Newly proposed federal rules would have "disastrous" impact on Medicaid, insurance funding, state says

Newly proposed federal rules could cost Colorado hundreds of millions of dollars in funding annually for both Medicaid and health insurance affordability programs in Colorado, state officials say.

The rules are intended to implement H.R. 1 — the Republican-backed measure also known as the One Big Beautiful Bill Act. But, in a letter sent to federal regulators last week, Gov. Jared Polis argues that the rules go far beyond that legislation and could take a sledgehammer to Colorado's systems for keeping health insurance costs down.

The overall loss to Colorado, if the rules are implemented as proposed, could be catastrophic to healthcare funding statewide, putting even more strain on a state budget that is already struggling to close deficits and rein in Medicaid spending.

As Polis wrote in the letter, dryly: "This reinterpretation would expose the state to substantial and ongoing losses of federal financial participation, affecting multiple existing state revenue and financing streams, and potentially require unwinding programs that stabilize Colorado's commercial insurance markets and support affordability for numerous Colorado residents."

Umm … what does that actually mean? We have answers.

Remind me again what H.R. 1 does?

The measure, which was signed into law last year, does a bunch of things. Let's just focus on Medicaid.

The bill imposes work requirements for some Medicaid members, which kick in Jan. 1, 2027. It also reduces the amount of money states can leverage from taxes or fees on healthcare providers such as hospitals. States use that money to draw down additional funding from the federal government.

Does Colorado have a tax on hospitals?

We do, but we call it a fee — it's officially the Healthcare Affordability and Sustainability Hospital Provider Fee, or just hospital provider fee for short.

It works like this: Colorado charges a fee to hospitals based on patient revenues. For the 2024-2025 fiscal year, this fee brought in $1.42 billion.

The state then takes that money and asks the federal government to match it. The feds respond by sending billions in funds back to Colorado. The state pools all this money and redistributes some of it to hospitals — in the 2024-25 fiscal year, hospitals got about $1.9 billion, meaning they netted more than $483 million through the program.

Where does the rest of the money go?

Colorado uses the rest of the money to fund Medicaid programs, most crucially the state's share of the Affordable Care Act's Medicaid expansion.

The expansion allowed the state to extend Medicaid coverage to people earning just over the poverty line. Nearly 400,000 Coloradans who might not otherwise be able to afford health insurance receive coverage this way, which led to a big drop in the rate of people without coverage in Colorado.

Under H.R. 1, able-bodied adults covered under the Medicaid expansion are the group subject to the work requirements. This is expected to reduce the number of people covered by Medicaid in Colorado.

But, because Colorado uses money from this hospital provider fee mechanism to pay for the expansion, the state general fund doesn't save any money when the expansion population shrinks.

How does H.R. 1 change the hospital provider fee?

Essentially it reduces the rate at which states can tax (or charge fees to) hospitals.

That percentage is currently 6% — that's 6% of patient revenues for hospitals, but it would be calculated differently if the tax is charged to different provider types. H.R. 1 shrinks the percentage over time to 3.5% by 2032.

So that means less collected in fees for Colorado and less received back in matching funds from the feds.

How much money will Colorado lose?

The Colorado Hospital Association estimates the cumulative impact of H.R. 1 from 2027 through 2032 will be $11 billion in lost federal Medicaid funding.

That's … a lot, right?

Colorado's budget for the agency that administers Medicaid just for this year is $20.5 billion, including $11.9 billion in federal funds. So a multibillion-dollar hit is not an amount Colorado can find in the state couch cushions.

"The likelihood of being able to make up that revenue from other sources is next to none," said Cody Belzley, a healthcare analyst who worked with the hospital association on the projection.

"There is no quick-and-easy solution here."

This is especially difficult because Medicaid keeps overshooting its budget in Colorado, leading to big impacts on the overall state budget. To the hospital association, that means it's time to rethink how the hospital provider fee is used to prepare for a reality where Colorado gets less money from it.

"Medicaid cost containment needs to be a theme of this conversation," Belzley said.

But it sounds like the state leaders knew this was going to happen.

They did.

So why is Polis upset about the H.R. 1 rules?

