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As part of his candidacy, President Biden promised to increase federal support to Medicaid and to “protect and build on the Affordable Care Act” previously passed under the Obama administration.

Generally, the Medicaid program is less understood than the Medicare program. For instance, unlike the federally administered Medicare program, Medicaid is run by states (within federal guidelines) and is jointly funded by states and the federal government.

Additionally, state healthcare provider taxes play a key role in the funding of Medicaid.

What Is A State Healthcare Provider Tax?

Most states have at least one version of a healthcare provider tax (“provider tax”). Provider taxes are state-enacted taxes, fees, or surcharges, enacted within the guidelines of federal statutes and regulations. Generally, provider taxes are imposed on certain federally defined groups of medical services providers, and these provider taxes are in addition to any other federal income taxes owed.

How do Provider Taxes Help States Fund Medicaid?

Medicaid and Medicare were established by the Social Security Amendments of 1965 to provide health coverage for people age 65 or older, and for certain low-income adults and children. Per the original statute, Medicaid was created to be a jointly funded federal-state program. As part of this joint funding, the ederal government matches funds that states contribute to their Medicaid programs. The federal match is based on the Federal Medical Assistance Percentage (FMAP). FMAP is determined by the per capita incomes relative to the national average, meaning states with a lower per capita income receive a higher match. 

Although Medicaid is partially funded by the federal government, it is estimated that states spend roughly 17 cents of every state-generated dollar to provide Medicaid healthcare coverage. States use provider taxes to shift some of the cost burden to medical providers and to generate additional federal matching funds.

Even though the provider tax is a state administered, the federal government limits how states can impose the tax as it relates to federal matching funds. To be eligible for a federal match, a state’s provider tax must be broad-based within a healthcare services class and uniformly imposed across that class throughout a jurisdiction.

Provider taxes are levied on various sources of revenues, including healthcare provider gross revenues, net patient revenue, patient per-bed fees, and facility admission charges. Typically, provider taxes are targeted at licensed healthcare facilities, like hospitals and nursing homes. However, some states have expanded the tax to medical services provided outside of the typical hospital or nursing home setting, including emergency ambulance services, as well as services performed by dentists and audiologists.

Medicare and Medicaid have also accelerated the impact of telehealth.

What are Examples of the Provider Tax?

Although almost every state has a provider tax, the structure and administration of the tax varies by jurisdiction. Here are a few examples:

Net Patient Services Revenue - New Hampshire

For the taxable period ending June 30, 2018, and for every taxable period thereafter, a tax is imposed at a rate of 5.4 % upon the net patient services revenue of every hospital for the hospital's fiscal year ending during the calendar year in which the taxable period begins. N.H. Rev. Stat. Ann. § 84-A:2 (v)

Per-Bed fee – Oklahoma

An application for a license, or renewal thereof, to operate a facility shall be accompanied by a fee of Ten Dollars ($10.00) for each bed per year included in the maximum bed capacity at such facility, except that any facility operated by the Oklahoma Department of Veterans Affairs shall be exempt from the fee. Oklahoma Statutes, 63 O.S. § 1-1905

Gross Revenue – Kentucky

A tax is hereby imposed at a rate of two and one-half % (2.5%) on gross revenues received by all providers on or after July 15, 1994, for the provision of hospital services….. KRS Sec. 142.303(1)

Broad Based Provider Tax Example – MinnesotaCare

In addition to the Minnesota Medicaid program, called Medical Assistance (MA), Minnesota also has a healthcare assistance program called MinnesotaCare. MinnesotaCare is a program for certain Minnesotan residents who may not qualify for the Medicaid program. Under this program, these residents can still receive subsidized healthcare coverage. To fund this expanded coverage program, Minnesota has enacted one of the broadest provider tax structures in the country. 

First, Minnesota has typical provider taxes or surcharges levied against private, non-state funded nursing homes and intermediate care facilities, of $2,815 per licensed bed. Also, most hospitals are taxed at 1.56 % net patient revenues. These surcharges are paid to the Minnesota Department of Health. 

In addition to provider surcharges, Minnesota imposes various MinnesotaCare Taxes:

Hospital Tax: Equal to 1.8 % of gross revenues.

Surgical Center Tax: Equal to 1.8 % of gross revenues.

Provider Tax: Equal to 1.8 % of gross revenues.

Wholesale Drug Distributor Tax: Equal to 1.8 % of gross revenues.

Use Tax; Legend Drugs: A person that receives “legend drugs” for resale or use in Minnesota, other than from certain wholesale drug distributors, is subject to a tax equal to the price paid for the legend drugs multiplied by 1.8 %. Legend drugs are typically prescription drugs.

Although MinnesotaCare is imposed on many of the same entities that are subject to the typical provider tax, the state taxing scheme combined under one umbrella is far reaching and multi-faceted. In addition to the provider surcharges and MinnesotaCare Taxes noted above, a MinnesotaCare Provider Tax is imposed on the gross receipts of healthcare providers, and healthcare providers are broadly defined to include those “regulated or required to be regulated by the state of Minnesota and provides medical, surgical, optical, visual, dental, hearing, nursing services, drugs, laboratory, diagnostic or therapeutic goods and/or services directly to a patient or consumer.” Additionally, sales of prescription drugs are subject to the gross receipts tax, which is typically incurred at the wholesale level as part of the wholesale drug distributor tax.

The provider taxes and the various MinnesotaCare taxes create compliance issues. For example, a Minnesota-based hospital would be subject to the medical care surcharge equal to 1.56 % of that hospital's net patient revenue (excluding that hospital's net Medicare revenues). Additionally, the hospital would be subject to the 1.8 % MinnesotaCare hospital tax, which is paid annually with monthly estimated payments.

How can Healthcare Providers Advocate for Provider Taxes?

Healthcare providers subject to provider taxes often benefit because states repay a substantial amount of the revenues collected through supplemental Medicaid payments (i.e., payments in addition to what is typically reimbursed by Medicaid). In some instances, medical providers receive more in increased Medicaid dollars than they pay in the tax. Although healthcare providers are subject to the tax in the states they operate in, the increase in total healthcare expenditures for Medicaid can offset the cost of these taxes to healthcare providers and therefore providers often champion their use as a funding mechanism.

The Future of Medicaid and Provider Taxes

State control of Medicaid programs can present issues when the federal government wishes to expand the programs. For instance, under the Obama administration, states were able to opt out of the expanded federal funding made available through the original Affordable Care Act., It remains to be seen what role provider taxes would pay in any new expansion or “Medicare-for-all” proposal that may be passed at the federal level. Lastly, some have even suggested limiting or eliminating a state’s use of provider taxes in general due to the fact that most of the funds raised by the taxes are passed back to the same medical facilities subject to the tax.

Know the Rules Concerning Provider Taxes

Healthcare providers should periodically review the reporting and methodology used to calculate provider taxes to verify that proper tax is being remitted to the states in which they operate in. Failure to do so could potentially jeopardize credentialing and licensing. Also, healthcare providers should consider the application of provider taxes when providing telehealth services or selling pharmaceuticals into a state with a broad-based provider tax like Minnesota.

Let us help you make sense of important tax rules and the impact of Medicaid on your healthcare organization.

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