Legislative fiscal staff on Tuesday briefed members on Vermont’s health-care provider taxes and a federal provision in HR1 that would reduce some provider-tax rates over time, a change that could sharply reduce state revenue used to draw federal Medicaid matching funds.

Moe Langlo of the state fiscal office explained provider taxes are state assessments on classes of health-care providers that help generate the state share of Medicaid. "Provider taxes are a revenue source that can be used to generate funds for the state share," Langlo said, and he described federal rules that require such taxes to be broad-based, uniformly applied and not directly 'held harmless' for providers.

Langlo summarized the scope and scale of Vermont's current provider-tax system: in fiscal year 2025 hospital provider taxes raised about $212 million (roughly 93 percent of the state’s provider-tax receipts) and total provider-tax receipts were about $229 million. He explained how federal matching (FMAP) multiplies each state dollar in Medicaid: under the regular match the federal share is about 58.81 percent, yielding roughly $2.43 in combined federal and state resources for each state dollar spent on Medicaid in that category.

A provision in HR1 would phase a hospital provider-tax rate down to roughly 3.5 percent for expansion states by the early 2030s. Langlo presented preliminary state estimates showing a first-year loss of about $15 million rising over subsequent years to roughly a $113 million annual general-fund revenue loss (in today's dollars) when the provision is fully implemented; with federal matching, the reduction in Medicaid-covered services could be substantially larger.

Committee members and staff debated who would ultimately bear the loss. Langlo warned that simply lowering the provider tax does not straightforwardly benefit hospitals: a cut to the tax can reduce the state share used to draw federal match, which could lower Medicaid rates or services and increase uncompensated care. Members expressed concern that small rural hospitals with high Medicaid exposure could be particularly vulnerable.

Langlo recommended the committee consider a range of levers to respond to any federal change: raising alternative revenues, cutting state-funded services, finding efficiency savings, or reallocating funds. He emphasized the federal rule changes in HR1 would also freeze the classes and cap rates states can use for provider taxes, limiting state flexibility.

Next steps: fiscal staff will continue to refine estimates and coordinate with AHS and AOE if HR1 language advances; the committee flagged the need for contingency planning for rural hospitals and Medicaid beneficiaries.