CMS Proposes New Limits on Medicaid Provider Taxes

On May 12, 2025, the Centers for Medicare & Medicaid Services (“CMS”) released language of a proposed rule it intends to publish 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.  Under current CMS regulations and the Medicaid act, states may impose health care-related taxes to generate non-federal share for Medicaid expenditures.  To receive the matching federal share, the taxes must satisfy three conditions:

• Broad-based: Imposed on all providers in a class.

• Uniform: Imposed at the same rate across the class.

• No hold harmless: The state may not provide, directly or indirectly, any guarantee, offset, or return of the tax to the payer such that the provider is held harmless from the cost of the tax.

States may seek a waiver of the broad-based or uniform requirements, but must demonstrate the tax is “generally redistributive” using the appropriate statistical test (P1/P2 or B1/B2, respectively).  While CMS is not proposing to alter these statistical formulas, CMS is proposing an additional structural requirement that disqualifies any tax, regardless of its performance on the statistical test, if it imposes a higher tax rate or amount on Medicaid providers or Medicaid business than on non-Medicaid providers, either explicitly or in effect.  This applies even when the tax nominally passes the redistributive test.  In other words, the tax must generate revenue from entities that serve lower percentages of Medicaid beneficiaries and use those funds to support payments to entities serving higher Medicaid volumes.  A tax that does the opposite will not be approved.  In addition, CMS is making clear that such waivers are subject to the hold harmless requirement. 

These changes are designed to target tiered tax designs that disproportionately burden Medicaid entities, such as sharply higher per-member per-month (“PMPM”) assessments on Medicaid managed care organizations (“MCO”).  For instance, in its news release, CMS explicitly highlighted California’s MCO tax, which sets the tax rate at $274 PMPM for Medicaid while only a $1.75 PMPM for comparable commercial member months.  It likely could implicate other healthcare-related taxes that are funded by differential rates for Medicaid and non-Medicaid items or services.

We note that this proposed rule closely mirrors the legislative changes proposed on May 11, 2025, by the House Energy and Commerce Subcommittee that we summarized earlier today.  One significant difference is that the legislative proposal permits CMS to create a three-year transition period.  The CMS proposed rule, however, includes much shorter timeframes.  First, states with approved waivers issued within two years of the final rule’s effective date must comply immediately.  Second, states with waivers approved more than two years prior will be given a one-year grace period from the effective date to bring their tax structures into compliance. 

CMS will solicit public comments on the proposed rule for 60 days after the date of publication.

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