including by imposing greater requirements on provider taxes and cracking down on the mechanism that has allowed New York and other states to reap billions in federal funds.
But the CMS proposal goes a step further by pledging to immediately end funding for states with recently approved tax waivers once it goes into effect. If the rule goes through as is, New York could lose billions that’s already been allocated, including some of the $1.5 billion that’s funding payment rate increases to hospitals, nursing homes and federally-qualified health centers in the recently enacted state budget.
Ken Raske, president and CEO of the Greater New York Hospital Association, which represents more than 200 hospitals in the region, said that the hospital industry is bracing for a “double whammy” from Congressional Republicans’ Medicaid cuts and the rule seeking to end the MCO tax.
“Our heads are exploding,” Raske said, pointing to the serious impacts cuts will have on the majority of New York hospitals that operate at a loss.
“If we were a fat and sassy industry, you could say they are taking away some of the fat but none of the meat,” Raske said. “Here, they are going right at the bone.”
Nicolette Simmonds, a spokeswoman for Gov. Kathy Hochul, declined to comment on the specifics of the proposal, but said Republicans in Washington have made it clear that any bill that they pass will include “sweeping cuts” to programs like Medicaid. The state cannot backfill massive cuts, but Hochul is committed to using litigation and other tools to protect services, Simmonds said.
New York’s MCO tax was on thin ice even before President Donald Trump took office. State officials closely modeled the tax on a similar move in California that was approved by the Biden administration. But CMS officials begrudgingly approved the tax, stating in a letter to California that it violated the spirit of the Medicaid program.
New York was not the only state to get approval for such a tax during President Joe Biden’s last year in office. California, Massachusetts and Michigan also received approval for their own waivers, and in combination with New York are responsible for 95% of all federal taxpayer losses under this loophole, the federal government said. CMS projected that the proposed rule would save $30 billion in federal dollars over the next five years if it becomes final.
“It’s really bad for New York,” said Michael Kinnucan, senior health policy advisor at the left-leaning think tank fiscal policy institute. He called the move to pull federal funds that have already been allocated “stunning.”
“That’s just not the way you run a government,” Kinnucan said.
