New Jersey has become the first state to impose fees on employers for hiring Medicaid beneficiaries. Legislation signed by Governor Mikie Sherrill on June 30 mandates that businesses with at least 50 employees pay an annual fee ranging from $325 to $725 per worker or dependent enrolled in Medicaid.
California lawmakers have approved legislation directing the state to develop options for New Jersey-style taxes on employers. Democrats in Washington and Connecticut have also considered similar proposals.
Supporters argue that profitable employers should not shift the cost of covering their workers onto taxpayers.
However, taxes change behavior. A tax on employing Medicaid recipients is effectively a tax on hiring low-income workers.
Employers will respond accordingly. Currently, Medicaid covers more than 74 million people nationwide—over one in five Americans.
The program accounts for roughly one-third of state expenditures and costs taxpayers approximately $931 billion annually.
Nearly 20 million individuals gained coverage through Obamacare’s expansion for able-bodied adults earning up to 138% of the federal poverty line, equivalent to about $29,863 for a couple.
Most states adopted this expansion because Washington pledged to cover 90% of benefits costs indefinitely. This is more than what states receive from federal sources for many legacy Medicaid enrollees—including the disabled, pregnant women, and children.
To finance their share of Medicaid costs, states have historically relied on funding strategies that maximize federal matching dollars. For example, they tax healthcare insurers or providers and then use proceeds to increase Medicaid reimbursements.
These higher payments attract additional federal funds.
Many of these financial tactics will end next year under the tax-and-spending law enacted by Republicans in Congress last summer.
Consequently, some states are seeking new sources of Medicaid funding.
Large corporations are an attractive target. However, New Jersey, California, and other states considering such policies are inadvertently harming the very population Medicaid is intended to assist.
Businesses do not simply absorb new costs; they adjust. If hiring a Medicaid recipient becomes more expensive than hiring someone else, employers may automate entry-level jobs using AI tools, reduce hiring, cut hours, or favor applicants less likely to trigger the fee.
The individuals most affected will be low-income Americans seeking their first job, returning to work, or climbing the economic ladder—not large employers.
New Jersey’s law prohibits employers from considering Medicaid enrollment when making hiring decisions.
Yet lawmakers cannot eliminate these incentives. If employing Medicaid recipients becomes more expensive, businesses will find legal ways to avoid those costs.
The Trump administration and congressional Republicans have pursued a different approach: rather than penalizing employers for hiring Medicaid recipients, their new work requirements aim to help more able-bodied adults enter and remain in the workforce.
The Congressional Budget Office estimates these measures could reduce federal Medicaid spending by about $326 billion over the next decade. The Department of Health and Human Services further projects they might increase average family incomes by roughly $12,000 and lift up to 2.9 million Americans out of poverty.
This reform is based on the premise that a stronger labor market serves as the best long-term solution to Medicaid’s escalating costs.
Lawmakers in states such as New Jersey, California, Connecticut, and Washington would do well to remember this.
The most effective way to reduce dependence on Medicaid is to help more people move beyond it. Policies that make low-income Americans harder to hire work against this goal.
States seeking to strengthen Medicaid should not penalize employers for creating jobs. Instead, they should facilitate pathways for beneficiaries to leave the program behind.
