As the Medicaid cuts from H.R. 1 begin to settle in, states are looking for workarounds to continue funding their programs.
Iowa Republican Gov. Kim Reynolds signed a bill March 25 allowing a steeper HMO tax, which will also affect managed care organizations, to bolster the state’s Medicaid program. The tax would not be levied on just HMO premiums, but would instead apply to all taxable funds beyond those from federal HHS. With CMS’ approval, a 3.5% tax rate could be retroactively applied from January until September 2026. The rate would then drop to 0.95%.
The law relocates over $347 million from the taxpayer relief fund to the general state fund, and $89 million from the general fund will go to the state’s department of health and human services for Medicaid reimbursement.
Iowa’s law could be one other states look to as they seek to recoup Medicaid funds. H.R. 1 effectively eliminated new or increased provider taxes, a key source of Medicaid funding. The law also established stricter parameters for uniform tax waivers, limiting whether states can charge providers with higher Medicaid volume more in taxes and, thus, secure more federal dollars.
Through the Federal Medical Assistance Percentage, the federal government “matches” state spending on Medicaid at a set rate. By cutting back on these provider taxes, the federal government has a reduced obligation to support state Medicaid programs.
“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 November 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 news release said these provisions would save taxpayers $200 billion over the next decade while reinforcing integrity. CMS said federal sharing of Medicaid financing grew from 57% to nearly 65% from fiscal 2012 to 2024. CMS added that these tax structures allowed states to gain more than $24 billion in federal dollars per year.
Iowa’s tax law strikes tension: While the state needs CMS approval for the higher retroactive tax rate, the agency is preparing to clamp down on provider taxes. CMS’ guidance included MCO taxes under the “healthcare-related tax” category, and states have until the end of fiscal 2026 to comply with these provisions.
While Iowa’s push is late, other states have also considered MCOs as a funding source. According to a December 2025 fact sheet from KFF, 22 states taxed MCOs. In 2025, before the federal funding law was confirmed, Minnesota Gov. Tim Walz proposed HMO surcharges increase from 0.6% to 1.25% of total premium revenue.
In terms of other fiscal strategies, Colorado and New Jersey have considered fees for companies with employees enrolled in Medicaid.
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