LANSING, Mich. (WZMQ) – Michigan could face a multibillion-dollar funding challenge in the next few years as new federal rules under President Donald Trump’s “One Big Beautiful Bill Act” are set to cap how much the state can collect from its hospital provider tax. This move could cost hundreds of millions of dollars in Medicaid revenue.
The state currently taxes hospitals and health insurers to leverage federal matching funds for Medicaid. Together, those “provider taxes” generate roughly $9 billion each year, about $6 billion from hospitals and $3 billion from health insurers.
“We tax hospitals, we get their revenue from the tax, we use that revenue to draw down federal matching funds, and most of it goes back to the hospitals,” said Robert Schneider, Senior Research Associate with the Citizens Research Council of Michigan.
Moving forward, the state may have to make up some portion of that $9 billion in revenue. But all of the revenue is expected to be available this fiscal year. When you include these tax-related expenditures, it boosts the state’s overall budget to about $84 billion, even though recent budget numbers only account for about $75 billion in direct spending.
The One Big Beautiful Bill Act will lower the cap on Michigan’s hospital tax starting in fiscal year 2028 or 2029, phasing the rate down from about 5 percent to 3.5 percent by 2032. Analysts at the Citizens Research Council estimate that the reduction could cost hospitals about $1.7 billion annually once fully implemented.
“When it goes down, we’ll lose some of that,” Schneider said. “The state then will need to decide, do we have the hospitals absorb this hit, or do we look inward to our budget and find another $500 million or $700 million or some larger figure in other discretionary revenue?”
A separate tax on health insurers, known as the Insurance Provider Assessment, is also under scrutiny by federal regulators, who say Michigan’s current structure collects higher fees from Medicaid health plans than from private insurers. That discrepancy has allowed the state to draw extra federal dollars, a practice the federal government has labeled a “loophole.”
To comply, Michigan passed a new law alongside this year’s bipartisan state budget, authorizing the Department of Health and Human Services to rewrite the assessment if federal officials revoke the state’s waiver. The change is meant to prevent an immediate revenue loss and maintain current Medicaid spending.
“It allows our Department of Health and Human Services to fix the tax in a way that will pass muster with the federal government,” Schneider said.
Health-plan representatives warn the replacement tax could increase premiums slightly for private-market customers, though state officials say it’s needed to “protect access to health care for millions of Michiganders.”
Schneider cautioned that while the insurance-tax fix may stave off short-term cuts, the hospital-tax cap poses a larger, long-term risk. “You could have less access to care if the Medicaid program takes major cuts,” he said. “If you’re a hospital, especially a smaller hospital, one in a rural area, you need to worry about what the potential impact is of those provider-tax reductions.”
