Jun. 30, 2025 by Rebekuh Eley and Danny Schmidt
Medicaid cuts loom as provider tax debate heats up in Congress
As Congress moves toward finalizing the sweeping One Big Beautiful Bill Act, a fierce debate over Medicaid funding has taken center stage. Proposed cuts to provider taxes are at the heart of the dispute, including state-imposed levies on health care providers that serve as a critical funding mechanism for Medicaid programs nationwide.
The House-passed version of the bill includes an $89 billion reduction in Medicaid funding, driven by a moratorium on new provider taxes. In parallel, the Senate Finance Committee has proposed a more aggressive measure that would reduce the federal “safe harbor” limit for provider taxes to 3.5% of net patient service revenue by fiscal year 2032, down from the current rate of 6%.
Provider taxes are a cornerstone of Medicaid funding in every state except Alaska. These taxes allow states to draw down federal matching funds without tapping general revenues, effectively boosting Medicaid reimbursement rates for hospitals and other providers. However, federal law prohibits states from guaranteeing that providers will be reimbursed for the taxes they pay—a safeguard known as the “hold harmless” rule. The 6% threshold currently serves as a regulatory safe harbor; lowering it would limit states’ flexibility and could jeopardize federal funding if violated.
The proposed changes could have far-reaching consequences. Rural hospitals, already operating on razor-thin margins, face the prospect of Medicaid reimbursement cuts, rising uncompensated care, and increased risk of closure or consolidation. The Senate has proposed a $25 billion relief fund to be distributed over five years to help offset these impacts, but industry groups warn it may not be enough to stabilize vulnerable providers.
The takeaway
The future of Medicaid funding through provider taxes is uncertain. Hospitals should proactively assess their exposure to potential funding shifts and explore revenue diversification strategies, including outpatient services, telehealth and strategic partnerships. With uncompensated care likely to rise, strengthening financial assistance programs and optimizing operational efficiency will be critical to maintaining stability.
As the legislative process enters its final stages, the outcome of the provider tax debate could historically reshape the Medicaid landscape.
Learn more about what’s happening in health care in our industry outlook.
About Rebekuh Eley
Rebekuh Eley is a partner at RSM and serves as the national exempt health care tax industry and exempt organizations market leader. She has over 20 years of experience advising tax-exempt organizations and specializes in the health care and nonprofit industries. In addition, Rebekuh is a senior analyst for the health care industry and a member of the firm’s Industry Eminence Program. She works alongside RSM’s chief economist and other senior analysts to understand, forecast and communicate economic, business and technology trends that affect middle market businesses.
About Danny Schmidt
Danny is a senior manager in the assurance practice and a health care senior analyst for RSM US LLP. As a member of the Industry Eminence program, Danny works alongside the firm’s chief economist and his fellow senior analysts to understand, forecast and communicate economic, business and technology trends affecting middle market businesses. He has over 11 years of experience bringing value to organizations in the health care ecosystem. His experience in serving clients ranges from private equity-backed health care facilities and health tech companies to managed care organizations and nonprofit and government-run health care systems.
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