Medicaid provider tax proposed rule could cut payments by $220 billion over 10 years

A proposed rule from CMS implements anticipated changes to the system of provider taxes that help fund supplemental reimbursement in Medicaid.

The changes are required under the One Big Beautiful Bill Act (OBBBA, also referred to as the Working Families Tax Cut legislation), with the proposed rule filling in details.

The repercussions of the rule could be significant given the role of provider-tax revenue in bolstering payment for Medicaid services. Providers would face a projected net deficit despite saving $163.7 billion in taxes between 2026 and 2035 under the rule.

That’s because Medicaid payments to providers would be $220.3 billion lower over the 10-year period compared with a scenario in which there is no OBBBA and no proposed rule, leaving a net decrease of $56.6 billion.

Within Medicaid spending, federal expenditures would drop by $245.8 billion and state spending by $138.2 billion as a result of the rule. States nonetheless would face a $60.5 billion net deficit over the 10-year time frame as a result of taking in less tax revenue.

“The proposed rule supports the [Trump] administration’s priorities to promote financial integrity in the Medicaid program,” CMS wrote in a fact sheet.

The comment period for the rule runs through Sept. 21.

Existing provider tax rules would become more restrictive

Before the OBBBA and the proposed rule, states already had to ensure provider taxes were broad-based (i.e., applying to all providers within a class), and with a uniform rate. The taxes also could not involve a hold-harmless arrangement, meaning assurance that providers are reimbursed for the tax they pay.

A “safe harbor” provision has allowed states to tax up to 6% of providers’ net patient revenue and avoid having to abide by the hold-harmless provision. The OBBBA and the proposed regulations restrict that amount in upcoming years, however.

Per the rule, provider taxes could be grandfathered at up to a 6% threshold through FY27 if they were enacted and imposed at that rate by July 4, 2025. Beginning with FY27 (Oct. 1, 2026), no new taxes would be permitted, and rates for existing taxes would be reduced as needed to the July 2025 rates. Rates could vary among the different provider types (e.g., hospitals, skilled nursing facilities) that are subject to a tax.

The proposed rule defines enacted and imposed provider taxes for the purposes of grandfathering. Not only would the state or local government need to have completed the legislative process authorizing the tax by July 4, 2025, but the tax would have had to actually be in effect, and any required CMS waiver must have been approved and effective.

Starting in FY28, Medicaid expansion states must lower tax thresholds by 0.5% per year until reaching the new statutory limit of 3.5%. Taxes for skilled nursing facilities (SNFs) and for intermediate care facilities serving individuals with intellectual disabilities will be exempt from the phasedown.

CMS would eliminate the 75/75 test

The proposed rule also would nix the 75/75 test, a regulatory guideline allowing certain taxes to exceed the 6% threshold if at least 75% of providers subject to the tax did not receive back at least 75% of their taxed amount.

In the proposed rule, CMS says the OBBBA indicated congressional intent to make statutory thresholds the overriding standard for determining the viability of a provider tax. Because the 75/75 threshold was not enacted via statute, CMS sees no room for it to continue. The agency also indicated that the threshold is rarely used.

“We believe that discontinuing this regulatory source of flexibility prospectively would better align the indirect hold-harmless framework with the operation of Section 71115 [of the OBBBA] and reduce opportunities for circumvention of the threshold limitations established by that provision,” CMS wrote.

Another provision in the proposed rule would formally establish health insurers as a taxable class, ensuring states can tax insurance premiums or covered lives.

States would face new reporting and compliance requirements

On a quarterly basis, states would need to file detailed, class-level reporting on tax revenue collected, net patient revenue and information on how tax funds are applied. The reporting would have to use actual data, not estimates.

States would have up to two years after a given reporting period to make data corrections and corresponding adjustments to their tax structures, and to issue refunds to taxpayers as needed. After that period, they would be subject to penalties, including reduction of federal matching funds.

Recoupment also would apply when a state is found to have exceeded the new limits on tax rates.

“CMS would deduct all revenues from taxes on the permissible class,” the proposed rule states.

That language suggests the reduction to federal matching funds would apply to all tax revenue for the pertinent provider class in the penalized state, not just the excess amount.

Provider tax limits could compound Medicaid payment pressures

Some states have specifically used hospital taxes, which totaled $61.8 billion nationwide in 2026, to fund Medicaid base-rate increases. Provider taxes also help fund state-directed payments (SDPs) furnished by Medicaid managed care organizations. The rule projects SDP reductions of $774 billion through 2035.

SDP limits were separately proposed in a rule that implemented OBBBA requirements for SDPs to drop to 110% of the Medicare rate in non-expansion states and 100% of Medicare in expansion states. Phasedowns of 10% annually until reaching those limits are set to start in 2028.

The SDP rule raised concern among provider advocates about provisions such as an interpretation of the 10% annual reduction as applying to current-law dollar amounts, rather than being a straight percentage-point reduction. In such a methodology, Medicare inflation would not act to soften the cuts.

“The [Medicaid] burden financially is just shifting,” Susan Harris, co-head of the Healthcare practice group at Norton Rose Fulbright, said in an interview, discussing the SDP rule. “My concern is it shifts so tremendously to the backs of the providers that the providers themselves will not be in a position to continue to provide services and [will] be so underfunded. You’re going to see at some point the system bend, and none of us want to see that.”