The Centers for Medicare and Medicaid Services laid the groundwork Tuesday afternoon for another provider tax pullback outlined in last summer’s One Big Beautiful Bill Act.
The proposed rule addresses how states commonly draw funds from the federal government—a matched tax on providers and Medicaid managed care companies that is later returned to providers—by imposing a new threshold on how much revenue can be collected and returned. The restriction on new state taxes exceeding the threshold goes into effect Oct. 1, with a multi-year phase-down among expansion states with existing taxes above the threshold beginning a year later.
The CMS Office of the Actuary expects the new regulations will trim federal government expenditures by $246 billion over a decade.
“The proposed rule supports the Administration’s priorities to promote financial integrity in the Medicaid program,” CMS said in a Tuesday release on the proposed rule.
While statute has prohibited direct or indirect arrangements in which a taxed group is held harmless, or has their payments returned or offset, the restriction only applied for indirect hold harmless tax structures in which a state’s tax revenues exceeded 6% of a provider’s net patient revenues (a cutoff sometimes referred to as a “safe harbor threshold” or “6% test”).
The One Big Beautiful Bill Act, and now CMS, stops states from imposing a new provider tax that wasn’t in effect by July 4, 2025, or from increasing those that are in effect beyond that date—codifying an interpretation of the statute previewed by the agency back in November.
Also changing is a new indirect hold harmless threshold of 3.5% for existing taxes in expansion states that will begin Oct. 1, 2027, and will be reduced down from the current 6% threshold by half a percentage point annually through Sept. 30, 2032, for which CMS this week outlined various new definitions and technical revisions to support the winddown.
Further, CMS proposed to fully discontinue the “75/75 Test,” an alternative calculation by which taxes exceeding the 6% indirect hold harmless threshold could still avoid the indirect hold harmless prohibition. Under the test, tax arrangements would be permissible if less than 75% of taxpayers in a class did not receive 75% or more of their taxed costs via Medicaid or other state payments.
Additionally, CMS proposed new tax data reporting requirements and moved to bring taxed health insurers under its oversight.
The proposal follows another rule finalized in January that similarly acted upon the One Big Beautiful Bill Act’s other limits on provider tax “loopholes.” Another proposal from May would cap state-directed payments at 100% of Medicare rates in Medicaid expansion states, and 110% in non-expansion states.
Hospitals had opposed the bill’s changes to little avail, describing the taxes as a necessary source of funding to offset their Medicaid and uncompensated care burdens. The state-directed payment proposed rule in particular drew ire from industry groups for CMS’ decision to include a broader swath of services outlined in last summer’s bill, reflecting hundreds of billions of dollars in additional reductions.