Provider tax: The proven way to fund affordable health care for Minnesotans

Betsy Hammer
Apr 03, 2019

Minnesota’s health care provider tax generates about $700 million each year to support affordable health care and investments in healthy people and communities. Under current law, the provider tax is set to expire in December of this year. The Minnesota Budget Project strongly supports maintaining the provider tax to make sure that our Minnesota neighbors and colleagues can continue to have affordable health care when they need it most.

Minnesota’s provider tax is a proven and time-tested way to ensure Minnesotans have affordable health care. In contrast, the state of Michigan experimented with a few types of health-related taxes, and discovered various problems with these alternative sources – including insufficient revenues and problems with federal regulations.

Michigan’s experience with a claims tax illustrates the risks and challenges with that type of funding mechanism, primarily related to failing to raise adequate revenues. In 2011, Michigan created the Health Insurance Claims Act (HICA): a 1 percent tax on all health insurance claims paid in the state. The state projected the HICA would raise between $375 million and $400 million to support the state’s Medicaid services; however, actual revenues were much lower and left a large gap in state funding for Medicaid, putting health care for those most in need at risk. The state continued to tinker with the tax rates and explored other revenue options, but problems persisted: Michigan’s HICA never managed to raise the projected amount needed. Minnesota’s provider tax has decades of history, which supports solid, reliable projections for accurate budgeting and planning to make sure Minnesota’s investments in healthy people and communities stay on track.

Michigan also experimented with a tax on Medicaid managed care organizations, which was flagged as problematic by the federal Centers for Medicare & Medicaid Services (CMS). Alternative types of revenue raisers can spell potential litigation and challenges with federal guidelines. Federal law allows provider taxes to fund Medicaid, and 49 states have some type of provider tax in place. However, there are restrictions: the taxes “must be broad-based, uniformly imposed, and cannot hold providers harmless from the burden of the tax.” ERISA, the Employee Retirement Income Security Act of 1974, also adds complexity in the case law regarding what types of taxes can and cannot be imposed. Minnesota’s provider tax has been in place for decades and has held up to legal scrutiny – other types of revenue raisers have not been tested in this way.

Minnesota has an infrastructure in place when it comes to provider tax implementation and collection. During the 27 years that the provider tax has existed, the Minnesota Department of Revenue and health care providers have developed systems and procedures to remit and collect the taxes. Starting from scratch with a different type of tax would be a bureaucratic challenge. While sometimes it makes sense to start fresh in order to implement a new, better, or more effective idea, in this case, shifting away from the provider tax to an untested alternative would result in a great deal of administrative work and costs for a change that is simply not needed.

Minnesota policymakers must act this session to extend the health care provider tax, or we will experience a serious blow to our ability to put affordable health care in reach for all communities. And while the provider tax is critical for Minnesotans’ health, if it is eliminated the consequences could be much broader. A budget hole of $700 million if the state fails to extend the health care provider tax – or if an alternative revenue source fails to live up to projections – would create stress on other important Minnesota priorities like K-12 education, roads and transit, and public safety. Protecting the tried and true health care provider tax will help ensure investment in Minnesotans’ health and in our state’s thriving communities. Minnesota is a leader in health care, and the well-being of our families and neighbors is too important to risk.

-Betsy Hammer, with thanks to our colleagues at the Michigan League for Public Policy