Provider Taxes: Worth a Second Look

Bookmark and Share

As states pursue coverage expansions, they are likely to consider a variety of means to raise the revenues needed to fund those expansions. For states interested in taking significant steps toward universal coverage, they face a substantial financial barrier. Significant coverage expansions require new funding to support subsidies for making private insurance more affordable and to help finance public program expansions. Most coverage expansions require states to raise funds by increasing existing taxes or imposing new ones.

Some tax options are broad-based, and others are more targeted. Broad-based options such as increases in the retail sales or personal income tax have the power to generate substantial revenues from relatively small tax hikes. They also offer the advantage of spreading the burden across a broad population. For this reason, however, broad-based taxes are politically difficult and may face steep opposition. In addition, with the economic outlook increasingly bleak, states may be reluctant to pursue tax increases.
With the recent economic downturn, states are already facing increasing demands on public programs as they experience significant declines in revenues. As a result, most states would be well advised to consider a variety of revenue sources for funding or maintaining health care coverage expansions. While no tax increase is ever popular, a health care sales taxor provider taxoffers some economic advantages to states looking for ways to maintain current coverage levels or to fund coverage expansions. Under such a tax, providers remit to the state a small percentage of the payments they receive for patient services.
A provider tax offers a stable source of revenue that is largely immune to economic cycles, because the need for medical services is relatively stable in both good and bad economic times. Given that the growth rate of health care costs has historically risen at a faster pace than the growth rate of the economy as a whole, a provider tax represents a largely recession-proof revenue source. Revenues from other sources are not able to keep pace with the rapid growth in health care costs and will eventually leave states with a gap in funding coverage programs.
While provider taxes have come under criticism for unfairly burdening providers, they offer states a strategy for recouping uncompensated care costs built into the current reimbursement systemcosts that would no longer be incurred by providers under a universal coverage system. Furthermore, providers are able to pass the cost of a provider tax on to consumers, who tend to be less price-sensitive, particularly when insurance partially covers costs. A one-time, small increase in the price of medical services is unlikely to deter individuals from seeking needed care.
A further question is whether insurers would cover the price increase that would likely result from a provider tax when providers pass on the extra cost to payers. A state Medicaid program, for example, would need to increase payment rates to providers to make up for the tax increase. Providers may not be able to recoup the tax directly on Medicare services.
Provider taxes also offer a broader revenue base than other “health” taxes such as premium taxes levied on insurers. While premium taxes may generate less political opposition, only non-self-insured plans pay the tax. With self-insured plans exempt, a large segment of the population would not share the burden of a premium tax. In contrast, everyone who uses medical services would share the cost under a provider tax scenario.
States have relied on provider taxes for some time: 43 states have levied some type of provider tax, and 30 tax more than one type of provider. Governor Arnold Schwarzenegger, for example, included a hospital provider tax as a mechanism to help finance the increased state expenditures that would have resulted from his proposal for achieving near-universal coverage in California.
While any tax proposal raises issues of fairness, a provider tax offers some advantages such that it deserves consideration among the menu of state options for raising new funds to finance coverage expansions.[i]

[i] Adapted from Wicks, E. “Can a Sales Tax on Medical Services Help Fund State Coverage Expansions?” State Coverage Initiatives, AcademyHealth, July 2008. For a more thorough discussion of the issues raised here, visit