How politics affects policies

Quirks can sometimes end up in policies when legislators try to avoid political consequences. KFF Health News published an article about how some in Congress are considering reducing Medicaid funding by cutting back or eliminating what are known as provider taxes. This naturally raises the questions of what are provider taxes and why are they levied.

Provider taxes are levied in 49 states on healthcare providers. The article paints a picture that at least some providers are happy to pay those taxes, because those taxes help fund state contributions to Medicaid, which the federal government will match. However, state Medicaid funding does not need to come specifically from provider taxes (as illustrated by Alaska, which is the state that does not levy provider taxes). So, why do states levy taxes on providers since healthcare services are viewed as essential?

From cursory research, it appears that state legislators are concerned about the unpopularity of raising taxes, even if doing so will bring in more federal funding. At the same time, it could be deeply unpopular to not fund Medicaid, since many could be affected. Since providers are the ones who benefit financially (they can be paid more because of the additional funding), the thought seems to be that they would generally be happy to pay some in taxes to receive more back and therefore would not raise an issue. Meanwhile, the general public is unaffected and therefore also would not raise an issue. Each step might make individual sense, but the overall path seem circuitous.

Federal legislators are now trying to reduce the budget by limiting the federal funds that go towards matching provider taxes. If that happens, then state legislators might need to decide whether the general public would prefer an increase in general taxes to help fund Medicaid or simply reducing how much Medicaid can cover.