CMS has issued a final rule that will end states’ ability to levy provider taxes to generate additional federal Medicaid matching funds, a financing mechanism the agency characterized as a “loophole.”
The rule, effective April 3, implements changes included in H.R. 1, which President Trump signed into law in July. The budget reconciliation package includes roughly $880 billion in Medicaid cuts over a decade, according to Congressional Budget Office estimates, with the provider tax changes representing a large portion of those reductions.
The provider tax arrangements allow states to impose taxes on Medicaid managed care plans and other providers, and then use those funds to draw down federal matching dollars. CMS said provider taxes generate more than $24 billion annually for state budgets, with one state alone bringing in more than $13 billion. The new rule bans states from imposing higher tax rates on Medicaid business than on non-Medicaid business and blocks indirect tax structures designed to bypass those limits.
“Medicaid only works when every partner meets its obligations,” CMS Administrator Mehmet Oz, MD, said Jan. 29. “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.”
The rule establishes a phased approach for states to come into compliance:
- Taxes on MCO services with waiver approvals within two years of April 3, 2026: through the end of calendar year 2026
- Taxes on MCO services with waiver approvals two years or more before April 3, 2026: through the end of state fiscal year 2027
- Taxes on other permissible provider classes: through the end of state fiscal year 2028
