If your spouse is simply being reimbursed for the amount that was deducted from their wages through a state assistance program for Medicaid recipients, then it would not be taxable.
According to this Pennsylvania DHS webpage, through HIPP (Health Insurance Premium Payment Program), the state purchases cost-effective, employer-sponsored health insurance for Medicaid recipients. Participating in HIPP gives Medicaid recipients more options when it comes to choosing a healthcare provider since some providers do not accept Medicaid payments but do accept private insurance. In addition, if a family is already paying for their benefits through their employers, enrolling in HIPP would mean that they get those benefits reimbursed to them.
If the employer's health insurance is determined to be cost effective, Medicaid recipients are required to participate in HIPP as a condition of continued eligibility for Medicaid. They will still be enrolled in Medicaid, but the employer insurance is used as the primary medical insurance.
The payments from DHS are therefore a reimbursement program to assist Medicaid recipients and are not taxable.
@Boombaby99
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