The Centers for Medicare & Medicaid Services has published a proposed rule that would implement a portion of H.R. 1, last year’s federal budget reconciliation bill, that called for establishing new indirect hold-harmless thresholds for health care-related taxes – primarily, provider taxes, which are currently employed in 49 states and the District of Columbia.
Major changes include:
Replacing the six percent safe harbor with state-specific thresholds based on July 4, 2025 structures.- Prohibiting states from introducing new Medicaid provider taxes or increasing existing provider taxes that were in effect on that same date.
- Phasing down the provider tax ceiling to 3.5 percent for Medicaid expansion states starting October 1, 2027.
- Eliminating the alternative 75/75 compliance test, which CMS uses to assess whether at least 75 percent of the taxed taxpayers receive back 75 percent or more of their tax costs in the form of Medicaid or other state payments.
As proposed, this regulation would limit the ability of states to fund their Medicaid programs and providers to serve their Medicaid and low-income patients and could lead to dramatic reductions in Medicaid services and payment rates.
CMS projects that this rule would reduce federal Medicaid spending by an estimated $246 billion from 2026 through 2035, potentially leaving large gaps in state Medicaid budgets.
Learn more about the proposed rule from this CMS fact sheet, the proposed rule, and the Healthcare Dive article “CMS moves to codify limits on Medicaid provider taxes.”
