Medicaid Provider Taxes: CMS Final Rule & What It Means

The Centers for Medicare & Medicaid Services (CMS) is cracking down on how states fund thier share of Medicaid, possibly shifting billions in costs and sparking debate over access to care.

WASHINGTON – The CMS on Thursday finalized a rule designed to close what it calls a massive loophole in Medicaid financing, a move expected to save federal taxpayers $78 billion over the next decade. The regulation targets provider taxes, wich critics argue states have been using to inflate their federal Medicaid reimbursement rates.

States’ Medicaid Funding Tactics Under Scrutiny

The finalized rule,initially proposed in May,prohibits states from imposing higher tax rates on healthcare providers and managed care companies participating in medicaid. It also aims to prevent states from disguising these taxes through “vague language or complex designs,” according to the CMS. The agency argues these tactics allow states to recoup more federal funds than intended, sometimes diverting those dollars to programs outside the scope of Medicaid, such as coverage for undocumented immigrants.

“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 the needs of medicaid beneficiaries,” said CMS Administrator Chiquita Brooks-LaSure in a statement. “This final rule ensures that states contribute their fair share to Medicaid and that federal funds are used as intended.”

However, the rule is facing pushback from states and healthcare advocacy groups, with concerns raised that restricting these arrangements could negatively impact access to care for Medicaid enrollees. Opponents argue that states may be forced to cut services and benefits due to decreased funding.

What does this mean for Medicaid patients? States may need to reduce services or benefits if they receive less federal funding due to the new rule.

Compliance Timelines and Broader Cuts

The regulation also establishes compliance timelines for other Medicaid provider tax restrictions that were initially enacted in the “Big Beautiful Bill” passed last summer. That legislation barred states from implementing new provider taxes or increasing existing rates, although it allowed current taxes to continue, subject to certain caps.

states that have approved taxes on Medicaid managed care association services since early April 2024 will have until the end of the year to comply with the rule.Those with taxes approved before that date have until the end of their state’s fiscal year 2027,while taxes on companies other than Medicaid insurers have until the end of the 2028 fiscal year.

This final rule arrives as healthcare providers are already bracing for increased financial pressure due to significant cuts to federal healthcare funding. The “Big Beautiful Bill” included historic reductions to Medicaid, including restrictions on provider taxes, work requirements for beneficiaries, and increased eligibility checks. Millions of people will likely lose coverage consequently of the law, decreasing providers’ revenue and increasing uncompensated care. Decreased Medicaid reimbursement could also disproportionately impact rural health systems and those serving a large number of Medicaid patients.

Adding to the financial strain, more generous financial assistance for health plans on the Affordable Care Act exchanges expired at the end of the year, leading to premium increases and potentially causing more individuals to drop their coverage.