Dive Brief:
- The CMS is moving to restrict the taxes on providers and managed care companies that states use to fund Medicaid, proposing a rule to codify policies in the GOP’s tax and policy megabill passed last summer.
- The rule released Tuesday would create new limits on the taxes based on provider and state, phase down allowable taxes in Medicaid expansion states and strengthen federal oversight of the arrangements. CMS actuaries estimate the changes will lower the federal government’s Medicaid spending by $246 billion over the next decade.
- Providers oppose stricter constraints on alternative Medicaid financing mechanisms, arguing they’re necessary to make up for insufficient Medicaid reimbursement. Curbing the taxes will also make it harder for states to raise money to cover their residents’ Medicaid coverage.
Dive Insight:
Provider taxes allow states to inflate their Medicaid revenue, boosting federal payments in response. The tax dollars can be returned to providers, insurers, nursing homes and other taxed organizations, as long as they stay below a certain threshold.
Every state besides Alaska uses one or more of the taxes, which have been around in some form since the 1980s. The arrangements are legal but controversial. States say they’re needed to ensure dedicated Medicaid funding. For providers, which tend to struggle with low margins in Medicaid, the extra dollars generated from the taxes help offset low reimbursement rates.
But top health officials and conservative think tanks have increasingly taken issue with the taxes, arguing they force the federal government to shoulder inflated Medicaid costs and hurt the safety-net insurance program’s financial integrity.
The “Big Beautiful Bill” signed into law last July curbed provider taxes as part of almost $1 trillion in Medicaid funding cuts, including forbidding new provider taxes and prohibiting states from hiking the rates of any taxes already in place.
Tuesday’s proposed rule is meant to ensure that states don’t structure the taxes in a way that guarantees providers get their tax payments back, regulators said.
Previously, providers could be repaid their taxes as long as the tax didn’t exceed 6% of providers’ net patient revenues. The rule would replace that so-called “hold harmless” threshold with new thresholds depending on the provider and the state, and based on their taxes as of July 4, 2025 — the date the “Big Beautiful Bill” was signed.
The rule would also phase down hold harmless thresholds for states that expanded Medicaid to a greater share of their low-income enrollees under the Affordable Care Act. Beginning in 2028, the thresholds would be lowered by 0.5 percentage points every year until they reach 3.5% in 2032.
Regulators also want to bring state taxes on Medicaid managed care insurers under CMS oversight. The rule would do so by establishing “services of health insurers” as a new provider tax class subject to the new restrictions.
Two large Medicaid states, California and Illinois, currently have taxes above the proposed 3.5% floor, while New York’s managed care tax nets billions of dollars for the state each year, according to the Association for Community Affiliated Plans.
Restricting the taxes will lead to less federal support, putting hospitals at risk of closure and threatening services for individuals on Medicaid, according to Jenny McGuigan Babcock, ACAP’s senior vice president for Medicaid policy.
The rule would also discontinue one element of the test used to determine if higher taxes can be held harmless, tweak tax definitions from previous state guidance and require states to submit more detailed tax data related to healthcare.
It’s the CMS’ latest regulation enacting the Medicaid provisions of “Big Beautiful Bill.” In January, the agency finalized a rule barring states from taxing Medicaid businesses more than non-Medicaid businesses. In May, the CMS proposed a crackdown on supplemental payments to providers, and in June released guidelines for states to operationalize work requirements in their Medicaid programs.
All told, the law’s Medicaid provisions are set to lower Medicaid funding by more than $900 billion and cause 7.5 million people to lose the safety-net insurance over the next decade. New limits on provider taxes alone are expected to cause 2.4 million people to lose Medicaid.
Comments on the provider tax proposed rule are due Sept. 21.
