Trump Administration Proposes Overhaul of Medicaid Provider Tax Programs

WASHINGTON, D.C. — A new regulation proposed by the Office of Management and Budget indicates that the Trump administration may be seeking to reform how states finance Medicaid provider taxes. The proposal, published on April 23, 2025, aims to update existing regulations governing state waivers concerning health care-related taxes.

The full details of the proposal have yet to be released, but analysts suggest it may impact Medicaid provider tax programs. According to TD Cowen analyst Ryan Langston, the reforms would affect how states can bypass Medicaid managed care restrictions on additional payments for specific services. Current arrangements permit states to set a base rate for services and enforce uniform rate increases.

These directed payments have been beneficial for healthcare providers, allowing them to remain viable within the Medicaid framework, which is often unprofitable. However, concerns about the financing mechanisms have grown. The Medicaid and CHIP Payment and Access Commission (MACPAC) has reported issues regarding the state-federal funding dynamics.

States heavily rely on taxes from providers and intergovernmental transfers for funding directed payments. These arrangements may not only inflate federal Medicaid spending but could also allow states to enhance reported spending without using their own revenues. Experts caution that this method raises ethical and financial concerns over funding allocation.

While the exact nature of potential reforms is still unclear, some observers predict stronger oversight might be introduced. Changes could limit how hospitals distribute directed payments among themselves, ensuring that each facility receives due compensation for tax contributions. Major hospitals are likely to lobby against such changes, as these arrangements significantly boost their Medicaid reimbursements.

Republicans aiming to cut federal spending might see curbing these arrangements as a viable strategy. The ongoing budgeting process indicates a push for significant reductions in Medicaid funding, with the House Energy and Commerce Committee targeting an $880 billion spending cut.

Despite calls for reform from various healthcare stakeholders, including MACPAC and influential Republican figures, Medicaid’s popularity among voters remains a potential barrier to drastic cuts. Russell Vought, director of the OMB, and others have been proponents of ending state financing loopholes as outlined in Project 2025.

While the upcoming rule may face substantial opposition from the industry, Langston noted that it does not preclude CMS from finalizing some proposals within the rule.