How States Use SNFs as Intermediaries in Their Pathway to More Federal Money

About a decade ago, your state discovered something beautiful: they could use your money to get federal money, then act like heroes when they gave you some of it back.

Here's how it works:

The state sends you a bill - let's say $500,000 - and calls it a "provider assessment tax." They're very careful not to call it a regular tax, because calling it an "assessment" sounds more professional and avoids certain constitutional problems.

Your state takes that $500,000 from you and declares it as their "state contribution" to Medicaid. The federal government sees Pennsylvania putting money into Medicaid and says "great, we'll match that dollar-for-dollar." Suddenly there's $1 million in the pot.

Pennsylvania then sends you back $600,000 as a "State Directed Payment" and issues a press release about their commitment to supporting nursing facilities. They pocket the remaining $400,000 in federal money for the general state budget.

You paid $500,000 and got back $600,000, so you're up $100,000. The state just gave you free money, right?

Not exactly.

THE BRUTAL MATH THEY DON'T MENTION

Remember that money you're losing every day on Medicaid patients? The math is simple. It costs more to take care of a resident each day than Medicaid reimburses (in most states most situations). That $100,000 "profit" from the directed payment scheme barely makes a dent.

The state isn't being generous. They're using your money as a pass-through to extract federal matching funds, giving you back just enough to make it seem like they're helping, and pocketing the difference. You're still drowning in Medicaid losses - you're just drowning $100,000 less than you would be otherwise.

The Gold Rush

In 2016, exactly two states were running these provider tax schemes. Two. It was an obscure Medicaid financing tool that barely anyone understood or used.

By 2025, thirty-nine states are doing it, spending $144.6 billion annually through State Directed Payments.

What happened in less than a decade? State budget directors discovered the perfect political solution to Medicaid underfunding. They don't have to raise taxes - voters hate that. They don't have to cut popular programs like education or roads - that's political suicide. They just use nursing home money to draw down federal matching dollars and let facilities struggle with whatever losses remain.

The scheme spread through state capitols like wildfire. Every Medicaid director calling their counterparts in other states: "You won't believe what we figured out." The spending jumped $20 billion in just one year, from $124.3 billion in FY2025 to $144.6 billion in FY2026.

This isn't thoughtful policy evolution. It's a gold rush where states discovered they could balance their budgets on the backs of nursing facilities, and nobody in the statehouse had to take a politically difficult vote.

WHY STATES WON'T JUST FIX MEDICAID RATES

The obvious question: why don't states simply pay adequate Medicaid rates from their own budgets?

Pennsylvania's state budget is $45 billion. They absolutely could raise Medicaid nursing home rates to actually cover costs. They choose not to because the political calculation is simple: nursing home residents can't vote. Most have dementia. They're institutionalized, invisible, and have zero political power.

Compare that to teachers, police officers, or highway workers. Those groups have unions, political action committees, and voters who show up to town halls. Cutting their budgets to fund Medicaid? Career suicide for any politician.

It's far easier to keep Medicaid rates at poverty levels, force facilities to participate in this provider tax scheme, and let nursing homes either figure it out or go bankrupt. The voters never see it, the nursing home lobby has no real power, and state legislators get to say they "fully funded Medicaid" without spending a dime of actual state money.

WHAT CMS JUST DID TO YOU

Now the federal government has decided this has gone too far. Starting this summer in 2025, State Directed Payments can't exceed 100% of Medicare rates in Medicaid expansion states, or 110% in non-expansion states.

Sounds reasonable, right? Medicare pays nursing facilities pretty well - typically $400-600 per day depending on the patient's acuity level. So capping Medicaid supplemental payments at Medicare levels seems fair.

Except here's what actually happens. Some states were using directed payments to boost total Medicaid reimbursement well above Medicare levels - sometimes to $500 or $600 per day - because that's what it actually took to make Medicaid patients financially sustainable. Those facilities are about to take a massive hit.

If Medicare pays $400 per day in your market, your state can now only boost Medicaid up to $400-440 per day total through directed payments. Before, they might have been supplementing you up to $500 or $600. That difference - $60 to $200 per patient per day - goes straight to your bottom line as additional losses.

The federal government isn't fixing Medicaid. They're just limiting how much states can use federal matching funds to partially patch their own broken payment system.

THE GEOGRAPHIC INEQUALITY NOBODY'S TALKING ABOUT

Medicare rates aren't the same everywhere. They vary significantly based on local wage indexes and cost of living. A nursing facility in San Francisco might get $550 per day from Medicare, while a facility in rural Pennsylvania gets $350.

Under the new CMS rule, California facilities can now receive up to $605 per day through Medicaid plus directed payments (110% of $550). Pennsylvania facilities are capped at $385 per day (110% of $350).

Same federal program, same rules, but facilities in expensive markets can now use directed payments to boost Medicaid much higher than facilities in cheap markets. The cap is pegged to local Medicare rates, which means the inequality in how much states can supplement Medicaid just got baked into federal policy.

WHAT THIS MEANS FOR YOUR FACILITY

CMS Administrator Dr. Oz claims this will "protect Medicaid's long-term fiscal integrity" and ensure state directed payments are "sustainable, transparent, and fully aligned with our mission to protect beneficiaries."

That's bureaucrat-speak for "we're limiting the scheme that was partially offsetting your Medicaid losses, and you're going to eat the difference."

Your Medicaid patients were already money-losers. The state directed payment boost was barely keeping you afloat. Now that boost is being capped, which means either your losses get worse, or your state finds a new creative financing scheme that complies with the letter of the new rule while still gaming the system.

Pennsylvania has until January 1, 2028 to phase in compliance if their current schemes qualify for grandfathering. That gives them a couple years to figure out the next workaround, or to simply let Medicaid rates fall back to catastrophic levels and watch facilities close.

THE BOTTOM LINE

The fundamental problem hasn't changed: Medicaid pays nursing facilities 30-50% below the actual cost of care.Everything else - the provider taxes, the directed payments, the federal matching schemes - is just financial engineering around that core disaster.

CMS isn't fixing it. They're just putting guardrails on one particular scam while leaving the underlying crisis untouched. You're still going to lose money on every Medicaid patient. You're still going to be used as a pass-through for state budget games. You're just going to lose slightly more money per patient than you were before.

Welcome to Medicaid in 2025, where the federal government cracks down on state schemes but can't be bothered to actually make the payment rates work. You're not in the game - you are the game.