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A “Sales” Tax on Providers to Fund State Coverage Expansion

This article discusses the use of a sales tax on healthcare providers as a means to fund state coverage expansion. It addresses the fluctuation of tax revenues compared to the economy, the growth of healthcare spending exceeding economic growth, and the fairness of the tax burden on providers. The potential impact on providers and insurers, as well as the advantages and challenges of implementing a provider tax, are also explored.

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A “Sales” Tax on Providers to Fund State Coverage Expansion

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  1. A “Sales” Tax on Providers to Fund State Coverage Expansion Elliot K. Wicks, Ph.D. Senior Economist Health Management Associates. Senior Economist Health Management Associates

  2. The Funding Problem • Business cycles: State revenues fall when the demand for medical services rises. • Over time, health costs grow more rapidly than the economy and tax revenues. • Provider sales tax helps with both problems.

  3. Problem 1: Tax Revenues Fluctuates More Than the Economy

  4. Demand for Medical Services Rises When Revenues Declines

  5. Solution 1: Provider Tax Is Largely Recession-Proof • People don’t stop buying medical care in recessions. • Need for services not reduced when economy falters. • Insurance helps make them less sensitive than for other services. • Data support this:

  6. Spending for Medical Care Doesn’t Decline When the Economy Falters

  7. Problem 2: Health Spending Growth Exceeds Economic Growth • Revenue from most state taxes grows roughly in line with state economic growth. • Sales tax • Income tax • Gross receipts tax • Health care always grows faster than economy as a whole:

  8. Problem 2: Health Spending Growth Exceeds Economic Growth

  9. Solution 2: Provider Tax Revenues Grow at Rates of Healthcare Cost Growth • Tax on providers is tax on the cost of health care. • Unlike other tax sources, when health spending rises, provider tax revenues would rise.

  10. Is a Provider Tax Fair to Providers? Do They or Should They Bear the Burden? • “Uncompensated care” is not really uncompensated: providers get paid. • Cost shift • DSH • If universal coverage, no uncompensated care but reimbursement rates include payment. • Provider tax would “recapture” what would otherwise be a windfall • Note indigent care burden not spread equally; so inequities could result.

  11. Providers Will “Pass on” the Tax and Not Bear the Burden • Consider sales tax on groceries: everybody recognizes consumers bear the burden of this tax, not the grocer who pays the state. • The tax is passed on: added on top of the price of groceries. • But taxes on business can sometimes reduce sales and thus net revenue: • People buy less when price rises. • But not generally true of health services: • Research shows people quite insensitive to price changes even when paying out of pocket. • 4% tax might cause sales to fall by 0.5% - 1.0% • When insurance pays the bill, even much less sensitive.

  12. Would Insurer’s Pay Passed-on Tax? • Assume tax more than offsets previous uncompensated care, so there is net cost to providers. • Private payers would probably pay (as they do now for uncompensated care) because legitimate cost of business. • Medicaid would need to raise payment rates to cover costs. • Medicare would not change rates for just one state.

  13. Provider Tax Deserves Consideration • Provider tax has key advantages: • Revenue less subject to business cycles. • Revenue grows with health care costs. • No tax will be easy to “sell” politically. • May be necessary to increase provider payment rates somewhat, as proposed in California. • Probably need to combine with other new revenue sources.

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