House Republicans are calling for $1.5 trillion in spending cuts next year. Medicaid, the joint federal-state health plan established in 1965 to provide publicly funded health coverage to the poor and disabled, is reportedly where they’ll find much of that money.
Eliminating so-called “provider taxes,” which allow states to game Medicaid’s rules to extract more dollars from the federal government, is a great place for Republican reformers to start.
Medicaid is long overdue for paring. In recent years, it has swelled to cover nearly 1 in 5 people. Total Medicaid spending exceeded $870 billion in 2023 alone.
States run their own Medicaid programs, but much of the funding comes from the federal government. In fact, states receive at least $1 from Washington for every dollar they devote to Medicaid.
States receive a whopping $9 for every $10 they spend covering Obamacare’s “expansion” population — able-bodied adults earning up to 138% of the poverty level. Forty states and Washington, D.C., have expanded Medicaid eligibility to able-bodied adults.
The federal government’s promise to match every dollar a state spends on Medicaid and then some has prompted some states to engage in elaborate fiscal gamesmanship to unlock additional federal money.
For example, some states levy taxes on healthcare providers and use the revenue to raise what they’ll pay those same providers. Those additional payments attract matching federal funds from the United States government.
Both states and providers enjoy a payday. Only the federal government loses out. No wonder Brian Blase of the Paragon Health Institute calls provider taxes a form of money laundering.
Provider taxes have grown popular. Every state but Alaska has one. In 2022, provider taxes and other “gimmicks” produced over a quarter of state Medicaid funding, according to the Cato Institute — up from 9% three decades ago.
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California’s Medicaid program, dubbed “Medi-Cal” in the state, provides a prominent example of the provider tax grift. The Golden State first implemented its provider tax in 2005. Last year, Gov. Gavin Newsom (D-CA) expanded the tax to generate an estimated $11 billion for his state through the end of fiscal 2026.
Limiting provider taxes could save the U.S. $175 billion over 10 years, according to the House Budget Committee. These handouts from the federal government need to end.
Sally C. Pipes is president, CEO, and Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute. Her latest book is The World’s Medicine Chest: How America Achieved Pharmaceutical Supremacy—and How to Keep It (Encounter 2025). Follow her on X @sallypipes.