On Thursday, January 29, the Centers for Medicare & Medicaid Services (CMS) finalized “Preserving Medicaid Funding for Vulnerable Populations – Closing a Health Care-Related Tax Loophole Final Rule,” tightening federal oversight of Medicaid provider taxes, a key mechanism utilized by State Medicaid Agencies to finance their share of Medicaid. The policies within the final rule implement and align with several sections of the One Big Beautiful Bill Act (OBBBA), the Medicaid Fiscal Accountability Rule (2019), and the text of the proposed rule on which AHCA submitted comments. Additionally, notable changes include revised transition periods for certain states and their Medicaid provider taxes to come into compliance, whether assessed against Managed Care Organizations (MCO) or other provider classes.
Transition Policies for Noncompliant Provider Taxes
The final rule seeks to allow states time to bring noncompliant provider taxes into alignment with the Section 71117 of OBBBA, (see AHCA's member-only summary) which restricts states’ ability to obtain waivers from requirements that Medicaid provider taxes be uniform, broad based, and generally redistributive and prohibiting tax structures that impose differential rates based on providers’ Medicaid volume. CMS has established tiered transition periods for states with currently approved tax waivers that do not meet the new standards.
In practice, CMS has created a three-track timeline:
- MCO taxes with recently approved waivers must move first and comply by the end of the calendar year 2026.
- MCO taxes with older waivers receive additional runway, extending through the end of the first state fiscal year that begins at least one year after April 3, 2026.
- All non-MCO provider taxes, regardless of waiver age, have the longest transition period and may remain in place through the end of the state fiscal year ending in calendar year 2028, but no later than September 30, 2028.
Other Key Issues
- Clarification of Medicaid Financing Definitions: The final rule adopts new regulatory definitions for “Medicaid taxable unit,” “non-Medicaid taxable unit,” and “tax rate group,” terms previously undefined in federal regulations.
- Redistributive Standard & Waiver Requirements: When states seek waivers from the broad-based or uniformity requirements, federal law requires CMS to determine whether the provider tax is generally redistributive and does not unfairly target Medicaid providers. While CMS will continue to apply existing statistical tests, the final rule adds new substantive requirements that states must meet for a waiver to be approved.
- Taxes that Explicitly Reference Medicaid: Under the final rule, CMS clarifies that a provider tax will not be considered generally redistributive if higher tax rates are imposed on tax groups defined by Medicaid utilization relative to non-Medicaid utilization within the same provider class.
- Differential Tax Rates Within a Provider Class: CMS also clarifies that provider taxes imposing higher rates on entities with greater Medicaid volume and lower rates on those with minimal Medicaid utilization fail to meet the generally redistributive standard.
- Proxy Concerns in Taxes That Do Not Explicitly Reference Medicaid: The final rule prohibits states from using indirect proxies, such as income-based geography or tiered classifications closely correlated with Medicaid utilization, to impose higher tax rates on Medicaid providers.
AHCA/NCAL has consistently supported statutory compliance and Medicaid fiscal integrity, while urging CMS to avoid unintended consequences that could undermine access to long-term services and supports. As implementation proceeds, we will continue to work with states and CMS to promote predictable, equitable implementation that protects providers serving Medicaid’s most vulnerable populations.