Fraud, waste, and abuse in Medicaid should be aggressively rooted out. The Trump-Vance Administration’s recent health care fraud enforcement demonstrates exactly how accountability should work. But some in Washington want to attack provider taxes as fraud. This is plainly false. Provider taxes are a lawful, transparent financing mechanisms that have become indispensable because federal reimbursement has failed to keep pace with the cost of providing care.
Washington must recognize that provider taxes are one of the last remaining tools keeping hospitals open in communities too often forgotten by the Beltway. Americans don’t experience health care through economic models. They experience it when an ambulance arrives and a hospital close enough to save their life.
Unfortunately, Washington has a habit of confusing economic theories with real-world health care. The latest example is Paragon Health Institute’s report, The Hidden Cost of Medicaid Provider Taxes: Higher Prices in the Commercial Market– a paper that asks the wrong question, relies on outdated assumptions about hospital reimbursement, and ignores the devastating consequences its recommendations would have for America’s forgotten communities.
Paragon argues that provider taxes drive up commercial insurance premiums because hospitals simply pass those costs along to private insurers. It’s an appealing theory, but also a poor reflection of how modern hospital contracting works.
Today’s commercial insurance market is overwhelmingly built on negotiated reimbursement agreements, not hospital chargemaster prices. Most insurers pay hospitals through fixed fee schedules, diagnosis-related payments, or predetermined “allowed amounts” that establish the maximum reimbursement for a service. Hospital list prices are largely irrelevant to what commercial insurers actually pay.
Paragon’s argument rests on a flawed assumption that hospitals can simply raise billed charges and shift the cost of a provider tax onto commercial insurers. In reality, there are a limited number of legacy contracts that reference billed charges, and almost all contracts are governed by negotiated payment terms, contractual limits, and predetermined escalation provisions, not by a hospital’s ability to arbitrarily increase prices. Commercial insurers do not simply pay whatever amount appears on a hospital bill; they pay according to negotiated agreements. Hospitals cannot create new revenue by changing a number on a chargemaster and expecting insurers to absorb the difference.
Yet this is the flawed foundation upon which Paragon builds its argument and the result is a flawed conclusion. More importantly, Paragon’s report focuses on theoretical price effects while ignoring the measurable consequences of eliminating one of the most important financing tools available to states.
There is a reason 49 states use provider taxes. It is because Medicaid reimbursement levels underpay hospitals. The impact of which is felt most acutely by those serving rural, low-income, and medically underserved populations. Provider taxes help states leverage federal Medicaid matching funds to keep emergency departments open, preserve maternity care, sustain trauma services, retain health care workers, and prevent hospital closures.
The real hidden cost isn’t provider taxes, but what happens when Washington takes them away. Across America, rural and small urban hospitals continue to face extraordinary financial pressure. Every closure forces patients to travel farther for emergency care, weakens local economies, eliminates jobs, and leaves communities more vulnerable during natural disasters and public health emergencies. Losing a hospital often means losing labor and delivery services, behavioral health treatment, pediatric care, and critical specialty services all at once.
Paragon measures hypothetical premium impacts. Families measure whether the emergency room is still open and rural areas measure the availability of local jobs that help to support their communities. Policy makers should ask themselves these questions: How many hospitals remain open? How many communities retain labor and delivery services? How many families avoid driving an hour or more during a medical emergency?
Health care financing cannot be evaluated in isolation. Eliminating provider taxes does not eliminate costs. It merely transfers them. Counties assume larger uncompensated care burdens. Property taxpayers face greater pressure to support struggling public hospitals. Employers lose one of their largest local economic anchors. Patients delay care until conditions become emergencies, increasing costs throughout the system.
The key question is whether Washington wants those costs borne through carefully designed state financing mechanisms or through hospital bankruptcies, higher local taxes, diminished access, and fewer choices for patients.
Conservatives rightly believe states generally know their own needs better than Washington bureaucrats. Yet Paragon’s proposal would strip governors and state legislatures of one of the few financing mechanisms nearly every state has independently concluded is necessary to preserve access to care.
Stefan Grow is a member of the Board of Defend Forgotten America. He was previously the Chief of Staff and General Counsel for Florida’s Agency for Health Care Administration.
