Dive Brief:
- The CMS on Thursday finalized a rule cracking down on provider taxes that critics argue states use to unfairly inflate their federal Medicaid reimbursement.
- The regulation, first proposed in May, prohibits states from levying higher tax rates on healthcare providers and managed care companies participating in the safety-net program. It also bans strategies that states use to disguise the taxes, such as “vague language or complex designs,” the CMS said.
- Additionally, the regulation adds compliance timelines for other Medicaid provider tax restrictions that were enacted in the “Big Beautiful Bill” passed last summer. The law barred states from adding new provider taxes or increasing rates, though allowed current taxes to continue with new caps.
Dive Insight:
Nearly all states use taxes levied on providers like hospitals or nursing facilities to help fund their share of Medicaid, according to health policy research firm KFF. The taxes are used to inflate state’s Medicaid spending, allowing them to bring in higher matching funds from the federal government, critics say.
Providers largely support the arrangements, as the taxes can lead to higher Medicaid reimbursement or supplemental payments — a lifeline given Medicaid doesn’t cover the cost of care, clinicians say.
Comments on the regulation finalized Thursday were largely opposed to the provider tax changes, according to the rule. They argued restrictions on the tax arrangements could impact Medicaid enrollees’ access to care, as states could be forced to cut services and benefits due to decreased funding.
But the CMS argues states use the financing gimmicks to recoup more funds from Washington to pay for things outside Medicaid’s scope, like providing coverage to undocumented immigrants.
“States that have relied on loopholes to offload their responsibilities onto federal taxpayers undermined the law and directed additional Medicaid spending to favored providers instead of focusing on families who depend on this program,” CMS Administrator Dr. Mehmet Oz said in a statement Thursday. “With this rule, CMS is ending these inappropriate schemes and ensuring every federal Medicaid dollar is used as Congress intended.”
The Trump administration says the final rule will save the federal government $78 billion over the next 10 years.
States that have approved taxes on Medicaid managed care organization services since early April 2024 will have until the end of the year to comply with the rule.
Those with taxes approved before that date have through the end of their state’s fiscal year 2027, while taxes on companies other than Medicaid insurers have until the end of the 2028 fiscal year.
The final rule comes as providers are bracing for increased financial pressure in the wake of major healthcare cuts from the federal government.
The “Big Beautiful Bill” included historic cuts to Medicaid, including restrictions on provider taxes, work requirements for beneficiaries and increased eligibility checks. Millions of people will likely lose coverage due to the law, decreasing providers’ revenue and increasing uncompensated care. Decreased Medicaid reimbursement could also hit providers hard, particularly rural health systems or those with a large share of patients enrolled in the safety-net insurance.
Plus, more generous financial assistance for health plans on the Affordable Care Act exchanges expired at the end of the year, causing premiums to spike and likely pushing more people to drop their coverage.
