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OVERVIEW OF PROVIDER TAXES FOR ALASKA STATE HOSPITAL AND NURSING HOME ASSOCIATION
May 2015

2. What is a provider tax?
A provider tax is merely a source of State revenue –
Federal provider tax law:
requires States to structure provider tax programs consistent with specified federal instruction or face penalty regardless of how the State uses the provider tax revenue.
does not require States to use provider tax revenue to increase Medicaid payments or use the provider tax revenue to fund any part of the Medicaid program.
permits States to increase Medicaid payments to the taxed providers within the applicable Medicaid payment limits. 2

3. What ARE THE provider tax RULES?
Federal law requires that provider taxes must:
be imposed on a permissible class of services listed in law and regulation;
be broad based – imposed on at least all non-federal, non-public providers of the service being taxed;
federal policy does not permit States to tax federally operated providers (Veteran’s Administration, Tribal facilities).
be uniform – all providers of the taxed service pay the same rate of tax; and,
not include a hold harmless arrangement – the State cannot guarantee to return any portion of the provider tax cost through Medicaid payments or any other form of State payment.
Provider tax collections limited to 6% of the taxpayers’ net patient revenue. 3

4. What ARE THE provider tax RULES?
Federal law permits States to “waive” the broad based and uniformity requirements if a State can demonstrate its provider tax structure is “generally redistributive.”
Generally redistributive:
A demonstration that the Medicaid program does not realize a greater burden under the State’s proposed tax structure than it would if all providers were subject to the tax (broad based) at the same rate (uniform).
Unable to demonstrate compliance if excluding only those providers with lower volumes of Medicaid business.
Offers States some flexibility to mitigate a portion of cost/loss otherwise incurred under a broad based and uniform tax. 4

5. What ARE THE provider tax RULES?
Generally redistributive measured under 1 of 2 numerical tests:
Broad Based Waiver Test (P1/P2) – a proportionality test utilized when the State seeks to exclude certain providers from the tax, but taxes all other providers at the same rate.
Must meet a value of 1.0.
An exclusion of only public hospitals does not require a waiver.
Uniformity Waiver Test (B1/B2) – linear regression analysis utilized when the State seeks to impose different rates of tax on certain providers, regardless of whether all providers are subject to the tax.
Graduated tax rate based on Medicaid volume not permitted – considered a hold harmless even if meets 1.0.
If a State excludes certain providers and imposes a different rate of tax under its provider tax program, only 1 test is required (the B1/B2 test). 5

6. What types of provider tax programs exist today?
Most States impose a tax program on hospitals and nursing homes.
Many of the hospital and nursing home taxes were proposed by the industry and designed to establish supplemental Medicaid payments.
Many of these hospital provider tax programs excluded certain providers and/or established different rates of tax to mitigate a portion of the tax loss that would occur in providers with lower volumes of Medicaid business under a broad based or uniformity waiver.
Providers of specialty services and/or smaller providers are commonly excluded or realize a lower rate of tax under the provider tax structure.
Hospitals – psychiatric, critical access, rehabilitation, long-term acute care, rural.
Nursing Homes – continuing care retirement centers, nursing homes with beds under certain threshold(s).
The supplemental Medicaid payments generated from the provider tax are typically targeted to only taxpaying providers.
State typically negotiated a “skim” to administer the provider tax program and to help fund other areas of the Medicaid program. 6

7. What types of provider tax programs exist today?
Over time, the benefit of these industry-supported provider tax programs has eroded as States have increased their reliance on the provider tax revenue to address budget shortfalls, including increasing the “skim” to avert rate cuts on the taxed industry and/or to other providers in the Medicaid program.
A few States have imposed their own hospital tax program under which the revenue is deposited into the general fund and no increased hospital payments are generated.
A few other States imposed a hospital tax that reimburses hospitals in the aggregate an amount equal to the aggregate tax collection.
Such a program creates a substantial windfall for these States while creating significant losses to providers that do not have high Medicaid utilization; and,
Over time, some States reduced the aggregate Medicaid payment distribution while maintaining the aggregate tax collection.
More recently, 2 States (Arizona and Indiana) have utilized hospital tax revenue to cover State costs related to Medicaid expansion.
No reliable data yet available to determine the net impact on hospitals relative to tax cost and increased revenue for services to Medicaid Expansion population. 7

