On June 14, the U.S. Senate Finance Committee released the text and section-by-section summary of its reconciliation proposal. The proposal includes Medicaid cuts that are significantly deeper than those in the House-passed version (H.R. 1). Of great potential impact to RCRC member-counites is the proposed phase-down of the provider tax safe harbor, from 6% to 3.5% by 2031. While the House version proposes to freeze new or increased provider taxes, the Senate plan would go further by capping the federal match on existing taxes—effectively limiting how much funding states can generate through provider tax arrangements.
Last November, California voters overwhelmingly passed Proposition 35, making the Managed Care Organization (MCO) tax, California’s provider tax, permanent. The MCO tax is a critical component to increasing provider rates and support rural hospitals and clinics. The federal proposal would dramatically reduce federal funds drawn down from the MCO tax for Medi-Cal.
The Senate’s proposed changes to the provider tax would mark a major shift in longstanding Medicaid financing rules. Under current law, states are allowed to tax Medicaid providers—such as hospitals—and use that revenue to draw down matching federal funds, up to a cap of 6% of provider revenue. The Senate version would gradually lower that cap to 3.5% by 2031, significantly reducing the amount of federal support states can claim through these arrangements. This would disproportionately impact rural hospitals, including those in RCRC counties, which are more reliant on Medicaid revenue and operate with narrower financial margins. A 2022 analysis by the Congressional Budget Office warned that lowering the provider tax threshold could destabilize state Medicaid financing and result in significant payment cuts to providers.
According to the American Hospital Association, the House bill would reduce federal support for rural hospitals by $50.4 billion over ten years and result in 1.8 million fewer rural residents with Medicaid coverage by 2034. In California alone, the projected impact includes 134,900 rural residents losing coverage and a $2.06 billion reduction in rural hospital funding over the same period. The impact of the Senate proposal would be even greater, given that it would also cap the federal match on existing taxes.
In response to mounting concerns from rural-state Republicans, Senate leaders are considering the creation of a targeted relief fund to blunt the impact of the cuts on rural hospitals.
For more information, contact RCRC Policy Advocate, Sarah Dukett.