If you are one of the roughly 12 million Americans who qualify for both Medicare and Medicaid — often called dual eligibles — a major shift in how states pay for Medicaid could directly affect the coverage you depend on every day. The 2025 reconciliation law, signed into federal law this year, imposes sweeping new restrictions on a financing tool called provider taxes. These are fees that states charge hospitals, nursing homes, and other healthcare providers, then use to draw down additional federal Medicaid matching dollars. The changes are not abstract budget policy. They are the kind of structural shift that, over the next few years, may result in fewer covered services, lower payments to the doctors and facilities that accept Medicaid, or both.
To understand why this matters, you need to know how Medicaid is actually paid for. Unlike Medicare, which is funded almost entirely by the federal government, Medicaid is a shared financial responsibility. In federal fiscal year 2024, the federal government covered approximately 65% of total Medicaid costs, while states paid the remaining 35%. But states have never been required to fund their share exclusively from their own general tax revenues. Federal rules have long allowed states to use provider taxes — fees assessed on hospitals, nursing facilities, managed care organizations, and other providers — as part of their contribution. The federal government then matches those state dollars at each state's Federal Medical Assistance Percentage (FMAP) rate, which ranges from 50% to 83% depending on a state's per-capita income. This matching structure means that every dollar a state raises through a provider tax can unlock significantly more in federal funds.
According to KFF's 2025 Medicaid Budget Survey, provider taxes accounted for a median of 18% of the non-federal share of Medicaid spending in state fiscal year 2026 enacted budgets, while state general funds covered a median of 70%. That 18% figure may sound modest, but in dollar terms it represents billions of dollars across the country — money that flows directly into payments to hospitals, nursing homes, home health agencies, and the managed care plans that serve Medicaid enrollees. Some states rely on provider taxes far more heavily than others, meaning the impact of the new restrictions will not be felt equally across the country.
The 2025 reconciliation law changes the rules in two significant ways. First, it prohibits all states — regardless of whether they expanded Medicaid under the Affordable Care Act — from establishing any new provider taxes or from increasing the rates on existing ones. This is a hard freeze on a revenue tool that states have used for decades. Second, and more aggressively, states that adopted the ACA Medicaid expansion are required to actually reduce their existing provider tax rates over time. The logic behind this provision, from a federal budget perspective, is that expansion states receive a higher federal match rate (90%) for their expansion population, and Congress has decided that states should not be able to use provider taxes to further leverage that enhanced match. But the practical consequence is that expansion states face a double constraint: they cannot raise taxes to compensate for any revenue shortfall, and they must reduce the taxes they already have.
For seniors, the most direct concern is what happens to dual-eligible coverage when states face these new budget pressures. Medicaid does things for low-income Medicare beneficiaries that Medicare simply does not do. It pays Medicare Part B premiums, which in 2026 run $185.00 per month for most beneficiaries. It covers Medicare deductibles and copayments that would otherwise come out of pocket. And critically, it pays for long-term services and supports — nursing home care, home health aides, adult day programs — that Medicare covers only in very limited circumstances. If states are forced to cut Medicaid spending because they can no longer generate provider tax revenue at current levels, these are the services most likely to face pressure.
Data Snapshot: According to CMS.gov data, as of 2024 there were approximately 12.4 million full-benefit dual-eligible beneficiaries enrolled in both Medicare and Medicaid. These individuals represent some of the most medically complex and financially vulnerable people in the healthcare system. Separately, CMS data shows that in 2025, more than 4,800 Medicare Advantage plans were available nationally, including Dual Eligible Special Needs Plans (D-SNPs), which are specifically designed to coordinate Medicare and Medicaid benefits for this population. D-SNPs are particularly sensitive to Medicaid policy changes because their supplemental benefits and cost-sharing structures are built around what Medicaid covers in each state.
