Can a Sales Tax on Medical Services Help Fund State Coverage Expansions?

Executive Summary For states considering health coverage expansions, a health care sales tax (provider tax) is one revenue source that deserves consideration, for many reasons. First, state revenues often decline significantly when states experience an economic downturn, at the very time when demands for state-funded health programs increase. But revenues from provider taxes do not fall when the economy falters, so they are a more stable revenue source. Second, state revenues from most sources do not grow as rapidly as health care costs and the subsequent cost of funding coverage programs, leaving states with a shortfall over time. A tax on providers is a tax on health care costs, so revenues grow as costs increase. Provider taxes have been criticized as unfair to providers; however, there is little doubt that the taxes are a viable way for a state to recoup uncompensated care costs that are built into the current reimbursement structure, but would no longer be incurred by most providers if nearly everyone had coverage. Further, because consumers' demand for health services is generally not very sensitive to price changes (especially when the cost is covered by insurance), providers would pass on most of the cost of a tax rather than bearing the burden themselves. Introduction For many years, people concerned about the uninsured have looked to the federal government for a solution. But in recent years, as the number of uninsured has grown and it has become increasingly evident that comprehensive federal action is unlikely, several states, perhaps most notably Massachusetts, have taken major steps to expand health coverage. These initiatives have prompted a number of other states to consider policies to achieve something close to universal coverage.