Medicaid is structured as an open-ended entitlement, with no cap on the amount of matching funds states receive from the federal government. The consequence of this design flaw is that states have devised a variety of budget gimmicks and financing schemes that have driven Medicaid costs higher for the federal government and weakened fiscal accountability in the program.
These schemes often revolve around provider taxes. Here’s how they work: A state levies a “tax” on health care organizations like hospitals or nursing homes. The state uses this revenue to increase Medicaid payment rates, thereby returning a substantial portion of the money to the very providers that were taxed. This new Medicaid spending automatically triggers a federal match, often resulting in a net financial gain for the state (meaning the state receives more from the federal government than it pays providers with state funds).
Although provider taxes conflict with the spirit of Medicaid’s federal-state partnership, the health care industry has vocally lobbied against reforms that would curb these abuses. Many in the health care industry frame provider taxes as tools for protecting access to services and improving patient outcomes, rather than fiscal maneuvers to shift Medicaid costs to the federal government. Without the infusion of federal money tied to provider taxes, the argument goes, states would be forced to reduce Medicaid reimbursement rates, endangering the viability of safety-net providers.
The Federation of American Hospitals has asserted that “provider taxes allow hospitals to stay open and provide critical care.” Similarly, the National Rural Health Association has warned: “Changes to provider taxes and state-directed payments could significantly reduce Medicaid funding for rural facilities, making it harder for providers to sustain key services and keep their doors open.” Conspicuously, neither organization cited any empirical evidence to support its conclusions.
What Do the Numbers Show?
These claims are at odds with the data. I examined rural hospital closures that occurred in the U.S. from 2005 to 2024. If provider taxes improved the financial stability of rural hospitals, closures should be more common in states without these taxes.
The data show the opposite. As depicted by the blue bars in Figure 1, states with hospital provider taxes throughout the 2005-2024 period experienced 21 rural hospital closures, while only one rural hospital closed in states without such taxes at any time during the 2005-2024 period. (See the Notes to Figure 1 for a list of specific states in each group.)
The raw numbers are stark, but since the two groups of states have different populations, a simple comparison of the number of hospital closures is incomplete. I address this by also calculating the population-adjusted number of rural hospital closures (the orange bars in Figure 1). By this measure, rural hospital closures in provider tax states were more than three times higher than in non-provider tax states—3.07 vs. 0.99 rural hospital closures per 10 million residents.
This finding echoes what Niklas Kleinworth and I reported last year, showing that hospital provider taxes were associated with markedly lower hospital employment in rural areas.
Although aggregating rural hospital closures over two decades reduces the risk of reverse causality (i.e., the possibility that states with financially distressed rural hospitals are more likely to adopt hospital provider taxes), many other factors influence rural hospital closures. To address this, I implement a statistical model that tracks rural hospital closures over time in states that adopted hospital provider taxes at some point between 2005 and 2024 and compares them to states that did not implement these policies. This approach approximates the design of a scientific experiment with “treated” and “control” units.
The results are shown in Figure 2. The outcome, measured by state and year, is the number of rural hospital closures per 10 million population. The vertical dashed line depicts the year the hospital provider tax takes effect. The jagged, roughly horizontal orange line shows how closures evolved over time in states with hospital provider taxes relative to states without them (the horizontal blue line). The pale blue region indicates the 95 percent confidence interval around the estimates.
Figure 2 shows that there is little difference between the two groups of states, even up to 14 years after the implementation of hospital provider taxes. If these policies were an essential source of financial support to bolster rural health care, as industry lobbyists often claim, we should observe a decline in rural hospital closures after states adopt hospital provider taxes. Instead, the evidence indicates that hospital provider taxes have no statistically discernible effect on rural hospital closures.
