Will Congress’ Reforms to Medicaid Financing Hurt Rural Health Care? No: Debunking the Myth that Provider Taxes Support Rural Hospitals

For nearly four decades, states have used provider taxes as part of legalized money laundering schemes in Medicaid. Federal taxpayers and patients alike bear the burden of these financing gimmicks through distortions of the health care system, higher costs, elevated federal spending, and reduced choices for care.

The passage of the One Big Beautiful Bill Act (OBBB) constitutes the most substantial conservative Medicaid reforms in more than a quarter century, including important limits on provider tax schemes.¹ OBBB opponents are claiming that the law’s reforms, including the provider tax limits, will decimate financing for rural health facilities. In this piece, we look at the data to determine whether provider taxes have delivered the support to rural facilities that special interest groups claim. We find no evidence of any such benefit — and in fact, these policies may even be harming rural health care access.

A Primer on Provider Tax Schemes

Provider tax schemes are effectively a legalized money laundering tactic states use to garner additional federal Medicaid matching funds without paying a dime or offering meaningful benefits to patients.² The schemes start with providers lobbying for the imposition of a tax on themselves — proof that this isn’t really a tax. After providers pay the tax, states then return that revenue to those very same providers in the form of higher Medicaid payments and bill the federal government for the legally required federal match on higher spending—higher spending that required no actual expenditures from states. The schemes are intensified in states that expanded Medicaid to able-bodied, working-aged adults, where the federal government pays 90 percent of these costs.

As far back as the 1980s the federal government recognized provider taxes as “scam[s],” as then-Vice President Joe Biden described them in 2011.³ Federal regulations imposed restrictions on provider taxes, barring states from holding providers harmless (i.e., fully offsetting providers’ tax burden with higher Medicaid payments) if the tax was greater than 6 percent of their aggregate patient revenues. Naturally, no state rate exceeds this threshold.

These restrictions did not prevent states from manipulating these taxes to abdicate more of their fiscal responsibilities to federal taxpayers. Largely through states’ increasing use of these schemes, combined with the incentives from Obamacare’s Medicaid expansion, the real federal share of Medicaid spending grew from a historical level of 60 percent of total Medicaid spending in 1991 to nearly 75 percent in 2024.⁴

Recently, some states have exploited a loophole through a managed care (MCO) tax to generate billions of dollars in new revenue to fund progressive projects like “free” — read: “taxpayer subsidized” — Medicaid for unauthorized immigrants.⁵ Federal regulations require these taxes to be “generally redistributive,” which broadly means that states cannot disproportionately tax providers who would get their money back through higher Medicaid payments. But states like New York and California devised a particularly egregious tax that barely meets the statistical test for meeting this requirement, obtaining 93 percent and 99 percent of their funding from Medicaid providers, respectively.⁶ Such a financing gimmick allowed these states to collect billions in federal revenue.

The OBBB curbs these overt abuses of Medicaid financing by codifying a pending rule by the Trump Administration to close the California provider tax loophole and lowering the safe harbor threshold from 6 percent to 3.5 percent (a similar policy to one proposed by President Barack Obama in 2014) in Medicaid expansion states starting in 2028.⁷ These reforms are expected to save more than $200 billion over the next decade.⁸

Despite Claims to the Contrary, Provider Taxes Don’t Support Rural Hospitals

Our empirical analysis shows that over the last 20 years, provider taxes have not been associated with better outcomes for rural hospitals, despite the additional federal funding flowing into states that employ these schemes.

We used data from the Quarterly Census of Employment and Wages (QCEW) to assess the impact of provider taxes on total employment in rural hospitals.⁹ Employment levels serve as a useful measure of whether facilities are offering new or expanded services, growing their capacity, and contributing to the local economy.

