CMS Finalizes Medicaid Provider Tax Oversight Rule

The Centers for Medicare & Medicaid Services (CMS) finalized the “Preserving Medicaid Funding for Vulnerable Populations, Closing a Health Care-Related Tax Loophole Final Rule,” strengthening federal oversight of Medicaid provider taxes. This is a vital financing tool adopted by the state Medicaid agencies to finance their portion of Medicaid spending.

The policies align with several provisions of the One Big Beautiful Bill Act (OBBBA), the Medicaid Fiscal Accountability Rule of 2019, and the framework outlined in the proposed rule on which industry stakeholders, including AHCA/NCAL, previously submitted comments. According to CMS, the rule is aimed at sealing loopholes, promoting fiscal responsibility, and ensuring that Medicaid funding mechanisms do not unreasonably target providers of high Medicaid beneficiaries.

Transition Periods for Noncompliant Provider Taxes

To determine the operational effect on states, CMS has provided a tier transition period whereby the state Medicaid agencies are given time to align existing, noncompliant provider taxes to the new federal regulations under Section 71117 of the OBBBA. These standards restrict the use of waivers from long-standing requirements that provider taxes be uniform, broad-based, and generally redistributive, and prohibit differential tax rates based on Medicaid volume.

CMS has provided the following three-track compliance schedule:

• Managed Care Organization (MCO) taxes with recently approved waivers should comply by the end of the calendar year 2026.
• Older waivers for MCO taxes receive extra time that extends until the end of the first state fiscal year, which begins at least one year after April 3, 2026.
• All non-MCO provider taxes, irrespective of the waiver age, will have the longest transition period and can continue to exist until the end of the state fiscal year in calendar year 2028, but not beyond September 30, 2028.

Key Policy Clarifications

• Medicaid Financing Definitions: CMS has formally defined “Medicaid taxable unit,” “non-Medicaid taxable unit,” and “tax rate group,” terms that were previously undefined in federal regulation.
• Redistributive Standard and Waiver Requirements: Even though CMS will still involve the application of the existing statistical tests in the assessment of the waiver requests, states would now have to meet other substantive requirements to prove that the provider taxes are generally redistributive and will not unfairly target Medicaid providers.
• Explicit Medicaid References: Provider taxes that charge increased rates on groups that are characterized by Medicaid utilization relative to non-Medicaid use within the same provider category will not be regarded as generally redistributive.
• Differential Tax Rates Within a Provider Class: Taxes imposing higher rates on providers with more Medicaid volume and lower rates on those with minimal Medicaid utilization will be non-redistributive.
• Proxy Concerns in Taxes: This rule does not permit states to employ indirect proxies like income-based geography or tiered classification, strongly linked to Medicaid utilization, to place higher tax burdens on Medicaid providers.

AHCA/NCAL reaffirmed its support for statutory compliance and Medicaid fiscal integrity while cautioning against unintended consequences that could affect access to long-term services and supports.