On July 23, 2026, the Centers for Medicare & Medicaid Services (“CMS”) published a proposed rule (CMS-2452-P) to implement changes to the “indirect threshold” limiting provider taxes, in part implementing section 71115 of H.R. 1 of 2025.  The “indirect threshold” has been a soft ceiling on provider taxes, historically 6% of net patient revenues.

What prompted this proposed rule?

Historically, provider taxes generally could qualify for federal matching funds if they did not exceed 6% of a provider’s net patient revenues. This was because taxes at or below the 6% threshold were not presumed to violate the federal indirect hold harmless rules.

Section 71115 of H.R. 1 of 2025 replaced this maximum threshold for new and modified provider taxes.  For any provider tax “enacted and imposed” on a “class” of providers after July 4, 2025 (the date H.R. 1 was enacted), the new permissible maximum threshold for that classis 0%.  In other words, provider taxes “enacted and imposed” after July 4, 2025, are not eligible for federal matching funds.

This broad prohibition against the use of new provider taxes to draw down federal funds does not apply to provider taxes enacted or imposed on July 4, 2025, or earlier.  For these grandfathered provider taxes, the impact of H.R. 1 differs between expansion and non-expansion states.

For non-expansion states, the maximum threshold is the percentage of net patient revenues “that has been so determined,” i.e., there was no reduction to the maximum percentage of net patient revenues.

For expansion states, the maximum threshold is the lower of: (1) percentage of net patient revenues “that has been so determined,” or (2) a declining percentage of net patient revenues (5.5% in fiscal year 2028, 5.0% in fiscal year 2029, 4.5% in fiscal year 2030, 4.0% in fiscal year 2031, and 3.0% in fiscal years 2032 and after).

Can States Still Exceed the Maximum Threshold?

Contrary to many people’s understanding, the provider tax rules prior to H.R. 1 did not impose a hard cap on provider taxes at 6% of net patient revenues.  Instead, the 6% threshold was part of the federal indirect hold harmless test: a provider tax that exceeded the 6% threshold was presumed to create an impermissible indirect hold harmless arrangement.  That presumption could be rebutted if it passed a “75/75” rule, meaning 75 percent of payors could not receive 75 percent or more of the taxes paid back.

In an abundance of caution, most provider tax programs were structured to fall below the 6 percent threshold (and many at lower rates to that out of concern of a historical reduction in the indirect hold harmless threshold).

While H.R. 1 did not address the 75/75 test, CMS proposes to eliminate the ability for states to rely on the 75/75 test out of concern that some states will rely on the 75/75 test to avoid the caps created by section 1 of H.R. 1.

What Does the Proposed Rule Do?

The proposed rule implements the provider tax changes enacted by H.R. 1 and explains how CMS intends to administer those new statutory requirements. It includes CMS’ proposed interpretation of what it means for a provider tax to have been “enacted and imposed” by July 4, 2025.  It also clarifies the time-period for which the percentage of net revenue “that has been so determined” would be calculated, as well as the process for doing so.  CMS also proposes the timing and process for data reporting, compliance determinations and state remediation.

Lastly, CMS renews a proposal it made in the Medicaid Fiscal Accountability Rule proposed by CMS in 2019 but never finalized to add a class of health care items or services that would fall within the scope of a provider tax for health insuring organizations.  Under longstanding administrative rules (42 C.F.R. § 433.55(e)), state taxes imposed on the premiums of health insuring organizations and health maintenance organizations have fallen outside the scope of the provider tax rules.

As a healthcare provider, what are the most important things for me to understand about this proposed rule?

First, section 71115 of H.R. 1 put into place a rule that is intended to freeze (for non-expansion states) and reduce (for expansion states) the amount of the non-federal share of Medicaid expenditures that can be financed through provider taxes.  This means that expansion states in particular may be faced with having to find alternative sources of funding for their Medicaid programs, such as alternative non-healthcare related taxes or intergovernmental transfers.  Some may have to consider cuts in their Medicaid programs, which have historically taken the form of benefit or rate reductions. The inclusion of premium taxes as a provider tax could aggravate this trend.

In addition, the proposed rule will impose additional data submission on states to confirm compliance with these new limits.  In turn, states may be forced to request more data from providers for these submissions.

Lastly, this rule anticipates that even after the initial reporting period, there may be an up to 2-year period for data reporting and/or remediation.  The result of this proposed after-the-fact process means that providers may see changes to their tax liabilities or Medicaid payments as much as 2 years after the end of the federal fiscal year subject to the indirect threshold.  Whether or not this happens depends on the corrective action plan that a state may propose and/or whether CMS may ultimately deny federal financial participation for provider tax revenues.

Does the proposed rule apply to both state and local provider taxes?

Yes.  In many states, local governmental agencies impose provider taxes, and use those revenues for the non-federal share of Medicaid expenditures.  Those local government provider taxes are subject to the proposed indirect threshold limits.

What does CMS say is the definition of a tax that was “enacted and imposed” by July 4, 2025?

CMS clarifies its interpretation of “enacted and imposed” that it published in a letter on November 14, 2025.

Enacted: CMS proposes that the definition of “enacted” means that “the applicable State or local government has completed the entire legislative process necessary to authorize the tax, either initially or to amend an existing tax that was in effect on or before July 4, 2025, not later than that same date.”  This definition excludes “administrative or legislative adjustments to a tax structure… that are retroactively applicable to July 4, 2025, or earlier.”

Imposed: CMS proposes that the definition of “imposed” means that the State or locality “imposed on taxpayers a legally enforceable obligation to pay as of July 4, 2025.”  This does not require active collection of the tax as of that date, but does require that taxpayers be “subject to a legally enforceable obligation to pay the tax as of July 4, 2025.”  To the extent a tax requires a broad-based and/or uniformity waiver, the waiver must have been approved by July 4, 2025, or have an effective date of July 4, 2025, or earlier.

Evidence of imposition of a tax includes legislative language including an effective date that includes July 4, 2025, billing information, or collection activity.  CMS clarifies that it did not intend for the November 14, 2025, letter to require collection for a tax to be “imposed.”  However, taxes “where the State legislature has provided a standing authority for a tax… to be implemented at an unspecified discretionary time” would be considered “enacted” but not “imposed.”

For more information on the Proposed Rule and its impact on providers, please contact Felicia Sze or Kyle Brierly.