HHS Analysis Does Not Establish a Causal Link Between Medicaid Provider Taxes and Commercial Premiums

A recent issue brief from the Department of Health and Human Services asserts that Medicaid hospital provider taxes raise employer-sponsored insurance premiums. It projects that lowering the limit on those taxes could reduce premiums by as much as 2.5% by 2032. However, the analysis is flawed and does not establish that provider taxes cause higher premiums. 

Provider taxes are a longstanding, integral part of state Medicaid policy. They play a significant role in ensuring sufficient program funding alongside other state financing mechanisms like sales, property or income taxes. And they are a crucial tool to help promote access to care, such as financing healthcare coverage, addressing gaps in behavioral health or maternity care, or ensuring adequate provider networks for Medicaid beneficiaries. Still, affordability for patients remains a critical issue, one hospitals and health systems are committed to addressing. 

Here are four reasons why the study does not create a causal link between Medicaid provider taxes and increases in employer-sponsored premiums.

The findings are highly sensitive to the starting year. The study measures each state’s average employer-sponsored premiums against the year before it adopted a hospital provider tax. For more than half of the adopters, the tax went into effect during the Great Recession or its immediate aftermath, when many states turned to provider taxes amid recession-driven budget shortfalls. During this period, premium growth slowed nationally as people used less care and employers increased cost sharing to help control costs. Premium growth then rebounded sharply in 2011. The study’s own figures show that premiums in the adopter states initially lagged the comparison states before returning to a similar trajectory, a pattern that may reflect a rebound in premium growth unrelated to provider taxes. An AHA replication of the analysis found that when measured from two years before adoption, instead of one, the estimated effect essentially disappears and is indistinguishable from zero. 

The analysis does not account for several key drivers of premium growth. Premiums are impacted by insurer pricing decisions, the age and health of covered workers, emergence of new and higher-cost treatments, plan design, and insurer market concentration. Apart from broad state and national trends, the model adjusts only for unemployment. Other changes that affect premium growth differently in adopting and comparison states could therefore be mistaken for a tax effect. The study also does not directly measure hospital prices or establish that hospital price increases explain the estimated premium effect. Instead, the authors use their own assumptions to translate the premium estimate into an implied hospital price increase.

The model does not account for the size of the tax. The authors argue that provider taxes raise hospitals’ costs, which are then passed on through higher commercial prices. This overlooks that commercial payment rates are negotiated between hospitals and insurers rather than determined by hospitals alone. But even if that argument holds, a larger tax should produce a larger effect. Yet the analysis records only whether a state has a provider tax, not how large it is or how it changed over time. The model treats a 1% tax and a 5% tax as identical, and the study never tests whether higher taxes are associated with larger premium increases. 

The comparison group includes a state with Medicaid hospital taxes. The authors rely on a cohort of comparison states that includes Texas, based on the understanding that Texas had no hospital provider tax before 2020. However, Texas hospitals have paid local provider taxes through Local Provider Participation Funds since 2013. A comparison group is supposed to show what happens to premiums when no tax is in place, so including a state that has one makes the results less reliable. 

Affordability is vital for individuals, families and employers across the country. This is why hospitals are committed to advancing policies that can improve affordability, such as increasing access to preventive services to reduce the need for higher-cost interventions later and reducing administrative costs that drive up unnecessary healthcare spending. Upending longstanding provider taxes that are an important part of how states finance their Medicaid programs will not contribute to this objective. Instead, reducing these taxes will put access to care at risk for some of our most vulnerable patients and communities. Decisions about the future of Medicaid provider taxes should be guided by rigorous evidence and a full understanding of the role these taxes play in supporting Medicaid coverage and access to care. Our review indicates this analysis does not provide sufficient evidence to establish that provider taxes drive increases in employer-sponsored insurance premiums.

Ben Finder is the AHA’s vice president of coverage policy. Isaac Nicchitta is the AHA’s senior associate director of health analytics and policy.