Hospitals, nursing homes at risk if Medicaid provider tax cap is lowered
By Jaymie Baxley
North Carolina health officials are warning that one of the many proposals being floated in Congress to shrink a key Medicaid funding mechanism could devastate hospitals and nursing homes across the state — cutting hundreds of millions of dollars from a system already straining to meet growing needs.
The proposals target taxes — referred to in the state as “assessments” — that North Carolina and other states impose on health care providers to generate revenue. The state then turns around and uses those tax dollars to draw down federal matching funds for Medicaid, which reimburses North Carolina for about two-thirds of every Medicaid dollar spent.
North Carolina collects more than $2.5 billion a year in provider taxes, which are currently capped at 6 percent of providers’ net revenue from patients.
Congressional Republicans like Rep. Chip Roy of Texas want to lower that cap. Roy recently likened provider taxes to a glorified form of “money laundering,” a comparison echoed by the conservative Foundation for Government Accountability think tank.
But Julia Lerche, chief strategy officer for the N.C. Department of Health and Human Services, said even a modest cap reduction could have “significant implications” for the state. Speaking during a video conference with reporters on May 1, Lerche noted that provider taxes account for more than a quarter of all non-federal dollars used to support Medicaid — and its more than 3 million beneficiaries — in North Carolina.
A drop of just 1 percentage point to those provider taxes from 6 percent to 5 percent, she said, would lead to “more than a billion-dollar reduction in related federal funds.” That would force the state to scale back or eliminate initiatives that have thrown a lifeline to many of the same providers who pay the tax.
Lower cap could hurt hospitals
One might assume hospitals would welcome a reduced tax burden. But many facilities — especially those in rural and underserved areas — benefit directly from the current system.
That’s because North Carolina uses provider tax revenue to fund programs like the Healthcare Access and Stabilization Program, or HASP. Launched in 2023 as part of the state’s Medicaid expansion, HASP boosts reimbursement rates for hospitals that treat Medicaid patients, helping to bring payments more in line with what they say are the actual costs for providing that care.
“I know it seems counterintuitive, but if the assessment or the tax is reduced, it is a direct hit to the bottom lines and financial sustainability of hospitals across North Carolina,” said Josh Dobson, the new president and CEO of the North Carolina Healthcare Association.
Dobson’s organization represents more than 130 hospitals in the state, many of which, he said, have faced “historic cost increases” in recent years.
“Salaries, benefits, supplies, regulatory and capital costs have made health care provider operations far more expensive than they ever have been,” he said. “Without HASP, all rural and safety net hospitals who have had to contend with this inflation in North Carolina would have a negative impact on their operating margins, and many of these hospitals in rural areas are already on a very small operating margin.”
Dobson added that HASP funds have been used to expand the number of ICU beds in areas with shortages. The program has also “increased access to maternal and child health initiatives to provide services to expecting moms and newborns.”
If those funds were to disappear, hospitals might have to delay hiring, postpone infrastructure upgrades or reduce critical services such as obstetrics, behavioral health and trauma care. In extreme cases, some rural hospitals might be forced to close or consolidate, exacerbating already significant health care access issues in parts of the state.
‘Extremely adverse outcomes’
Nursing homes would also suffer if the tax cap is lowered, state officials said.
Lerche said a decrease could force the state to cut Medicaid reimbursement rates for skilled nursing facilities, which are heavily dependent on the program. More than 60 percent of North Carolina’s nursing home stays are paid for with Medicaid dollars, and more than a quarter of the state’s share of nursing home funding comes from provider tax revenue.
“If the allowable tax, or allowable amount of tax on revenues, is reduced by just one percentage point, that amounts to a net reduction of tens of millions of dollars in nursing home funding in North Carolina,” said Adam Sholar, president and CEO of the North Carolina Health Care Facilities Association, whose members make up 90 percent of the state’s skilled nursing facilities.
Sholar said changing the cap could undo years of progress made in recovering from the COVID-19 pandemic, which triggered a mass departure of long-term care workers. Staffing levels fell by nearly 20 percent at the height of the crisis.
“We’ve been working hard as we try to rebuild and build back our staff and add new caregivers, and now we’ve almost fully recovered,” he said. “We are still down almost 2 percent of our workforce since early 2020, but now we find ourselves facing new challenges like this that may force us to reduce caregiver wages and cut other nonessential staff.”
He added that many of the state’s nursing facilities are in urgent need of capital upgrades.
“The average age of a nursing home in North Carolina is 38 years old, which means a greater need for investing in renovations and facility maintenance,” Sholar said. “One reason these issues are sometimes delayed is because our funding, first and foremost, goes toward providing the care that our residents need.”
Lutheran Services Carolinas, which operates several nursing homes in rural parts of the state, also opposes lowering the cap. Kesha Smith, the nonprofit’s chief operating officer, said a reduction of any size would compound existing challenges facing the sector.
“Provider tax cuts would be devastating to nursing home operations and cause extremely adverse outcomes for our residents,” she said.
Committee proposes freeze
In the U.S. House of Representatives, the Energy and Commerce Committee, which oversees Medicaid, stopped short of reducing or eliminating provider taxes in legislation introduced late Sunday.
Instead, the committee proposed freezing the taxes at their current rates. While less impactful than a reduction, the moratorium on new and higher taxes could limit North Carolina’s ability to increase its share and, consequently, pull in additional federal funds.
The legislation also includes a national work requirement for Medicaid. This controversial provision, referred to in the bill as a “community engagement” requirement, would force non-disabled adults to work or volunteer for at least 80 hours a month in order to retain their benefits — something many health policy experts fear will exacerbate health care inequities in low-income communities and place undue administrative strain on the state agencies that administer Medicaid.
Members of the committee are expected to begin debating and refining the legislation, which is likely to face fierce opposition from congressional Democrats, on Tuesday.
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