Illinois faces a $239 million drop in hospital and managed care organization provider tax revenue, an important mechanism for funding the state’s Medicaid program, in 2028 and as much as a $1.5 billion cut over the next five years, according to a new assessment of looming budget challenges for the state.
The issue of diminishing provider taxes and the somewhat-corresponding payments back to hospitals is another multiyear, cost-cutting change to Medicaid rules contained in the federal Big Beautiful Bill Act.
While much has been made of the threat of Medicaid cuts over the next decade in the form of dropping enrollment due to twice-yearly re-enrollment and new work requirements included in the spending plan, provider tax revenues and directed payments to hospitals will be another kind of cut with which Illinois and health care providers will have to contend. And overall Medicaid reimbursements will have an impact on that funding.
The Institute of Government & Public Affairs at the University of Illinois System produces an annual Fiscal Future project analyzing Illinois’ fiscal condition and long-term trends. For fiscal 2025, the report lists the federal policy changes to provider taxes as a long-term challenge to growth in state revenue. The report also examines evidence of a long-term decline in state sales taxes and the act’s impact on re-categorization of individual and corporate income tax revenues.
Special assessment fees and taxes on hospitals and nursing homes are used by most states, including Illinois, to support state Medicaid expenditures, the IGPA report explains.
In a fairly opaque manner, those provider taxes represent more non-federal funds against which matching federal funds are generated through state-specific Federal Medicaid Assistance Percentages, said Paula R. Worthington, a lecturer at the Harris School of Public Policy and senior policy adviser for the Civic Federation said. Worthington is the primary author of the Medicaid provider tax portion of the IGPA report.
States also dole out funding from the provider taxes and federal matching funds back to hospitals and other providers in the form of state-directed payments, she said.
In Illinois, assessments on hospitals and managed care organizations generate the two largest revenues, comprising over 75% of all provider tax revenues, the report said.
The federal spending package calls for, beginning in 2028, provider assessment "safe harbor" tax caps decline a half percentage point until they reach 3.5%. Currently at 6%, the cap drops to 5.5%, and continues to ratchet down to 3.5% in FY 2033.
The IGPA estimates, assuming no future growth in patient revenues, the hospital provider and MCO provider assessment revenues would be $239 million lower in FY 2028 than under the pre-H.R. 1 status quo and increasingly larger impact in future years. The overall estimate, assuming no growth in patient revenues, by FY 2033 would be $1.594 billion.
The Illinois Department of Healthcare & Family Services paints an even worse picture for the impact on state-directed payments, which are tied to provider taxes. It estimated in October that as states ratchet down their taxes from 6% to 3.5% of net patient revenues, state-directed payments in Illinois might have to be reduced a total of $3.4 billion over funding reduction period.
HFS said the change will require it to reduce hospital state-directed payments and restructure the nursing home and MCO taxes to come into compliance with the act’s regulations.
Worthington noted that the actual figures are difficult to estimate because of numerous factors.
For example, the half percentage point drop, she said, could be exacerbated by other changes to Medicaid funding, making the cut in provider tax assessments even steeper as fewer people stay enrolled in Medicaid, due to the spending package’s redetermination and work requirement regulations.
