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 Health Management Associates Problem 1: Tax Revenues Fluctuates More Than the Economy

4 Health Management Associates Demand for Medical Services Rises When Revenues Declines

5 Health Management Associates 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 Health Management Associates Spending for Medical Care Doesn’t Decline When the Economy Falters

7 Health Management Associates 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 Health Management Associates Problem 2: Health Spending Growth Exceeds Economic Growth

9 Health Management Associates 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 Health Management Associates 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 Health Management Associates 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 Health Management Associates 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 Health Management Associates 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.