What the Media Gets Wrong About Medicaid ‘Cuts’
Headlines assert that the reforms Republicans recently passed amount to a trillion-dollar cut to Medicaid. The New York Times calls this the most significant cut to federal healthcare spending in history. Is that so?
Maybe not. There are reasons to question whether cuts are actually happening, or if they are, who bears responsibility for the reduction.
Of the $1 trillion in “cuts” to Medicaid, $167 billion is coming from a 10-year delay of two Joe Biden rules that were finalized in 2023 and haven’t taken effect, both aimed at making re-enrollment procedures more permissive for different groups. It’s a stretch to characterize as a “cut” spending increases that have not occurred, especially when these increases come from the prevention of states identifying people no longer eligible for the program.
An additional $191 billion in alleged spending cuts concerns provider taxes, a complex issue that major news networks don’t understand. States fund Medicaid by taxing providers — hospitals and doctors — and then paying that money back to the same providers. That enabled states to claim this as a Medicaid expenditure and collect the matching funds from the federal government.
This fake accounting, facilitated by provider taxes, allowed states to spend money on Medicaid without actually incurring their expenses. Understanding this potential for abuse, Congress passed a law saying that such use of provider taxes would not qualify for the matching federal funds decades ago.
Unfortunately, there was an exception. As long as the provider tax levy stayed below 6 percent, the government would look the other way. Because the Affordable Care Act (Obamacare) offered states a much more generous match of $9 for every $1 the state spent on the expansion population, states started looking for ways to boost their provider taxes while staying under the 6 percent threshold that triggered closer scrutiny.
Of course, the states remained free to tax providers at any rate they wanted — 6 percent, 50 percent, 150 percent or more. Still, if they did so, the government would take a close look to make sure that they weren’t funneling that money back to the providers to enhance their federal intake.
That’s why the legislation reduces that 6 percent threshold to 3.5 percent, which in the past, President Obama, the Washington Post, and the bipartisan Bowles-Simpson Commission recommended.
While this may indeed lead to reductions in Medicaid spending, describing it as a cut obscures reality. With this provision, neither the federal matching formula is changing nor is it forbidding the use of provider tax as a source of funds. There is no “limit” to the taxes states can impose on providers, but a limit to how much abuse the feds will overlook. If states want to limit their provider taxes to meet federal standards, that’s for each state to decide.
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