The Centers for Medicare & Medicaid Services recently published a rule targeting “provider taxes,” a financing gimmick states use to harvest extra Medicaid dollars from the federal government.
Good on the Trump administration. Over the last decade and a half, states have exploited provider taxes and other financing loopholes to push more and more of the cost of Medicaid onto the federal government. Now, Uncle Sam is finally pushing back.
States receive between a dollar and $9 in “matching funds” from the federal government for every dollar they spend on Medicaid. This generous financing structure incentivizes them to expand their programs and grab more from the federal piggybank.
That’s where provider taxes come in. States levy a tax on healthcare providers, such as hospitals or nursing facilities, and use the proceeds to pay for expanded Medicaid services. That money draws extra funding from the federal government. Both states and providers end up better off, while federal taxpayers lose out.
States have engaged in additional chicanery to game the system. Under federal law, provider taxes must apply to organizations equally. However, states have been applying for waivers so they can levy higher taxes on Medicaid businesses while letting other organizations off the hook. California, for instance, taxes certain Medicaid businesses at a steep monthly rate of $274 per member. Non-Medicaid businesses pay a monthly fee of just $2 per member.
Now, CMS is cracking down on the grift. The new rule would “prohibit states from taxing Medicaid business at higher rates than non-Medicaid business.” It would also “bar the use of vague language to disguise Medicaid-specific taxes.”
The new rule is necessary, given how the previous administration encouraged states to draw as much from the federal government as they could. In its last year alone, the Biden administration green-lit four provider tax waivers for California, Michigan, Massachusetts, and New York. These states together “are responsible for more than 95% of projected federal taxpayer losses under the loophole,” according to CMS.
Such losses aren’t negligible. States are making $23.6 billion off the provider tax loophole, according to CMS. If finalized, the new rule would save taxpayers more than $33 billion over five years.
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The rule would also help nudge Medicaid back toward its original purpose of covering needy individuals, such as pregnant women, the disabled, and children. Provider taxes help states such as California finance health benefits for illegal immigrants and thus take resources away from those the program was created to serve.
Stopping the provider tax grift would be an effective way to eliminate waste, fraud, and abuse in Medicaid. The Trump administration is correct to focus its attention on this matter.
Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy for 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.