Impacts of the OBBBA on Medicaid and CHIP in Kansas

Limits on How States Fund Their Share of Medicaid Costs

Provider Taxes

Most states use provider taxes to fund a portion of their share of Medicaid. A provider tax is a fee that health care providers, such as hospitals or nursing homes, pay to the state. The state uses this money to fund part of its share of Medicaid, and the federal government matches it based on its established federal match rate. This helps states bring in more funding to support care for low-income patients. In fiscal year (FY) 2025, 49 states, including Kansas, and the District of Columbia used at least one provider tax, making it one of the most widely used Medicaid financing tools.

While provider taxes are a common financing tool, some critics argue they inflate the amount the federal government must pay.

The OBBBA made two major changes to provider tax policy:

1.  Freezes and Limits Provider Tax Rates:
The OBBBA freezes current provider tax rates and prohibits states from implementing new taxes unless already enacted. For Medicaid expansion states, the maximum allowable provider tax rate will gradually decrease from 6 percent to 3.5 percent by FY 2032. Non-expansion states can maintain their current provider tax rates if they are within federal limits, preserving higher thresholds within federal limits. Kansas increased the provider tax rate up to 6 percent for inpatient and outpatient hospitals (tax waiver approved for 2025). Kansas later extended this rate to include Critical Access Hospitals (CAHs) and Rural Emergency Hospitals (REHs) above a certain threshold that will be determined by the Healthcare Access Improvement Panel (HCAIP). Because the state acted before a key federal deadline, either by making a good faith effort to obtain CMS approval before May 1, 2025, or by submitting a formal request by July 4, 2025, the additional waiver to include CAHs and REHs may be approved at the increased rate under the OBBBA’s grandfathering provisions.

2. Establishes Stricter Federal Criteria:
To qualify for federal matching funds, provider taxes must meet several conditions, including being broad-based, uniform and generally redistributive, meaning the tax burden and benefits should be spread across providers. The OBBBA tightens the definition of “generally redistributive,” limiting states’ ability to design taxes that disproportionately benefit the providers paying them. These stricter rules apply to both new waivers and existing waivers when they come up for renewal, reducing state flexibility in financing Medicaid.

Potential Impacts

• The grandfathering provisions in the OBBBA allow Kansas to maintain existing provider tax rates.
• As existing provider tax waivers come up for renewal, Kansas may face constraints under the OBBBA’s stricter rules due to the new definition of generally redistributive.