CMS issues final rule closing state Medicaid provider tax 'loophole'

Nipping state government fraud in the bud - we hope.

Michigan's dishonorable mention is 4 paragraphs from the end.

https://www.fiercehealthcare.com/regulatory/cms-issues-final-rule-closing-state-medicaid-provider-tax-loophole

CMS issues final rule closing state Medicaid provider tax 'loophole'

By Dave Muoio    |    Jan 30, 2026

CMS, in Thursday's final rule, noted that one unspecified state recently increased its federally-matched Medicaid revenue by "about $12.7 billion per year" via a "loophole" involving higher tax rates on Medicaid Managed Care Organizations. (Getty Images/zimmytws)
The Centers for Medicare & Medicaid Services (CMS) finalized a rule Thursday afternoon, clamping down on states’ Medicaid provider taxes.

The changes to address what the agency has described as “loopholes” and “a Medicaid financing gimmick” were floated last May in a proposed rule and since codified by the summer’s One Big, Beautiful Bill Act.

CMS said the tactics have generated an estimated $24 billion in revenue for just seven states, and that heading them off will save the federal government $78.2 billion over the next decade. Some of the final rule’s changes have a Dec. 31 deadline, though some states will have longer depending on the timing of their relevant tax waivers.

“Medicaid only works when every partner meets its obligations,” CMS Administrator Mehmet Oz, M.D., said in a Thursday release. “States that have relied on loopholes to offload their responsibilities onto federal taxpayers undermined the law and directed additional Medicaid spending to favored providers instead of focusing on families who depend on this program. With this rule, CMS is ending these inappropriate schemes and ensuring every federal Medicaid dollar is used as Congress intended.”

So-called provider taxes are funds collected by most states from healthcare providers, and sometimes Medicaid Managed Care Organizations (MCOs) or other Medicaid insurers, that have historically been matched anywhere from 50% to 77% by the federal government. States then distributed the combined funds back to providers under CMS-authorized payment arrangements targeting specific areas of care.

Though the law requires that these taxes are “uniform and broad-based,” states may also apply for a waiver to impose a nonuniform tax that leans on a statistical test designed to ensure a proposal is generally distributive.

While Medicaid providers have said the funds raised under the existing provider tax rules are necessary to preserve care, critics of the approach have said some states are gaming the statistical test by imposing higher taxes on MCOs’ Medicaid businesses that still pass the statistical test.

CMS, in the final rule, noted that such an approach allowed one unspecified state to recently submit a waiver “which increased the tax revenue from approximately $8.3 billion per year to about $12.7 billion per year.”

Related
Seeking spending cuts, GOP lawmakers target a tax hospitals love to pay
The final rule prohibits that practice, and closes other “back-door pathways by blocking vague, opaque, or indirect tax structures intended to disguise disproportionate burdens on Medicaid business,” CMS said Thursday.

The agency previously said that four states—California, Michigan, Massachusetts and New York—are responsible for more than 95% of the funds generated from the federal government in this way. CMS has also said that some of the excess funds generated through the approach sometimes go toward non-Medicaid uses, “including the expansion of healthcare coverage for illegal immigrants.”

“The Administration is making clear—federal Medicaid funds must only serve vulnerable Medicaid beneficiaries,” CMS said.

The final rule outlines a transition timeline for states to come into compliance. Those that received waiver approvals for MCO services taxes within two years of April 3, 2026, will have until the end of the current calendar year. Others with waiver approvals two years or more before April 3, 2026, will have until the end of the state’s 2027 fiscal year. Taxes on other permissible classes will be given until the end of a state’s 2028 fiscal year.

Beyond the changes outlined in CMS' rule, the One Big, Beautiful Bill Act also outlined new caps on how much funding states can secure from the federal government via provider taxes. The law's signing brought an immediate block to any new taxes or increases, and will see grandfathered taxes with higher rates gradually reduced beginning in fiscal year 2028.