Senate Republicans are poised to ramp up savings in their version of the 2026 budget reconciliation bill by setting tighter restrictions on states’ abilities to increase federal payments for Medicaid through an arrangement that many fiscal conservatives have decried as a gimmick.
The Senate Finance Committee‘s version of President Donald Trump’s One Big Beautiful Bill Act is set to go further in limiting states from levying Medicaid provider taxes than the legislation passed in the House. While the provision would save the federal government money, it could prove controversial, as Democrats have decried it as a cut to the popular low-income health insurance program.
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Although the bill’s text is not expected to be released until Finance Chairman Mike Crapo (R-ID) meets with fellow Republicans on Monday evening, several sources have reported that the Senate version lowers Medicaid provider taxes to a maximum of 3.5%. The House-passed bill set the number at 6%, but it only applied to new taxes.
All states except Alaska levy some sort of Medicaid service provider tax to increase state Medicaid revenues.
Here’s how it works: States charge providers taxes, and then use the revenue to pay those same providers for services. For those expenditures, the states are then allowed to claim larger matching shares from the federal government. So, in effect, imposing the provider taxes allows states to shift more spending to the federal government.
Conservative health policy organizations, including the Foundation for Government Accountability and the Paragon Health Institute, have labeled Medicaid provider taxes as a gimmick or a loophole that states use to inflate their Medicaid budgets artificially, harming federal taxpayers.
Roughly a third of state-level Medicaid spending comes from provider taxes and other local government funds, while the other 68% comes from state general funds, according to the National Association of State Budget Officers.
According to the Paragon Health Institute, the House cuts to provider taxes would have produced a net on-budget savings of $87.5 billion over a decade, meaning the Senate’s cuts could yield even greater savings.
Medicaid provider taxes are one way states fund state-directed payments for Medicaid managed care organizations or Medicaid coverage managed by private insurance providers. State-directed payments are a mechanism states use to set minimum levels of reimbursement for healthcare providers from MCOs, which provide the bulk of Medicaid services.
The Senate version of the bill is expected to tighten state-directed payments even more than the House version of the legislation.
THE ONE BIG BEAUTIFUL BILL ACT WOULD ERODE OBAMACARE
Hospital associations from 13 states wrote to Crapo and Senate Majority Leader John Thune (R-SD) last week asking Senate leadership to keep the “carefully negotiated” House version of the provider tax and state-directed payments provisions. They argued that the House version’s provisions “reflect a balanced approach that recognizes the vital role Medical direct payments play in sustaining access to care.”
“Without these supplemental payments, many hospitals would face immediate and difficult choices, including scaling back essential services or closing entirely,” the hospital association representatives said. “These consequences would fall hardest on the most vulnerable populations we serve.”