OBBB’s Course Correction + New Paragon Research

This week, Paragon released a host of products on four important topics: the One Big Beautiful Bill (OBBB), CMS’s rule on provider taxes, a new empirical study on the effect of provider taxes on rural hospital employment, and a framework to test whether and how artificial intelligence (AI) can lower health care costs. Kev Coleman, Paragon’s expert on AI and association health plans (AHPs), will testify before the Senate HELP Committee at 10 a.m. on Thursday, July 17. The hearing is titled “Freedom to Work: Unlocking Benefits for Independent Workers,” and Kev will focus his testimony on expanding AHPs.

Setting the Record Straight on the OBBB’s Health Provisions

The OBBB represented a significant course correction from the enrollment-at-any-cost policies of the Biden administration that dramatically expanded taxpayer subsidies to big hospital systems and insurance companies. Last week, we released an analysis of all 33 health policy provisions in OBBB.

There is a lot of misinformation about OBBB, much of it funded by the health care industry. Paragon is committed to debunking these myths and setting the record straight about the reforms. We will continue to explain why they are needed and how they can be built upon for future legislation and regulations. Today, we are releasing three fact sheets tackling the myths of Medicaid cuts, coverage loss, and opposition to OBBB’s Medicaid reforms.

Support for CMS Rule to Close a Major Provider Tax Loophole

Paragon submitted a comment letter strongly supporting a proposed rule from the Centers for Medicare & Medicaid Services (CMS) to close a loophole that allows states a particularly egregious way to game Medicaid financing. Under current rules, states can impose taxes almost exclusively on Medicaid managed care organizations (MCOs), then return the tax revenue to those same MCOs through higher Medicaid payments. This creates the illusion of state spending and unlocks large federal reimbursements without any real state contributions. This scheme benefits insurance companies, hospital systems, and states—with the American taxpayer holding the bag.

Back in March, Paragon and the Economic Policy Innovation Center (EPIC) exposed one of the worst abuses of this scheme in California. In a joint paper, we documented how the state levied massive taxes on Medicaid MCOs—while imposing minimal ones on private plans—and then reimbursed those Medicaid plans for the tax. This scam helped California collect roughly $10 billion in federal funds over just 18 months without any actual state contributions. The Golden State used this federal loot to expand Medicaid to unauthorized immigrants and eliminate asset tests for Medicaid long-term care coverage. New York followed California’s example and received approval for a similar scheme in the final days of the Biden administration.

Although the Trump administration had already proposed to close this loophole through regulation in May, in the OBBB Congress provided the administration with even stronger ground to do so. Currently, there are seven states that exploit this loophole to operate a total of eight provider tax scams.

Medicaid money laundering hurts the most vulnerable because it enables states and big hospitals and insurance companies to focus on developing schemes to enrich themselves instead of focusing care on those who need it. In our letter, we urge CMS to bring all these state scams to an immediate end, particularly the egregious ones from California and New York. Doing so would end the fleecing of the American taxpayer and force states to focus Medicaid dollars on helping those who need it most.

New Analysis Shows Provider Taxes Don’t Help Rural Hospitals

In a new policy brief, Liam Sigaud and Niklas Kleinworth debunk the claim that limits on Medicaid provider taxes—like those implemented by the OBBB—will harm rural health care. Although some special interests argue these taxes are essential, the evidence shows otherwise.

Using employment data from 2004 to 2023, Liam and Niklas find that rural hospital employment declined in states that adopted hospital taxes, compared to states without a hospital tax. If provider taxes supported rural care, rural hospital systems would be growing, not shrinking, in the states using these schemes relative to those that do not. Urban hospitals, by contrast, showed no change in employment after adopting hospital provider taxes compared to their peers in states without such taxes. Their analysis suggests that, if anything, provider taxes are harming rural hospitals.

Rather than helping struggling hospitals, provider taxes disproportionately benefit large, politically connected hospital systems. Universal Health Services, for example, reaped nearly $1 billion through such arrangements in 2024, while North Carolina’s Atrium Health is projected to collect $1.7 billion in 2025—funded not by state contributions but by recycled federal Medicaid dollars. For a deeper explanation of the Medicaid money-laundering machine, see Paragon’s Addressing Medicaid Money Laundering, which recommended a host of reforms that Congress enacted in OBBB.

During the debate over OBBB, Paragon experts documented how large hospital systems were hiding behind rural hospitals in efforts to block needed reforms to address the Medicaid money-laundering machine. This new analysis reinforces why lawmakers should continue to view industry claims skeptically. The truth is that provider tax schemes primarily enrich large, well-connected hospital systems—not struggling rural providers. Thankfully, OBBB includes a better approach: the Rural Health Transformation Program, which sets aside $10 billion annually to target support to the hospitals and communities that truly need it. By reining in abusive financing gimmicks and ending the broad, inefficient flow of federal dollars to already wealthy systems, Congress has opened the door to smarter, more effective rural health investments.

Could the VA Be the Key to Lowering U.S. Health Care Spending?

Last year, in his important paper, Lowering Health Care Costs Through AI, Kev Coleman outlined how AI can reduce labor costs, improve diagnostic accuracy, and scale clinical tasks more efficiently than past efforts.

In a new policy brief, Kev offers a provocative idea: the Veterans Health Administration (VHA) could serve as a national testbed to determine whether—and how—AI can meaningfully reduce U.S. health care costs. He argues that the VA is ideal for this evaluation and that policymakers must focus on lowering health care costs to ease the burden on families and to reduce the mounting fiscal pressure from Medicare, Medicaid, the ACA, and other federal programs.

Kev notes that most nonprofit health systems lack incentives to cut costs. Their financial models depend on maximizing revenue, making them unlikely to adopt tools that reduce service volume or payment rates. The VHA, by contrast, is both payer and provider, which gives it control over clinical protocols, access to claims and EHR data, and national reach—all key ingredients for a credible cost-reduction demonstration.

Crucially, Kev emphasizes that AI alone won’t lower costs—it depends on the system in which it’s deployed. It requires a system willing and able to iterate, adapt, and prioritize cost reduction—features currently lacking in most health systems.