CMS on July 21 proposed sweeping changes to Medicaid provider tax policy that would replace the longstanding 6% federal threshold with state- and provider-specific limits, phase down allowable taxes in Medicaid expansion states, create a new provider tax class for payers and strengthen federal oversight of a financing mechanism used by nearly every state.
The agency estimates the proposal would reduce federal spending by $246 billion from 2026 through 2035. CMS said the changes are designed to prevent states from structuring healthcare-related taxes in ways that effectively guarantee providers will recoup their tax costs.
Eight things to know:
1. The proposal could reduce federal Medicaid spending by $246 billion. CMS projects the rule would reduce federal expenditures by $246 billion over 10 years. Provider taxes help states finance their share of Medicaid spending and draw federal matching funds, making changes to the policy potentially significant for state budgets and provider payments.
2. The universal 6% threshold would be replaced. CMS currently generally allows provider tax collections of up to 6% of net patient revenue before determining that an indirect hold harmless arrangement may exist. Beginning Oct. 1, 2026, each state would instead receive a separate threshold for each permissible provider class based on the tax structure enacted and imposed as of July 4, 2025. A class without a qualifying tax on that date would receive a threshold of 0%.
3. Medicaid expansion states would face phased reductions beginning in fiscal 2028. For most provider classes in expansion states, the maximum threshold would be the lower of the state’s July 4, 2025, baseline or 5.5% in fiscal 2028. The ceiling would fall by 0.5 percentage points annually until reaching 3.5% in fiscal 2032. Taxes on nursing facilities and intermediate care facilities for individuals with intellectual disabilities would be exempt from the phase-down, according to CMS.
4. CMS would revise how it determines whether a tax was ‘enacted’ and ‘imposed.’ A tax would be considered enacted when the state or locality completed the legislative process needed to authorize the tax by July 4, 2025. It would be considered imposed if taxpayers had a legally enforceable obligation to pay it on that date. When a broad-based or uniformity waiver is required, the waiver would need to be effective July 4, 2025, or earlier. The interpretations differ from preliminary guidance CMS issued Nov. 14, 2025.
5. The alternative 75/75 compliance test would end. Under current policy, a tax above the applicable threshold can remain permissible if it passes a second test assessing whether 75% of taxpayers receive at least 75% of their tax costs back through Medicaid or other state payments. CMS proposed eliminating that pathway after Sept. 30, 2026, leaving the applicable class-specific threshold as the sole mathematical test for an indirect hold harmless arrangement.
6. Payers would become a permissible provider tax class. CMS proposed adding “services of health insurers” as a permissible class, excluding managed care organizations already covered by existing regulations. The change would bring state taxes on health insurance premiums, covered lives and similar measures into the federal provider tax framework. Taxes in this class that were not enacted and imposed by July 4, 2025, would have a threshold of zero percent.
7. States would face expanded data reporting requirements. States would have to submit initial estimates by Dec. 31, 2026, final tax collection and net patient revenue data by June 30, 2028, and detailed information quarterly through the CMS-64 report. CMS said the submissions generally must use actual data rather than estimates or projections. Failure to report properly could lead to reduced federal grant awards, deferrals or disallowances and delayed approval of certain Medicaid payment proposals.
8. This is CMS’ second major move against provider taxes this year. In January, CMS finalized a separate rule, effective April 3, that bars states from taxing Medicaid business at higher rates than non-Medicaid business and blocks indirect structures designed to bypass those limits. Its phased compliance timeline runs through state fiscal year 2028.
That rule and this proposal both stem from HR 1 and together chip away at a core Medicaid financing tool the agency calls a “loophole.” Provider taxes generate more than $24 billion a year for state budgets, with one state alone raising more than $13 billion, according to CMS. The Congressional Budget Office has estimated the law cuts roughly $880 billion from Medicaid over a decade.
“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 Nov. 14 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.”
The proposed rule is scheduled for publication in the Federal Register July 23. Comments are due Sept. 21.
Click here to access the 118-page proposed rule.
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