by Dick Hall-Sizemore

There are many provisions of the reconciliation bill now being considered by the U.S. Senate that would affect Virginia. One issue that would have a great impact is the proposed crackdown on health-related taxes or assessments used by states.

The federal Medicaid statutes authorize states to levy taxes, or assessments as they are sometimes called, on health-care facilities that serve Medicaid patients and then use the revenue from those assessments for the state’s share of Medicaid expenditures. (This article will use the term “assessment” from now on, primarily because that is the term Virginia uses.) In other words, in addition to its revenue from the General Fund, a state can use any revenue from a provider assessment for its share of Medicaid funding.

The details of the authorizing provision are complex, but there are three principal requirements:

1. Broad based. The assessment must be imposed on all the non-governmental health care entities within a specified class. For example, all hospitals must be subject to the assessment, not just those that treat a high proportion of Medicaid patients.
2. Uniform. The assessment must be consistent in amount and scope to the services to which it applies. For example, the rate cannot be higher on Medicaid revenue than it is on non-Medicaid revenue.
3. Hold harmless. Taxpayers, i.e. hospitals, cannot be guaranteed that they will recoup their entire assessment from increased Medicaid revenue.

Forty-nine states and the District of Columbia use at least one type of assessment to help finance Medicaid. The federal Medicaid law establishes minimum levels of eligibility, service provision, and payment rates for participant states. States may exceed those minimums, but they must pay their share of the increased costs. (Virginia’s share of Medicaid costs is about 40 percent.) However, they can use revenue from the health-care assessments to pay all or a portion of the state share. The result is that the number of people served, services provided, or payment rates are increased, with the increased costs being borne by the hospitals, nursing homes, etc. and the federal government. The health care facilities benefit because their overall Medicaid revenue increases, usually more than offsetting the amount of the assessments. Those facilities that have a higher Medicaid caseload benefit the most. There is no question that these assessment programs are expensive for the federal government. The Congressional Budget Office estimates that eliminating the authorization for the assessments would save the Medicaid program $612 billion over a nine-year period.

The Commonwealth of Virginia has two health-care related assessments, both enacted in 2018 as part of the state’s expansion of Medicaid under the Affordable Care Act (ACA). It should be noted that the federal law authorizes the assessment of a large variety of health-care providers, including nursing homes. However, Virginia’s assessments are limited to private acute care hospitals and critical access hospitals.

The first Virginia assessment is the “provider coverage assessment.” Under the terms of the ACA, the federal government pays 90 percent of the cost of the additional cost for states that expand Medicaid coverage to include nearly all adults with incomes up to 138 percent of the federal poverty level.  Virginia’s provider coverage assessment is designed to cover all the increased costs associated with Medicaid expansion. Total revenue from this assessment in the last fiscal year (2024) was $839.1 million; to date in the current fiscal year, it is $1.1 billion.

The second assessment fund is the “provider payment rate assessment.” The revenue from this assessment is used to pay the state share of higher rates paid to hospitals to offset regular Medicaid rates, which are usually lower than other payers. Total revenue in the last fiscal year was $707.5 million and, to date, in the current fiscal year, $675.4 million.

So far, in the current fiscal year, the Dept. of Medical Assistance Services, which administers the state’s Medicaid program, has spent $1.7 billion from these two assessments. That was 6.6 percent of all expenditures by the agency. Virginia relies on revenue from assessments to pay for Medicaid much less than many other states. On a national level, about 17 percent of state revenue used to pay for Medicaid came from assessments.

The expansion of Medicaid meant that Virginia hospitals were able to reduce their indigent/charity costs significantly. One expert in Virginia Medicaid financing explained to me that the net effect, for hospitals, of Medicaid expansion (reduction of charity costs) and the supplemental payments from the rate assessment is a significant financial benefit from both assessments.

The federal law authorizes states to impose assessments of up to 6.0 percent of net patient revenues. The reconciliation bill that passed the House of Representatives would have placed “a moratorium on provider taxes, keeping current taxes in place but prohibiting states from establishing any new provider taxes or from increasing the rates of existing taxes.” The reconciliation bill the Senate Finance Committee is proposing would keep the House provisions, but would reduce to 3.5 percent the assessment rate allowed for states that have expanded Medicaid, such as Virginia.

Currently, Virginia uses an assessment rate greater than 5.5 percent. Obviously, reducing that rate by about 40 percent would result in a significant reduction of Medicaid revenue. The Governor and the legislature would be faced with several unwelcome choices: make up the difference from general fund revenues, reduce reimbursements to hospitals, reduce Medicaid eligibility criteria and services, or a combination of all of these.

Fortunately, if the proposed reduction is enacted, its effects will not be felt at once or immediately. The Senate proposes phasing in the reduction by 0.5 percent annually, starting in 2027. Governor Youngkin would need to factor in the proposal’s first year effects in the 2025-2027 budget bill he will submit to the General Assembly in December.

The ultimate fate of this provision is uncertain. President Trump is putting a lot of pressure on Congress to have the bill on his desk by July 4. However, there are several major issues that are generating major opposition from Republicans in both houses of Congress and the health-care assessment is one of them. Republican Senators Josh Hawley (Missouri) and Susan Collins (Maine) have both expressed opposition to the Senate health care assessment provisions. Sixteen Republican House members have told the Speaker of the House and the Senate Majority Leader that they could not support a bill that included the Senate’s assessment provisions. Of course, there are other major points of friction that lead uncertainty to the fate of the reconciliation bill, many of which would affect Virginians, but that’s another story.