CMS has issued preliminary guidance to states aimed at tightening rules on Medicaid provider taxes as part of the One Big Beautiful Bill Act. The agency projects the move will save more than $200 billion over the next decade.
Earlier this year, the agency issued a proposed rule to close what it describes as a Medicaid tax “loophole” that some states have exploited to increase federal payments while minimizing their state financial contributions. The proposed rule aims to ensure that federal Medicaid dollars are used to support vulnerable populations rather than being redirected to fund other state programs, including healthcare coverage for undocumented immigrants.
“CMS is restoring the federal-state partnership by ensuring that Medicaid dollars are spent responsibly, transparently, and in service of the beneficiaries who depend on this program for their health and dignity,” CMS Administrator Mehmet Oz, MD, said in a news release. “While closing a loophole that some states were taking advantage of to shift billions in costs onto federal taxpayers, we have crafted policy that gives states time to transition as the new tax limits are implemented.”
Ten things to know:
1. The guidance implements new federal requirements contained in the Working Families Tax Cuts Act, signed July 4, 2025, which amended certain Medicaid financing provisions. The law targets provider‑tax structures and arrangements that CMS argues have allowed states to shift their share of Medicaid financing onto the federal government.
2. CMS will generally prohibit new or increased healthcare‑related taxes after the date of enactment, and it is ending certain financing practices that enabled states to draw down excessive federal matching funds.
5. CMS’ proposed rule would:
- Ban states from taxing Medicaid business at higher rates than non-Medicaid business
- Prevent the use of ambiguous language to obscure Medicaid-specific taxes
- Continue statistical testing while introducing additional safeguards to deter system manipulation; and
- Implement a phased transition timeline based on the duration of existing waivers.
6. The proposed rule is particularly aimed at curbing alleged tax schemes employed by California, Michigan, Massachusetts and New York, which are responsible for 95% of the projected federal losses under the loophole, according to CMS. The rule would provide a transition timeline based on the age of existing waivers, allowing states to phase out these practices.
7. Under CMS’ new guidance:
- For managed care organization taxes exploiting the closed loophole, states have until the end of their fiscal year ending in 2026 to comply, according to CMS.
- For other permissible tax classes that fall under the new rules, states have until the end of fiscal 2028 (but no later than Oct. 1, 2028).
8. A Nov. 14 letter from CMS clarifies that the new thresholds (effective Oct. 1, 2026) apply only to taxes that were both enacted (fully authorized by the legislative process and any required waiver approved by CMS) and imposed (the state or locality was actively collecting revenue under that tax structure) as of July 4, 2025. These definitions establish that only taxes in effect as of July 4, 2025, are included in the new indirect hold harmless threshold, effectively prohibiting new or increased provider taxes beyond those limits, according to the American Hospital Association.
9. The guidance means that states will have less flexibility to use provider taxes as a source of non‑federal share for Medicaid programs. Some state financing structures that hospitals have relied upon — particularly those tied to supplemental payments funded via provider taxes — may face significant revision. This could affect payment models, hospital margins and state funding dynamics if states cannot replace lost tax‑leveraged revenue.
10. CMS said it will engage in rulemaking and issue further implementing regulations, and it encourages states to work proactively to prepare. States that submitted pending tax waivers after July 4, 2025, will find they are not included in the threshold calculations, making their financing arrangements subject to closer scrutiny, according to the agency.