Because those rules also could impact funding for health insurance affordability programs, which is something state leaders weren't prepared for.

How do the H.R. 1 rules affect health insurers?

Basically, the rules would classify insurers as medical providers, meaning they would also be subject to H.R. 1's regulations on provider taxes and fees.

Michael Conway, the state's insurance commissioner, said insurers have never been classified this way, so taxes and fees on them have never had to comply with Medicaid rules.

"Insurance taxes are not used to fund Medicaid," he said.

Why does this matter?

In addition to the new limit on the tax or fee rate, the proposed rules have other restrictions. Taxes must be "broad-based and uniform," meaning they apply equally to everybody in the same provider class.

But Colorado's insurance taxes and fees aren't set up that way. Nonprofit insurers pay less in some instances than for-profit ones do. Insurance plans structured as HMOs don't pay certain taxes.

So, if these rules apply to insurers, Colorado will be in violation.

What happens if Colorado violates the rules?

Big penalties.

"The rule on the Medicaid side makes it particularly punitive if a state accidentally goes over the thresholds by a cent," said Adam Fox, the deputy director of the Colorado Consumer Health Initiative, which also submitted comments opposed to the rules.

As Conway explained it, Colorado collects hundreds of millions of dollars a year in taxes and fees on health insurance companies. If these rules were to go into effect, and if the federal government deemed Colorado's insurer taxes to be in violation, then the feds could cut even more in Medicaid funding to the state.

That would put the state in a bind: Does it sacrifice that funding to save the insurance taxes, which help the state's general fund as well as a bunch of specific programs? Or does it cut the taxes to protect Medicaid dollars?

What do these insurer taxes pay for?

Lots of things. One generates money to operate Connect for Health Colorado, the state's online health insurance exchange. Another funds an insurance program to protect consumers in case a carrier goes broke. Still another pays for some major affordability programs in Colorado.

There's the reinsurance program — this program uses state and federal funds to help insurers pay their highest-cost claims, allowing them to lower prices for consumers. There's also a state subsidy that helps lower-income people buy coverage.

Polis and Conway have credited the reinsurance program with saving Coloradans billions of dollars on insurance premium costs over several years, and they have credited the state subsidy with helping keep insurance prices from rising even more than they have over the last two years.

The taxes and fees also help pay for OmniSalud, a program that offers subsidized coverage to a limited number of people who can't receive state subsidies because of their immigration status.

So what will happen to these programs?

Conway said the rules could have a "disastrous impact" on these programs.

"It's an existential threat to all of the affordability programs and work we've done on the private insurance side of things," he said.

Opponents of the rules paint a bleak picture: If Colorado has to end or scale back many of these programs, health insurance costs for people who buy coverage on their own would likely increase, more people would go without insurance, and hospitals could end up providing more care they don't get paid for, which would both hammer their budgets and likely force them to raise prices on everybody else.

"Imposing these new restrictions on the many states, like Colorado, that have health insurer taxes or fees will have devastating consequences," the Colorado Consumer Health Initiative wrote in its comment letter on the rules.

Can't Colorado just fix its insurance taxes to comply with the rules?

Conway said that would be "incredibly difficult to do" both politically and logistically. There would be a lot to change and a lot of powerful groups within the healthcare industry involved.

Belzley, the healthcare consultant, said it's important that everyone work together on solutions rather than devolving into warring factions.

"We don't want to create an environment where access to care and coverage are pitted against one another," she said.

Are other states in the same bind?

Every state but Alaska has some type of hospital provider fee program, so lots of states are looking at potential impact to their Medicaid funding.

Reinsurance programs are also common — more than a dozen states have them with many funding them through taxes or fees on insurers.

The National Association of Insurance Commissioners submitted a letter raising concerns about the rules, as did the National Association of Medicaid Directors. Both organizations are made up of officials from state governments across the country.

So what happens next?

The comment period for the rules closed earlier this week. The federal government will now consider those comments before issuing final rules, likely sometime next year.

If the rules go into effect, it's likely at least some states will sue, saying they violate the Congressional authority provided in H.R. 1.

Type of Story: News

Based on facts, either observed and verified directly by the reporter, or reported and verified from knowledgeable sources.

Distributed by Newsbank, inc.