Comparing the number of rural hospital jobs in 2023 between states that did and did not have a provider tax on hospitals in effect in the prior two decades, we found states without a provider tax had markedly more employees per capita than those with these schemes in place (illustrated in Figure 1). If hospital provider taxes were essential for allowing rural facilities to stay afloat, one would expect to see a larger rural hospital sector in states in which these policies have been in force for two decades, not the opposite. To be sure, a simple comparison between these two groups of states does not account for other factors that influence rural hospital employment. To bolster the robustness of our analysis, we leveraged more advanced statistical methods.

To estimate the impact of provider taxes over time, we perform a “dynamic difference-in-differences” analysis that measures how rural hospital employment changed in states adopting a provider tax on hospitals between 2004 and 2023, relative to states without these taxes. The results are shown in Figure 2. In the years leading up to the implementation of provider taxes on hospitals, there was virtually no distinction between the two groups of states in terms of the population-adjusted level of rural hospital employment. After the adoption of the tax, however, states with provider taxes on hospitals experienced declines in rural hospital employment compared to those without, and these negative effects grew over time.

If provider taxes were truly helping to sustain rural hospital systems, one would expect these facilities to grow, relative to non-tax states, when provider taxes are adopted. Employment would be expected to stay steady or even expand as systems offer more services, capacity, and locations.

Notably, there is no such distinction when running the same difference-in-differences analysis on urban hospitals. In this alternate analysis, we found small, statistically insignificant differences between states with and without hospital provider taxes. This illustrates that not only did urban hospitals not experience a similar decline in employment after the implementation of hospital provider taxes as their rural counterparts, but they mirrored trends for urban hospitals in other states without these taxes.

The Real Impact of Provider Taxes

Rather than supporting rural providers, anecdotal evidence points to how provider taxes really go to enrich large, well-connected, corporate hospital systems. Universal Health Services, for example, made nearly $1 billion in net revenues in 2024 alone through such schemes.¹⁰ In North Carolina, specifically, Atrium Health System expects to derive $1.7 billion in laundered funds in 2025, despite being a nonprofit system.¹¹

In the case of North Carolina, State Treasurer Dale Folwell penned a letter to the Centers for Medicare and Medicaid Services requesting their rejection of his state’s application for a new payment scheme.¹² Folwell explained how North Carolina already boasts some of the most expensive health care in the nation and notes how provider tax schemes will do further harm to the state’s health care delivery system.

Studies show these schemes have tangible impacts on patients both on and off Medicaid, as they raise the cost of care and encourage consolidation of hospital systems. These effects on prices are particularly pervasive when additional Medicaid payments are tied to average commercial rates (ACR) for care — which are roughly 2.5 times Medicare rates for the same services.¹³ Additionally, tying these schemes to ACRs creates upward pressure on hospital prices for everyone, as higher commercial prices would generate more revenue from Medicaid. Meanwhile, consolidation reduces already scarce market competition for patient services, which further raises prices and has detrimental effects on wages and employment for rural communities who depend on these facilities as economic drivers.

The decline in rural health care employment after the imposition of hospital provider taxes shows there are better ways of aiding rural health care facilities than leaving the money laundering machine in place. The OBBB sets aside $10 billion annually for the next five years to establish a fund dubbed the “Rural Health Transformation Program.” This measure targets assistance to financially needy hospitals rather than perpetuating the current system where the vast majority of Medicaid spending flows to large, urban health systems.¹⁴

Conclusion

Our analysis suggests rural hospitals do not benefit from provider tax schemes. Empirically, provider taxes are associated with a reduction in employment in rural hospitals. Instead, these schemes disproportionately serve large, well connected hospital systems. As a result, patients face higher costs, fewer options, and reduced access in their care.

Congress was right to take action to limit provider tax gimmicks that siphon federal money into state and corporate health care coffers. Though the reduction of the safe harbor threshold will not eliminate the effects of these legalized money laundering schemes, it takes a $200 billion step toward curbing the abuse — an achievement that benefits both rural health facilities and the patients who depend on them.

Footnotes