NCPA - National Center for Policy Analysis

Understanding Medicaid Provider Fees

June 26, 2014

States and the federal government each fund Medicaid, explain Angela Boothe and Sang Kim of the American Action Forum, and provider fees are a significant part of the funding mechanism.

Federal Medicaid funding depends upon a state's per capita income, and the matching rate ranges from 50 percent to 74 percent of a state's Medicaid funding. To increase funding, 49 states institute provider fees (commonly called "hospital taxes" or "bed taxes"):

  • States collect provider fees from specific providers -- such as hospitals, nursing homes and managed care plans -- and designate those dollars for the Medicaid program.
  • The Centers for Medicare and Medicaid Services (CMS) must approve the state's provider fees. If it does, the fees go into the state's Medicaid budget and become eligible for federal financial participation -- the Federal Medical Assistance Percentage (FMAP) for Medicaid.
  • The federal government matches those fees.
  • The states then use the dollars on Medicaid programs and expenses. Some of the funds are returned to providers.

Provider fees have some limitations. For example, they can only equal up to 25 percent of Medicaid expenditures, limiting the federal funds that states can receive. Restrictions also effectively ensure that states cannot levy fees equal to more than 6 percent of a provider's revenue.

In recent years, there has been debate about limiting the fee in order to cut down on federal spending.  

Source: Angela Boothe and Sang Kim, "Medicaid Provider Fees Explained," American Action Forum, June 16, 2014


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