8. WHAT IS A PROVIDER TAX AGAIN?
A provider tax is a slippery slope –
In nearly every State in the country, the provider industry supporting the tax established as many legislative protections as possible to ensure the State could only use the tax revenue to make increased Medicaid payments to the taxed industry.
Despite those efforts, the benefits of such programs have gradually reduced due to ongoing Medicaid budget shortfalls.
A determination of whether to support a provider tax program must take into account:
The political strength/influence of the taxed health care provider industry.
The ability to maximize the benefit to the taxed industry through the development of the provider tax structure and establishment of increased Medicaid payments.
The ability to minimize the amount of the initial “skim” to the State.
The willingness to fund State costs under Medicaid expansion with provider tax revenue.
The understanding that the initial benefit generated under a provider tax program will significantly diminish over time. 8

9. Consideration for a Provider Tax in Alaska
Components of the Alaska Medicaid program that make a hospital and/or nursing home provider tax program potentially attractive:
Based on State information, additional spending room is available under the applicable aggregate fee-for-service (FFS) Medicaid payment ceiling,
referred to as the Medicaid upper payment limit or UPL.
Opportunity to establish targeted supplemental Medicaid payments up the UPL.
No history of State budget reliance on provider tax revenue.
Opportunity to realize new Medicaid revenue under Medicaid Expansion for historically unreimbursed costs.
Opportunity to establish supplemental Medicaid UPL payments allocable to the Medicaid Expansion population at enhanced federal matching rates if enrolled in FFS program. 9

10. Consideration for a Provider Tax in Alaska
Components of the Alaska Medicaid program that make a hospital and/or nursing home provider tax program less attractive:
Available spending room under the applicable Medicaid UPLs not confirmed.
A small universe of hospital and nursing home providers – difficult to exclude providers to mitigate tax loss.
Current (and future) budget deficits could require significant State “skim.”
State cost of Medicaid Expansion not certain.
Future transition to Medicaid managed care would reduce available spending room under the FFS Medicaid UPL 10

11. Interaction of Provider Tax and Medicaid Expansion
States have options to expand their Medicaid programs to non-disabled adults under age 65 with income up to 138% of the Federal Poverty Level.
A traditional Medicaid expansion can be implemented through the Medicaid State plan amendment process or the 1115 Waiver process for States already operating their Medicaid programs under such waiver authority.
States may implement an alternative to Medicaid expansion under an 1115 Waiver only – State must still maintain same eligibility standards as traditional Medicaid Expansion, but can implement reforms that test models, such as:
Premium assistance programs for commercial coverage.
Enrollee premium contributions.
A lesser benefit package.
Healthy behavior incentive programs.
The federal government will fund 100% of the cost of providing services to the Medicaid Expansion population through FY 2016 and will fund at least 90% of the costs through 2020 and beyond. 11

12. Interaction of Provider Tax and Medicaid Expansion
Funding Medicaid Expansion with a provider tax:
Potential benefit to hospitals based on current uninsured volume.
Limited benefit to nursing homes based on age of Medicaid Expansion population and very limited uninsured volume.
Alaska’s cost attributable to the Medicaid Expansion population far less than cost of existing Medicaid population.
Regardless, many costs exist including:
Administrative costs.
Non-federal share of hospital and non-hospital service costs for traditional Medicaid Expansion.
Premium assistance costs for alternative Medicaid Expansion.
Woodwork effect (currently eligible under existing Medicaid but not enrolled). 12

13. QUESTIONS? 13