Course Correction, Not Combat: Reading CMS’ Provider Tax Rule Without the Rhetoric
CMS finalized changes to longstanding CMS regulation that did not work as intended. Unfortunately, the agency also took the opportunity to cast states as bad actors.
Authors: Patti Boozang and Avi Herring
Editor: Amanda Eisenberg
tl;dr
The Centers for Medicare & Medicaid Services (CMS) has finalized its regulatory change to how CMS determines if a state is compliant with one key aspect of provider tax rules, which the agency anticipates will save the federal government $78 billion over the next decade.
All of the dollars that flowed under this authority were federally approved and consistent with the operative regulation at approval — not fraudulent “schemes” by states, as some would suggest. But a regulatory change was warranted — acknowledged by both the Biden and Trump administrations.
The real risk is relational. The press announcement and the regulatory background materials cast states as wrongdoers rather than partners in making a course correction to a policy that was no longer working. It’s the latest CMS policy action being framed by the administration as a “battleground issue” between the federal government and the states. That narrative undermines the federal–state partnership essential to the program that serves 80 million people.
The 80 Million Impact
CMS finalized a rule on Jan. 29 seeking to strengthen longstanding standards for the approval of provider taxes. The rule change follows both Biden and Trump administrations forecasting that new policy was in the works, and it implements statutory change enacted under H.R. 1. CMS estimated that in 2024, states collected roughly $24 billion in taxes under the now-revised authority, mostly through taxes states imposed on managed care organizations (MCOs).
While the new rule was expected and offered no real surprises, the tone and framing of the announcement is the latest in a troubling trend of casting states as shirking or worse abusing their role as stewards of the Medicaid program. While CMS framed the rule as an effort to “restore” or “strengthen” the federal–state partnership, the agency’s rhetoric undercuts that claim. The official press release announces that CMS is “shutting down” a “massive Medicaid tax loophole” and repeatedly characterizes federally approved state financing arrangements as “schemes,” “gimmicks,” and efforts to “offload responsibilities” onto federal taxpayers — language that assigns intent and blame rather than describing the legitimate need to recalibrate a long‑standing rule that was no longer working as intended.
CMS Administrator Mehmet Oz sharpened that framing, saying that “states that have relied on loopholes to offload their responsibilities onto federal taxpayers undermined the law” and that CMS is now “ending these inappropriate schemes,” But the rule should be understood for what it is: a course correction that had been previewed two years ago, not an exposé. And understanding that distinction requires starting from a shared set of facts.
What Federal Law Has Long Required
Federal law has long required provider taxes to be broad‑based and uniform, meaning they apply to all providers within a defined class—such as inpatient hospitals, nursing facilities, or MCOs — and are imposed at the same rate. At the same time, the statute explicitly allows states to seek “waivers” of those requirements if they can demonstrate, through detailed statistical tests set out in regulation, that a tax is “generally redistributive” — that it does not disproportionately shift the tax burden onto Medicaid providers. Taxes can be complex and these statistical tests were CMS’ attempt to ensure compliance.
The System Drifted
It should be acknowledged new policies were needed. Over time, some states adopted provider taxes — most commonly on MCOs — that technically satisfied the statistical test but nevertheless taxed provider Medicaid revenue at significantly higher rates than non‑Medicaid revenue. These structures often relied on covered lives assessments that imposed much higher per member per month taxes on Medicaid managed care lives than on commercial managed care lives.
While these approaches passed the regulatory tests then in place, CMS raised concerns — well before the passage of H.R. 1 — that such designs undermined the intent of the “generally redistributive” standard by functioning, in effect, as a mechanism for shifting Medicaid costs back to the federal government. That legitimate concern — not the discovery of illicit behavior — is what animates the current changes in federal rules.
What Changed
H.R. 1 prohibits any provider tax that:
Imposes lower tax rates on providers explicitly defined by their lower Medicaid volumes than on providers with higher Medicaid volumes;
Taxes Medicaid units of service — such as discharges, bed days, revenue, or member months — at higher rates than non‑Medicaid units of service; or
Has the “same effect” as either of the above, even if the distinction is drawn indirectly.
CMS’ final rule codifies those statutory requirements and elaborates on how the agency will evaluate compliance. It also modifies regulatory language providing that waivers meeting the statistical test are “automatically” approved. Under the final rule, waivers are merely “approvable,” increasing agency discretion in light of the rule’s intentionally ambiguous “same effect” standard. States will need to assess not only whether a tax technically complies, but also whether it aligns with CMS’ approach to implementation.
Non‑compliant MCO taxes with recent waiver approvals must comply by Jan. 1, 2027. Older MCO taxes generally must comply by the start of state fiscal year (SFY) 2028. Non‑MCO provider taxes have until SFY 2029, with compliance required no later than Sept. 30, 2028.
Layered on top of the uniformity reforms is a separate statutory prohibition on new or increased provider taxes beginning in federal FY 2027. Existing taxes may be grandfathered, but only within newly defined indirect hold harmless thresholds, capped at the percentage of net patient revenue in effect as of July 4, 2025. CMS has clarified that states may modify non‑uniform taxes to comply with the new rules and still qualify for grandfathering, provided the revised tax does not exceed the applicable threshold. Additional rulemaking on the provider tax moratorium is expected shortly.
In theory, states could restructure taxes to be uniform and revenue‑neutral. In practice, doing so — particularly with covered lives assessments — often requires increasing assessments on commercial managed care lives, raising concerns about premium impacts and political feasibility well beyond Medicaid.
States — especially those relying on MCO taxes that may not be compliant with the new rule — face a narrow window to restructure their taxes or risk substantial losses in funding that supports their Medicaid programs and, in some cases, supports other state government functions. Coming into compliance will require more than technical recalibration. States with taxes that don’t comply will need to design tax structures that satisfy the new uniformity standards, fit within the constraints of the provider tax moratorium and are workable in that state. That may require tough decisions about shifting tax burdens across Medicaid and non‑Medicaid markets, with real implications for health plans, providers, and premiums.
The Bottom Line
A trusting partnership between states and CMS will be essential to navigating what comes next: restructuring financing mechanisms while preserving stability for providers, plans and — most importantly — the 80 million people who rely on Medicaid coverage. This rule is a course correction. How it is implemented and how CMS and others continue to frame it will shape not only Medicaid financing but also the durability of the state-federal partnership that sustains the program itself.