The effects of the provider tax restrictions will vary considerably by state, and that variation matters if you are trying to understand your own risk. States that have historically relied most heavily on provider taxes to fund their Medicaid programs will face the steepest revenue gaps. States with stronger general fund revenues may be able to backfill some of the lost provider tax dollars with direct appropriations, though that requires political will and budget flexibility that many states currently lack. States are already experiencing slower overall revenue growth heading into this period, which means the timing of these restrictions is particularly difficult. A state that might have absorbed a provider tax reduction in a strong budget year may find it genuinely painful in a year when income and sales tax revenues are also growing slowly.
One outcome that analysts have flagged is downward pressure on provider payment rates. When states have less money to put into Medicaid, one of the first levers they pull is reducing what they pay hospitals, nursing homes, and physicians for Medicaid services. Lower payment rates create a well-documented problem: providers who are already operating on thin Medicaid margins may stop accepting new Medicaid patients, reduce the number of Medicaid patients they see, or in some cases exit the Medicaid program entirely. For a dual-eligible senior who relies on Medicaid to cover their nursing home stay or their home health aide, a provider that stops accepting Medicaid is not a minor inconvenience — it can mean a forced move or a loss of care.
Another possible outcome is benefit reductions. States have some flexibility in what optional Medicaid services they cover, and when budgets tighten, optional benefits are often the first to be cut. Services like dental care, vision, hearing aids, non-emergency medical transportation, and personal care attendants are all optional under federal Medicaid rules. These are also services that many low-income seniors depend on and that Medicare covers poorly or not at all. A state facing a $500 million Medicaid funding gap because of provider tax restrictions may look at its optional benefit package as a place to find savings, even knowing that those cuts will fall hardest on the most vulnerable enrollees.
If you are a dual-eligible beneficiary or you help a family member navigate dual coverage, there are concrete steps worth taking now rather than waiting to see how your state responds. Start by contacting your State Health Insurance Assistance Program (SHIP) counselor — this is a free, unbiased service available in every state, and SHIP counselors are trained specifically to help Medicare and Medicaid beneficiaries understand their options. You can find your local SHIP at shiphelp.org. Ask specifically about whether your state is planning any changes to Medicaid benefits or provider payment rates in the coming year, and whether your current D-SNP or Medicaid managed care plan is expected to remain available.
It is also worth understanding the enrollment windows that govern your options as a dual-eligible beneficiary. Unlike standard Medicare beneficiaries who can only switch Medicare Advantage plans during the Annual Enrollment Period (October 15 through December 7) or the Open Enrollment Period (January 1 through March 31), full dual-eligible beneficiaries have a Special Enrollment Period that allows them to switch Medicare Advantage or D-SNP plans once per quarter during the first three quarters of the year. This means that if your current plan's network or benefits deteriorate because of Medicaid funding changes, you may have more flexibility to move than a standard Medicare Advantage enrollee.
The transparency argument in favor of the new provider tax rules deserves a fair hearing, even if the timing is difficult. Critics of the provider tax system have long argued that it allows states to effectively draw down federal Medicaid dollars in ways that obscure the true cost of the program and reduce accountability. When a state charges a hospital a provider tax, the hospital often receives that money back in the form of higher Medicaid payment rates — meaning the state's net cost is lower than it appears, while the federal government's cost is higher. The new restrictions may force states to be more straightforward about what Medicaid actually costs and how they are choosing to fund it. That transparency could ultimately benefit beneficiaries by making it clearer when coverage is being cut and who is responsible for those decisions.
What you should not do is assume that your current Medicaid benefits are guaranteed to remain unchanged. The 2025 reconciliation law sets in motion a multi-year process of state budget adjustments, regulatory implementation, and political negotiation. Some states will find ways to maintain current benefit levels; others will not. The states most likely to struggle are those that have historically relied most heavily on provider taxes and that have less fiscal flexibility in their general fund budgets. If you live in a state with a large Medicaid program and a history of aggressive provider tax use, it is worth paying close attention to your state legislature's budget debates over the next one to two years. Your state Medicaid agency's website will typically post proposed benefit changes before they take effect, and there are usually public comment periods during which beneficiaries and advocates can weigh in.