CMS Finalizes Provider Tax Rule

The Centers for Medicare & Medicaid Services (CMS) has finalized a rule limiting the use of provider taxes to fund their Medicaid programs. The final rule, “Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations- Closing a Health Care-Related Tax Loophole” codifies changes passed by Congress in HR1. The provisions mainly focus on a use of provider taxes that CMS says is present in only seven states.

The rule addresses what the Trump Administration describes as a “loophole” in a regulatory statistical test applied to State proposals for Medicaid tax waivers, which currently allows some health care-related taxes, especially taxes on managed care organizations (MCOs), to be imposed at higher tax rates on Medicaid taxable units than non-Medicaid taxable units, contrary to statutory and regulatory intent for health care-related taxes to be “generally redistributive.”

The updated regulations prohibit states from taxing Medicaid businesses at higher rates than comparable non-Medicaid businesses. The final rule indicates that tax waivers that pass the current statistical tests, but are not generally redistributive, are not approvable, by adding an independent generally‑redistributive requirement that can bar approval even if those tests are met. The Final Rule sets out attributes that disqualify a tax from being “generally redistributive,” even if it would otherwise satisfy the statistical tests.  

The Final Rule details a three-year transition timeline for compliance: 

FMI: Read the final rule at https://www.federalregister.gov/documents/2026/02/02/2026-02040/medicaid-program-preserving-medicaid-funding-for-vulnerable-populations-closing-a-health

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