- Changes in President Donald Trump’s tax-and-spend law threatens to blow a hole in Michigan medicaid funding
- At risk are two taxes, on insurers and hospitals, used to get federal matching funds
- A new law could change and preserve one of the taxes, but a later potential cut to hospitals remains
LANSING — Michigan officials are attempting to head off a multibillion-dollar loss in Medicaid funding as insurer and hospital taxes the state has used to secure federal matches face the chopping block under President Donald Trump’s “big, beautiful” new law.
The new bipartisan state budget Gov. Gretchen Whitmer signed last week aims to maintain current Medicaid spending over the next year, and a related new law would allow the state to craft a replacement tax that private insurers warn could lead to a small premium increase.
The legislation will “protect access to health care for millions of Michiganders and ensure our hospitals have the resources they need to stay open and keep serving patients,” Whitmer said Monday at a ceremonial bill signing.
At issue is the state’s insurance provider assessment, or IPA, a provider tax that has allowed Michigan to maximize federal matching funds for Medicaid but may soon be invalidated under Trump’s new law.
The state has taxed Medicaid-providing health plans at a much higher rate than private insurers — more than $60 per patient, versus less than $3. In turn, the state receives more federal matching dollars than it collects in taxes, enabling it to pay back Medicaid insurers and have federal funds left over.
According to the nonpartisan Senate Fiscal Agency, the state collects about $650 million from the insurance provider assessment each year and receives $1.75 billion in federal matching funds.
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The move has been financially advantageous for the state by freeing state money for other budget priorities, said Bob Schneider, a senior research associate for the Citizens Research Council of Michigan.
“Now we don’t have to spend our own state revenue on Medicaid anymore,” Schneider said. “We can spend the gravy that we get from the insurance provider assessment on Medicaid” and use state funds for other purposes.
Michigan currently has a waiver that allows it to tax providers at different rates by passing a statistical test.
But a pending change in federal rules, along with requirements in the “big, beautiful” law, are poised to put an end to the practice. To comply with federal rules, a new assessment would have to treat all insurance plans the same.
It’s part of a push by Republicans at the federal level to rein in government spending and close what the Centers for Medicare and Medicaid Services has called a “loophole” allowing some states to collect more taxpayer dollars.
Four states with waivers — California, Michigan, Massachusetts and New York — “are responsible for more than 95% of projected federal taxpayer losses under the loophole,” CMS said in May.
A replacement tax
The new law Whitmer signed alongside the state budget will allow the Department of Health and Human Services — if the state’s ability to levy the current assessment is ended — to craft a new tax on insurers that’d prevent any loss in state revenue relative to last fiscal year.
Michigan hasn’t been mandated to change the tax yet, and the law instructs the state health department to continue the current assessment until that happens.
But if the state is forced to make a change, it would likely mean an increase in the taxes on private insurers, according to Dominick Pallone, Executive Director of the Michigan Association of Health Plans, which represents insurers.
“We’re not out there saying this guarantees a commercial tax increase, because it doesn’t, but it does grant the authority to the executive to do that unilaterally in the future,” Pallone said.
To maintain the same level of revenue the state is getting now, private insurers estimate their assessments would have to increase to between $7.10 and $8.30 per member month, Pallone said. That increase could be reflected in higher premiums.
He suggested the state could opt not to increase the tax and instead cover the funding shortfall from another source, but that could also mean losing out on federal matching funds for Medicaid.
State Rep. Greg VanWoerkom, the Norton Shores Republican who sponsored the legislation, said in a statement the new law “prioritizes the health and well-being of people and communities throughout Michigan.”
Earlier this year, Whitmer made the latest of several White House trips to lobby Trump on this issue, among others, and asked the president for a three-year transition period to make changes to the provider tax.
The stakes are high in Michigan, where Medicaid provides health insurance to more than 2.6 million people, or 1 in 4 state residents, primarily with lower-than-average incomes.
Another looming threat
It’s not the only health tax issue the state faces under the “big, beautiful” law. The Quality Assurance Assessment Program — known as a “bed tax” for Michigan hospitals — is a larger, but further away funding hurdle.
That tax is currently assessed at about 5.05% to 5.5% in Michigan. By the end of 2028, the tax will be capped at 5% and reduced to 3.5% three years later, reducing payments to hospitals by $1.7 billion annually, according to the Citizens Research Council.
Since the hospital tax is directly used to fund the state’s Medicaid program, reductions in revenue from the tax would also limit federal matching funds, creating an even larger Medicaid funding shortfall.
The budget plastered over the issue, for the time being, by removing an appropriation of $6 billion in hospital tax and federal matching fund revenue and instead placed the money as contingency spending — for reasons that aren’t immediately clear. The move doesn’t do anything to head off long-term funding reductions.
Citizens Research Council estimated the state will have to devote $680 million to cover the decline by the 2031-2032 fiscal year.
Down the line, Schneider said the hospital tax reductions “will mean we’ll either need to take big Medicaid cuts or we’re going to have to find new revenue to substitute for the provider tax revenue.
“That’s an important issue for the state, but it’s not an immediate one.”
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