Healthcare Provider Taxes and the OBBBA

States levy taxes on various healthcare providers, including hospitals, managed care organizations, home health agencies, and nursing homes. While some states use provider tax revenue to support insurance coverage for the uninsured, most state provider tax revenue is used to increase reimbursement rates for Medicaid providers and draw down matching federal funds – as long as the state provider taxes did not exceed 6% of a provider’s net patient revenue (the safe harbor threshold). 

Medicaid is the largest source of healthcare coverage in the U.S. and is jointly funded by federal and state governments. To fund and support state Medicaid functions, all states (including the District of Columbia but excepting Alaska) have implemented healthcare provider taxes. 

In passing the One Big Beautiful Bill Act (OBBBA), Congress authorized more than $900 billion in Medicaid cuts, significantly limiting states’ ability to impose or raise healthcare provider taxes. While not all healthcare provider taxes have been wiped out, they have been significantly restricted and will not fund Medicaid as intended. Taxpayers must be aware of various OBBBA-related changes to state healthcare provider taxes, such as freezing rates and reducing the safe harbor threshold, which previously allowed states to reimburse providers up to 6% of net patient revenue.

State Taxation of Healthcare Providers

Approaches for levying provider taxes vary by and are specific to each state, and the taxes often differ in which providers (e.g., hospitals and health systems, nursing facilities, managed care organizations) and base (e.g., flat tax, per admission, share of net revenue) to tax. For example, provider taxes imposed on hospitals, nursing homes, and home health agencies are generally based on gross receipts, and nursing homes providers often are taxed per bed.

State statutes typically refer to classes and definitions in the Code of Federal Regulations (CFR), which lists 19 classes of healthcare providers and services (see 42 CFR §433).

To ensure matching federal funds for Medicaid programs, state healthcare provider taxes must satisfy three requirements:

• Be imposed on all providers in a given category;
• Be uniformly imposed regardless of whether the providers service Medicaid patients; and
• Not hold providers harmless for the burden of the tax by guaranteeing its reimbursement.

Many states impose more than one provider tax and can use multiple types to fund different programs. The taxes are administered by the state’s Department of Revenue or Department of Health.

Implications of the OBBBA

There is now a nationwide moratorium on the implementation of new provider taxes and a prohibition on increasing the rates of existing taxes. Also, under the OBBBA, the safe harbor threshold will be reduced from 6% to 3.5% for states that expanded Medicaid eligibility under the Affordable Care Act. That reduction must be implemented gradually by 0.5% per year beginning in 2028 and reach the new 3.5% rate by 2032. States that did not expand Medicaid are not subject to that requirement, but their provider tax rates are frozen at 2025 levels as long as the OBBBA remains in place.

States will face revenue shortfalls because of the OBBBA’s changes to the Medicaid system and state access to matching federal funds. As such, they will need to generate funding through other methods (e.g., modified sales, income, and excise taxes) or attempt to navigate complex updated requirements for seeking provider tax waivers. 

Those changes affect all states with healthcare provider taxes, although the mandated reduction in existing rates differs based on whether the state expanded Medicaid eligibility, the types of provider taxes it levies, and its existing provider tax rates. They also affect all 19 CFR provider classes.