Why Employer Fees on Hiring Medicaid Recipients Could Backfire

New Jersey has enacted a law that imposes an annual fee on employers for each employee (or dependent) enrolled in Medicaid, and other states are considering similar measures. Under the New Jersey measure signed into law on June 30, companies with 50 or more employees will pay between $325 and $725 per Medicaid enrollee each year. California lawmakers have asked state officials to develop options modeled on New Jersey's approach, and proposals have been floated in Connecticut and Washington.

Supporters’ Case

Proponents say profitable companies should not shift the cost of employee health coverage onto taxpayers. The idea is to recoup state Medicaid expenses from employers who can afford to help cover workers’ care.

Why Critics Say It May Do More Harm Than Good

That argument has intuitive appeal. But tax and fee policies change incentives. A charge tied to a worker’s Medicaid enrollment operates in practice as a tax on hiring low-income employees, and employers are likely to respond by changing hiring behavior.

Medicaid now covers more than 74 million people—about one in five Americans—and costs roughly $931 billion annually across federal and state budgets.

Nearly 20 million Americans gained coverage through the Affordable Care Act’s Medicaid expansion, which extended eligibility to adults earning up to 138% of the federal poverty level (about $29,863 for a couple). Most states accepted that expansion largely because the federal government agreed to fund about 90% of the additional costs for expansion enrollees.

How States Fund Medicaid—and Why New Revenue Is Sought

States historically used a range of funding mechanisms—such as provider and insurer assessments that are recycled into higher Medicaid payments—to maximize federal matching dollars. Some of those strategies are being constrained by recent federal tax-and-spending changes, prompting states to explore new revenue sources, including employer levies.

Likely Employer Responses

Businesses rarely absorb new costs without adjusting. If hiring a Medicaid enrollee becomes comparatively more expensive, employers may lawfully avoid the fee by automating entry-level roles, slowing or reducing hiring, cutting hours, or favoring applicants less likely to be on Medicaid. The consequences would fall hardest on low-income jobseekers seeking their first job, returning to work, or advancing their careers—not on large corporations.

New Jersey’s law attempts to prevent discrimination by barring employers from directly considering Medicaid status in hiring decisions. But lawmakers cannot fully neutralize economic incentives: firms will find lawful ways to respond to increased costs.

Alternative Policy Approaches

Rather than penalizing employers, some policymakers have favored work and employment-focused reforms to reduce long-term reliance on Medicaid. Analyses cited by proponents of such approaches include a Congressional Budget Office estimate that certain work-requirement proposals could reduce federal Medicaid spending by roughly $326 billion over the next decade, and a Department of Health and Human Services projection that expanded employment supports could raise average family incomes and reduce poverty for millions. (Estimates depend heavily on the precise rules and supports implemented.)

Policy designers face a trade-off: measures that make hiring harder for low-income workers risk increasing dependence on public benefits, while supports that help beneficiaries move into stable employment can reduce long-term program costs.

What States Can Do Instead

States seeking to curb Medicaid spending while promoting economic mobility should prioritize policies that help beneficiaries transition to stable employment—such as job-training programs, childcare and transportation supports, earnings supplements, and stronger connections between Medicaid and workforce services—rather than imposing fees that create perverse hiring incentives.

Author: Sally C. Pipes is President and CEO and the Thomas W. Smith Fellow in Healthcare Policy at the Pacific Research Institute. Her most recent book is "The World's Medicine Chest: How America Achieved Pharmaceutical Supremacy — and How to Keep It." Follow her on X @sallypipes.

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