CMS Finalizes Provider Tax Waiver Rules

February 2, 2026

On February 2, 2026, the Centers for Medicare & Medicaid Services (“CMS”) published its final rule (“Final Rule”) that revises how CMS evaluates requests by states to waive the broad-based and uniformity requirements for health care-related taxes under 42 C.F.R. § 433.68.  This new final rule implements newly enacted section 71117 of H.R. 1 of 2025, and prohibits approval of health care related tax waivers that meet the currently existing statistical tests if the tax program imposes a higher tax rate or amount on Medicaid providers or Medicaid business than on non-Medicaid providers, either explicitly or in effect.  More information about the background of broad-based and uniformity requirements and the proposed rule is available on our May 12 ,2025, blog post.

Effective July 4, 2025, Section 71117 of H.R. 1 prohibited the waiver of the broad-based and uniformity requirements if: (1) the tax rate imposed on any taxpayer or tax rate group explicitly defined by its relatively lower volume or percentage of Medicaid taxable units is lower than the tax rate imposed on any other taxpayer or tax rate group explicitly defined by its relatively higher volume or percentage of Medicaid taxable units; (2) the tax rate imposed on any taxpayer or tax rate group based upon its Medicaid taxable units is higher than the tax rate imposed on any taxpayer or tax rate group based upon its non-Medicaid taxable unit; or (3) the tax excludes or imposes a lower tax rate on a taxpayer or tax rate group based on or defined by any description that results in the same effect as the prohibitions described in (1) or (2) (“in effect arrangements”).  The legislation described prohibited in effect arrangements to include where the tax rate group is defined based on Medicaid payments or expenditures without using the term “Medicaid” or otherwise has the effective of imposing higher taxes on higher Medicaid taxable units or lower taxes on lower taxable units.  Congress explicitly authorized CMS to allow a transition period of up to three years.

The Final Rule generally hews to the text of section 71117 of H.R. 1 and the policies announced in the proposed rule.  However, it provided further clarification as to the types of in effect arrangements that may trigger scrutiny under the new rules. 

Importantly for California, the Final Rule appears to authorize the current structure of the California MCO tax through December 31, 2026, and authorizes existing hospital programs with Medicaid specific rates to continue until the state fiscal year ending 2028 (no later than September 30, 2028).

Clarification of In Effect Arrangements 

CMS provided some additional guidance as to when differential tax rate groups may be permissible to achieve legitimate public policy goals.  “In this context, by ‘legitimate,’ [CMS] means any public policy goal that the State may lawfully pursue, which is the State’s actual purpose and not a spurious or fictive purpose offered to conceal or negate a true purpose of directing higher relative tax burden to the Medicaid program.”  Some of the factors that may impact a legitimate public policy goal include public health priorities, State fiscal administration, or the health insurance marketplaces in respective States.

For example, CMS reasons that a State may provide lower tax rates to sole community hospitals or rural providers to support beneficiary access.  Likewise, even though a lower rate on continuing care retirement communities may result in a lower rate imposed on a lower Medicaid utilization provider, such a classification would be permissible because the separate licensure and classification is not created for the purposes of establishing tax provider groups or otherwise to minimize the impact on non-Medicaid providers or taxable units.  CMS states that the Final Rule is not intended to “prevent States from being able to balance tax rate groups [to achieve legitimate public policy goals like promoting health care access] as they have in the past.”

CMS emphasized its iterative process with states in determining whether a health care related tax involved an in effect arrangement.  CMS anticipates that if a State begins with a legitimate public policy purpose when designing its tax program, the purpose of that purpose should be evident on the face of the State’s waiver request or will be elaborated during the collaborative waiver review process.  CMS “would examine the tax and waiver submission, including the characteristics of each tax rate group description, the entities in the tax rate group, and the Medicaid taxable units and non-Medicaid taxable units associated with each tax rate group and entities in each tax rate group.  No single factor would result in an automatic determination by CMS that the tax rate groups have been designed to target Medicaid when it is not explicitly named.”  “If a State’s justification is rational and does not appear to be designed to avoid complying with a Federal requirements, [CMS is] likely to accept it.”

Likely or Definitely Considered in effect arrangements	Possibly not an in effect arrangement
Taxes a taxpayer or tax rate group more heavily based on Medicaid taxable units or utilization without using the word “Medicaid”	Lower tax rates imposed on providers specified in 42 C.F.R. section 438.68(e)(2)(iii)(B), e.g., sole community hospitals, rural hospitals, financially distressed hospitals, and psychiatric hospitals
Higher taxes based on beneficiaries “covered by a joint Federal and State health care program” (verbiage is referencing Medicaid without using the word “Medicaid”)	Lower taxes on continuing care retirement communities
Higher taxes on taxpayers in counties with an average income less than 230 percent of the Federal poverty level (income can be seen as a proxy for Medicaid eligibility)	Grouping providers by number of bed days for an inpatient hospital services tax and member months for a managed care plan services tax
Tax rate group based on particular provider types associated with high Medicaid utilization like State or other public facilities and university/teaching hospitals
A Medicaid utilization in a tax wavier submission (which lists providers, their tax rates, and their Medicaid utilization) and observes that a certain group of excluded providers described as “Provider Group A” has no little to no Medicaid utilization (subject to further scrutiny)
Tax rate classification based on a feature of the physical plant of the facility (e.g., a hospital with high Medicaid utilization with two separate exterior entrances to the emergency department)

Transition Period

The transition period for states to bring existing provider taxes into compliance is summarized in the following table, which was published in the Final Rule:

Tax Permissible Class	Most Recent Waiver Approval	Compliance Date
MCO	2 years or less	January 1, 2027
MCO	More than 2 years	State Fiscal year 2028
Non-MCO	Any length of time	State Fiscal Year 2029

For states with MCO taxes that were most recently approved within two years of April 3, 2026, the transition period ends December 31, 2026.  These taxes must therefore be modified or reauthorized to comply no later than January 1, 2027.  This timing applies to California’s MCO Tax.

For states with MCO taxes that were most recently approved more than two years before April 3, 2026, compliance is required no later than the first day of the first state fiscal year beginning on or after April 3, 2027, which in practical terms means the first day of state fiscal year 2028.

For health care-related taxes other than MCO taxes, the transition period ends on the last day of the state fiscal year that ends in calendar year 2028, but no later than September 30, 2028.  The date of the most recent approval has no bearing on this deadline.  For California, this means the transition period for non-MCO provider taxes, including the Hospital Quality Assurance Fee, ends June 30, 2028.

These transition deadlines are longer than those published in the Proposed Rule, and provide at least as much time as the transition parameters CMS previewed in its November 14, 2025, “Dear Colleague” letter.  Even so, the final rule does not fully utilize the three-year transition period authorized by H.R. 1. 

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