Before Argentina’s 2001 financial collapse, its provinces embraced a dangerous habit: spending locally and sending the bill to the national government. The U.S. Medicaid program turbocharged similar fiscal free-riding during the Biden administration. Using provider taxes and state-directed payments, states maximized their draw from the national treasury while federal taxpayers bore the burden.
States first tax healthcare providers such as hospitals, nursing homes, and managed care plans. Then they use provider tax revenue to secure several times more in federal matching dollars, cycling the combined funds back to providers through state-directed payments.
As a new study from the Department of Health and Human Services shows, by 2025, state-directed payments had raised average Medicaid payment rates to nearly twice Medicare rates. These Medicaid gimmicks do not just raise Medicaid spending; they also drive up commercial prices, as providers gain both the room and the incentive to charge more elsewhere. The burden lands on employers, workers, and American families.
The Working Families Tax Cuts legislation caps major state-directed payments at roughly Medicare rates, generally freezes provider taxes at their July 2025 levels, and ratchets down allowable provider tax rates for Medicaid expansion states. Critics mischaracterize these changes as Medicaid cuts. In fact, the legislation unburdens both state and federal taxpayers while making healthcare more affordable for commercial payers and strengthening Medicare’s finances.
The HHS study estimates that each 1-percentage-point cut in provider tax rates reduces non-Medicaid prices by about 1.4%. A 2.5-point reduction, which corresponds to what the law requires of several states, reduces non-Medicaid prices by approximately 3.5% in those states. The result is lower spending on employer coverage and Marketplace plans, and thereby higher take-home pay.
In total, these benefits are estimated at between $502 billion and $875 billion for non-Medicaid consumers over 2025-2034. Republicans in Congress delivered more than just Medicaid savings — they delivered middle-class healthcare affordability reform.
The Congressional Budget Office estimated that these provisions will generate approximately $332 billion in federal Medicaid savings over 10 years — and that is only the Medicaid portion. When provider prices fall outside Medicaid, Medicare pays less, and the tax subsidies for employer-sponsored insurance and Affordable Care Act plans also decline as premiums fall. These non-Medicaid federal savings add another $97 billion to $169 billion over the next decade. Taken together, the reform is projected to cut federal healthcare spending by about $419 billion to $748 billion.
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The same mechanism also improves Medicare solvency, extending it about a year by saving billions of dollars on Part A spending. When Medicaid financing gimmicks are stopped, healthcare inflation eases. In an environment with low provider-price inflation, Medicare saves money through plan bidding in Medicare Advantage and market-basket updates in the traditional fee-for-service program. Medicare’s finances are further strengthened as the Trump administration roots out waste, fraud, and abuse, while its economic policies drive growth.
That brings us back to Argentina, and the instructive lesson its financial crisis provided to the world. Communal fiscal systems create perverse incentives long before they trigger visible crises. When states can overspend and shift costs upward onto federal taxpayers, they will do more of it, steering the entire nation toward fiscal trouble. Republicans’ provider-tax reforms halt this dynamic, promoting sound budgets, better incentives, and lower prices for all Americans.
Casey B. Mulligan is the chief economist, chief regulatory officer, and affordability czar at the Department of Health and Human Services.