By Bill Alpert

As the Trump administration looks for ways to reduce federal Medicaid spending, a Tuesday note from Mizuho Securities examined one proposal that could hit nursing home stocks.

The change would restrict state "provider taxes," a way that states fund their share of Medicaid spending, but also an arrangement that can shift spending to the federal government. The Congressional Budget Office has said restrictions on provider taxes could save the federal government $600 billion over the next decade.

But that would also hurt Medicaid revenue at nursing home chains like the real estate investment trusts Omega Healthcare Investors and Sabra Health Care REIT, says Mizuho's Vikram Malhotra.

"Adjusting the provider tax 'math' is likely a viable path to lowering federal Medicaid costs and a risk to [skilled nursing facility] providers," he writes.

Those potential cuts are one more reason why the Mizuho analyst has a Hold rating on Omega and Sabra stocks.

Medicaid provides big chunks of the nursing home industry's revenue. According to Raymond James analyst Jonathan Hughes, Omega gets 53% of its rent income from the program, while Sabra gets 35%. Another nursing home REIT, CareTrust, gets 60%.

Provider taxes have long been one of the ways that states fund their roughly 40% share of Medicaid costs, with a tax on all hospitals, nursing homes, rehab hospitals, and sometimes managed care organizations. The state can use the resulting money to pay providers' bills for Medicaid patients.

Medicaid funding from provider taxes has far outpaced Medicaid spending: tripling in the last couple of decades, to more than $27 billion, or 17% of states' costs, according to the U.S. Government Accountability Office.

But critics say the financing technique can be manipulated to extract more from the federal government. By boosting both payments and taxes to the same healthcare providers, a state can report higher costs and inflate the federal government's match, without the state having to boost its net spending, says a 2023 study by the fiscal examiners at the Committee for a Responsible Budget think tank.

"The fundamental problem with provider taxes is that they operate in a way that resembles a kickback," says the study. To prevent provider tax schemes that fleece the federal government, a federal rule examines any state tax rate that exceeds 6% of providers' revenue, to ensure the state isn't using the proceeds to reimburse its Medicaid providers for the tax.

Lowering that cap from 6% to 2.5% could save the federal government $250 billion over a decade, according to the Congressional Budget Office. Eliminating it altogether could save $600 billion.

Another frequently discussed proposal could save hundreds of billions by limiting the portion of a state's Medicaid costs that it covers through a provider tax.

There are those who see provider tax limits as a threat to healthcare availability. A December paper from the liberal think tank Center on Budget and Policy Priorities say such taxes have let states keep pace with Medicare costs and avert benefit cuts. "Restricting or ending states' ability to use these revenues would open a hole in state budgets and have serious consequences for Medicaid enrollees," says the group.

But state provider taxes were flagged for limitation -- or even elimination -- by a budget-cutting group of House Republicans last year. So the tax arrangements are likely to catch the eye of Elon Musk's DOGEers at the Department of Government Efficiency, says Mizuho's Malhotra.

Nursing homes, beware.

Write to Bill Alpert at william.alpert@barrons.com

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March 06, 2025 04:30 ET (09:30 GMT)

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