Minnesota hospitals hoped for a $1 billion windfall, but the OBBBA has killed their plan

WASHINGTON – Minnesota’s hospitals thought they had a great idea to increase the money they receive for treating Medicaid patients by leveraging federal dollars.

But the One Big Beautiful Bill Act threatens to shred that plan and is even likely to kill it outright. The at-risk proposal was approved by the state Legislature in June and hospitals hoped it would bring them $1 billion in increased revenues every year.

The Minnesota Hospital Association developed the plan to boost hospital revenues because they lose money on every Medicaid patient they treat. A study by the American Hospital Association found that hospitals were paid just 88 cents for every dollar spent caring for Medicaid patients, who qualify for the program because they have low incomes. 

“It’s a difficult situation for hospitals because Medicaid pays us below cost,” said Joe Schindler, vice president of finance policy at MHA. So, the association came up with a proposal to increase those payments.

About 40 states have similar programs — called provider taxes or directed payments — to leverage federal dollars to increase money received from treating Medicaid patients.

Related: ‘Seismic’ Medicaid changes will be rough on rural hospitals

“We were trying to fund our way out of a financial mess,” Schindler said.

The cost of the Medicaid program, known as Medical Assistance in Minnesota, is shared between the state and federal governments. That means the federal government is required to contribute a percentage of the cost of Medicaid. In Minnesota, it averages at about 62%. 

Boosting the cost of Medicaid payments to hospitals and other medical providers forces the federal government to pay more for Medicaid services. Under one provider tax scenario, states recoup their part of the cost share by taxing those hospitals and medical providers for the state’s share of the cost.

Currently, Minnesota implements a 1.56% hospital surcharge that applies to outpatient and inpatient services. Another provider tax, in the amount of 1.8%, applies to both hospitals and a long list of other medical services. That tax funds the MinnesotaCare program, a state health care program for Minnesotans with low incomes, but whose incomes are too high to qualify for Medical Assistance. 

The new hospital provider tax, approved by the Legislature earlier this year, would raise the total surcharge to hospitals to 5.75%.

Yet the plan to raise hospital provider taxes ran into trouble when the One Big Beautiful Bill Act banned new provider taxes and capped existing provider taxes at 3.5% for states like Minnesota that expanded Medicaid services under the Affordable Care Act.

The previous caps on provider taxes for states like Minnesota was 6%. 

A  ‘rip off’’ of taxpayers?

Although permissible by law, some say provider taxes are a way to game the system. The conservative Paragon Health Institute argues that these provider taxes are a taxpayer “rip off” that create loopholes and a lack of transparency. 

Minnesota was hoping to collect about $800 million annually in taxes from hospitals and use the money — and the 62% federal match — to increase the payments hospitals receive from treating Medicaid patients. So the new $800 million hospital tax would raise $1.8 billion in federal reimbursements to hospitals.

But the plan had not been approved by the Centers for Medicare and Medicaid Services (CMS) by July 4 of this year, when the federal budget bill was signed by President Donald Trump into law, banning new provider taxes and directed payment plans, which are similar ways to leverage federal dollars.

The Minnesota Department of Health said it advised CMS of its intent to levy the new provider tax on July 3, a day before the deadline.

The new cap on provider taxes does not go into effect until 2032. But states like Minnesota are required to start bringing them down in 2028.

The Minnesota Hospital Association hoped the new 5.75% tax could be implemented, both fully or in part, until 2032. But CMS has not given the state a go ahead. 

“If the state is permitted to implement new taxes that were authorized in the 2025 session, those taxes may need to be reduced (starting in 2028) according to the schedule described in federal statute” the Minnesota Department of Health said in a statement. 

The Department of Health also said the state “has not yet determined how that process would work because additional guidance is expected from CMS.”

Schindler said rural hospitals and others with large percentages of Medicaid patients are going to feel the most pain and that Minnesota hospitals may have to curtail services, including eliminating labor and delivery and mental health services.

Hospitals are also stressed by inflation and escalating labor costs that are rising faster than Medicare and Medicaid reimbursement rates. 

The OBBBA established a $50 billion Rural Health Transformation Program to stabilize rural hospitals by providing funding for workforce shortages and infrastructure. But Schindler said the program will provide “a token amount of money” to solve rural hospital woes.

The only chance Minnesota’s hospitals have to leverage more money from the federal government is for Republicans in Congress to agree to repeal all of the Medicaid-related provisions in the OBBBA, something Democrats want in return for support of a GOP stopgap bill that would reopen the shuttered federal government. But that’s not likely to happen.

So, for now, Minnesota’s hospitals, and hospitals across the nation, are waiting for CMS to finalize the new regulations on provider taxes mandated by the federal budget bill. 

“A lot of people and states don’t know how this is going to work out,” said Alice Burns, associate director of the Kaiser Family Foundation’s program on Medicaid and the Uninsured.

Coupled with the OBBBA’s Medicaid cuts, which are expected to result in an increase of uninsured patients at hospital emergency departments and other federal cuts to health care, the crackdown on provider taxes are expected to shake the financial stability of many American hospitals.

“The effect will be big,” Burns predicted. “But we don’t know when and where we’ll start to feel them.”

‘Couldn’t take the risk’

One of the most financially vulnerable hospitals in the state is Hennepin Healthcare in Minneapolis.

It is considered a safety net hospital that serves many low-income and uninsured patients. About 45% of its patients are covered by Medicaid.

Yet Hennepin Healthcare decided it would be the only one of the state’s 140 hospitals to not participate in the Minnesota Hospital Association’s new provider tax plan.

“We wanted to but couldn’t take the risk,” said Charles Esler, the hospital’s vice president of finance.

The reason? Hennepin Healthcare already had its own plan, which has been to leverage more Medicaid money from the federal government which has been given the green light by CMS since its inception in 2021.

Related: Emmer spins Dems’ Medicaid position in casting blame for shutdown

Esler said the hospital was loath to give up its plan in favor of a new one that might not pass muster with the Trump administration — especially since the implementation of the OBBBA.

All of Minnesota’s Medical Assistance patients have managed care plans. That means they get their health care through privately run plans that contract with specific networks of doctors and hospitals to provide services at reduced rates.

But Hennepin Healthcare pays the state a 1.8% tax every month on its Medical Assistance revenues, money that is boosted by the federal match and is paid in the form of higher premiums to managed care companies. In turn, hospitals receive higher payments from managed care companies for their treatment of Medicaid patients.

Esler said he hopes Hennepin Healthcare made the right choice in keeping its current plan to increase Medicaid reimbursements. But, since that plan must be approved every year by CMS, he has some doubts.

“The one thing that we don’t have is certainty,” Esler said.

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