By Nic Horton, Jonathan Ingram, and Josh Archambault— Mr. Horton is a Policy Impact Specialist, Mr. Ingram Research Director, and Mr. Archambault a Senior Fellow at the Foundation for Government Accountability
After the legislature blocked his Obamacare Medicaid expansion plans in 2014 and 2015, Utah Governor Gary Herbert (R) began working with legislative leaders to negotiate some kind of “compromise” to expand the program to more than 100,000 able-bodied adults. Although the deal is being negotiated in secret, some details have been leaked to the public.
According to the few specifics made public, the biggest component of the negotiated framework is to levy a new “assessment” on medical providers in Utah to help pay for the state’s share of expansion. But the so-called assessment is simply a new Obamacare tax on the sick that will not only raise health care costs for all Utahns, but add significantly to the national debt.
Provider Taxes Are Taxes On Everyone
Gov. Herbert says this plan will allow the state to expand Medicaid under Obamacare without the need to “raise taxes” to pay for it. But the proposed provider tax is still a tax – and not just on providers.
Hospitals and other providers won’t pay this tax. Although they may write a check and send it to the state treasury, they won’t bear the burden of a new tax. As Milton Friedman frequently explained: only people can pay taxes. This new Obamacare expansion tax will simply be passed along to Utahns seeking medical care.
Worse yet, this new tax will be borne not just by sick Utahns, but by taxpayers everywhere. This new schemewas designed specifically to draw in more money from federal taxpayers.
Here’s how it works: hospitals and other providers will pay an “assessment” to the Utah government. Utah will then turnaround and spend those dollars in order to trigger federal “matching” dollars for Medicaid expansion. In this case, federal taxpayers will have to kick in an extra $9 or more for every dollar Utah collects from the sick.
And remember: there is no magic pot of Obamacare money to cover those funds. Any federal money Utah spends on Obamacare expansion will simply be added to the national debt.
Provider Taxes Have Significant Limits
While very few details have been released about Utah’s provider tax plan, Gov. Herbert has indicated that he wants providers to pay “seven cents of every dollar” they receive from Medicaid expansion. But federal law has several limits on states seeking to use these taxes to fund Medicaid services.
First, these taxes must be broad-based and uniform. This means that states must impose the same tax for all providers of a similar type – regardless of whether they accept Medicaid patients. Utah cannot simply impose the tax on those providers receiving Medicaid expansion funding.
Second, these combined taxes can only comprise one quarter of the state’s share of overall Medicaid costs. Federal law also caps these taxes individually to just six percent of net patient revenue. It is worth noting that Utah already has provider taxes in place to fund traditional Medicaid, leaving less wiggle room for any new tax.
Finally, federal law prohibits states from holding providers “harmless,” meaning they can’t provide a direct or indirect guarantee that providers will receive their tax dollars back in the form of additional Medicaid spending. Basing the tax on how much Medicaid expansion funding providers receive could risk running afoul of this requirement.
If the provider taxes do not cover the entire Medicaid expansion bill, state taxpayers will be tapped to pay the remainder of the costs. Providers in Utah may even be willing to promise to pay these costs, knowing that their liability is capped by federal law, while state taxpayers don’t have that luxury and could be on the hook for overruns. Given the huge cost overruns other states are experiencing, Utah lawmakers should be extremely wary of these promises.
This is exactly what happened in Tennessee, where hospitals promised to pay expansion costs, knowing the projected costs would almost certainly outpace the maximum provider tax that state lawmakers could levy. Fortunately, Tennessee lawmakers had the good sense to reject the Obamacare expansion plan, despite hospitals’ promises.
And, despite the spin coming out of the capitol, not all providers are excited about the prospect of this new Obamacare tax. In fact, the Utah Medical Association has voiced serious concerns about the proposal.
Provider Taxes Are On The Federal Chopping Block
If this were not worrisome enough for policymakers, the federal government has already put this funding on the chopping block. Utah lawmakers should be hesitant to create a permanent, new entitlement for able-bodied adults that hinges on funding that could easily disappear.
Republicans in Congress – led by U.S. Senators Bob Corker (R-TN) and Lamar Alexander (R-TN) – have proposed eliminating this provider tax scheme altogether by lowering the amount of provider taxes that can be used to pay for states’ Medicaid costs. As mentioned above, federal law currently caps these schemes at six percent of net patient revenue; Republican proposals would eventually reduce it to zero.
The Congressional Budget Office (CBO) frequently lists the reduction of provider taxes among the deficit-reduction options available to federal policymakers. The bipartisan Simpson-Bowles Commission proposed eliminating the scheme. And even President Obama has proposed phasing out authority to use these taxes to pay for Medicaid.
By funding Obamacare expansion with a new provider tax scheme, Utah lawmakers would not only be undermining congressional efforts to repeal Obamacare – it would also undermine efforts to restore national fiscal sanity and end these kinds of budget shenanigans that drive up the national debt. It would also put Utah taxpayers on the hook.
There’s Still Time to Walk Away
Legislative leaders have been negotiating with Governor Herbert for months, trying to come up with a solution that “works for Utah.” But any plan that accepts Obamacare dollars, raises taxes, and prioritizes welfare for able-bodied adults over resources for the truly needy is a plan that must be rejected.