A provision in President Donald Trump’s “Big, Beautiful Bill,” could strip Connecticut state coffers of hundreds of millions in hospital tax revenue passed as part of the latest budget, as the Trump administration moves to end what they call a Medicaid “money-laundering” scheme used by states to increase federal reimbursements.

As part of the changes to Medicaid, congressional lawmakers have essentially frozen state taxes on Medicaid providers to close a “loophole” used by at least twenty-two states to extract more federal money, and one that landed Connecticut in a legal hot water with the state’s hospitals.

“States are gaming the system—creating complex tax schemes that shift their responsibility to invest in Medicaid and rob federal taxpayers,” said CMS Administrator Dr. Mehmet Oz in a May press release. “This proposed rule stops the shell game and ensures federal Medicaid dollars go where they’re needed most—to pay for health care for vulnerable Americans who rely on this program, not to plug state budget holes or bankroll benefits for noncitizens.”

Essentially, states levy a tax on healthcare provider services, which increases the cost of those services and therefore increases the Medicaid reimbursement; the state then returns some of that money to the healthcare provider in the form of higher reimbursements. Gov. Dannel Malloy implemented Connecticut’s hospital provider tax in 2011 with this very idea, but promptly started withholding the reimbursement to hospitals to make up for budget deficits, resulting in a lawsuit. Gov. Ned Lamont settled that lawsuit for $1.8 billion in 2019, which also froze the hospital provider tax at 2016 rates until 2026. 

However, as part of the 2025 budget, the governor and lawmakers passed an increase in the hospital provider tax of $375 million starting in 2027, followed by a $25 million tax increase every year thereafter – something the Connecticut Hospital Association (CHA) lambasted as “devastating for hospitals, their workforce, and their patients.”

However, a Medicaid provision in the Big, Beautiful Bill may halt those tax increases.

According to the bill summary, the legislation “generally precludes states from instituting new or otherwise increasing Medicaid provider taxes,” and specifically “precludes the revenue from any Medicaid provider tax that is newly imposed or increased by a state from qualifying for federal matching payments.”

According to health policy organization, KFF, Connecticut, along with twenty-one other states that have adopted the Affordable Care Act Medicaid expansion, “could be required to reduce their provider taxes on either hospitals or managed care organizations, cutting a key source of state Medicaid funding in those states.”

While the Big, Beautiful Bill has officially become law, whether it affects Connecticut’s increase to the hospital provider tax in 2027 will really come down to a matter of how the Center for Medicare and Medicaid Services (CMS) interprets the provision. Essentially, since Connecticut’s hospital tax increase was made law before the Big, Beautiful Bill was passed, does it allow the tax increase to move forward even though the increase won’t happen for two years? No one knows yet.

“We are currently awaiting guidance from federal agencies on the exact impacts, including the Hospital Provider Tax,” said Chris Collibee, spokesman for the Office of Policy and Management (OPM), in an email. “Once we have received and reviewed the information, discussed options with the Governor, and he has decided on a course of action, the administration will discuss next steps with legislators and other relevant stakeholders.”

The Connecticut Hospital Association, which issued a press release lambasting the congressional budget bill, saying it will increase taxpayer costs and limit accessibility, likewise says they are waiting to see how CMS will interpret the new law.

“State lawmakers were aware of the moratorium on tax increases contained in the original house bill, and this was one of the factors that led to the significant hospital tax increase before the bill’s passage,” said CHA spokesperson Nicole Rall in an email. “Now that the final bill has been passed, we’re assessing the impact and path forward, which will necessarily include understanding how CMS will interpret and implement the new rules.”

The CHA had been pushing for state lawmakers to increase Medicaid payment rates, arguing the state is only reimbursing 62 percent of costs, thereby forcing the hospitals to raise their rates on patients with commercial insurance. Meanwhile, Connecticut lawmakers had broken the state’s spending cap to plug a $284 million funding gap in Medicaid during the 2025 legislative session, which was largely due to increasing medical costs and caseloads.

Despite potentially ending a tax they say would be devasting, the CHA likewise said the cuts to Medicaid would increase costs on everyone. “If the uninsured forgo preventive care that could keep them healthy or address chronic conditions, they are more likely to need acute care in hospitals, which treat all patients regardless of their ability to pay for those services, further straining our care delivery system,” the CHA wrote.

There are currently over 1 million children and adults covered by Medicaid in Connecticut, according to KFF, costing $10.4 billion in combined state and federal dollars. 

Using figures from the Congressional Budget Office, KFF estimated the bill will result in roughly 137,000 people losing Medicaid coverage through the imposition of work requirements, increasing eligibility redeterminations, and repealing a Biden-era simplification of the renewal process, and Connecticut could see $1 billion less in Medicaid funding per year over ten years, including the moratorium on hospital provider taxes.

“Medicaid was designed to protect low-income seniors, pregnant women, children, and people with disabilities—not subsidize coverage schemes that displace our most vulnerable,” said Drew Snyder, CMS Deputy Administrator and Director of Medicaid & Children’s Health Insurance Program (CHIP) Services. “We are restoring Medicaid to its original purpose and ensuring the intent of the law is followed.”

“There isn’t a single state in the nation that will have the ability to backfill these massive cuts. Kicking people off their health insurance, reducing funding to hospitals, and limiting food and nutrition assistance is going to have a ripple effect throughout the country, causing workers to lose their jobs and premiums to go up,” Collibee said. “And to top it all off, this bill will saddle our children and grandchildren with trillions in additional debt.”

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