Medicaid Indirect Hold Harmless Threshold Proposed Rule Summary

On July 23, 2026, the Centers for Medicare & Medicaid Services (CMS) published in the Federal Register (91 FR 46562) a proposed rule to revise standards for determining whether an indirect hold harmless arrangement exists for a health care-related tax (sometimes referred to as a provider tax). The rule would implement section 71115 of P.L. 119-21, herein referred to as the “Working Families Tax Cut (WFTC) legislation,” which established new indirect hold harmless thresholds for health care-related taxes.

Currently, the threshold for a State’s collection of tax revenues is no more than 6 percent of net patient revenue attributable to the assessed permissible class of health care items or services.

Under the WFTC legislation:

• Effective October 1, 2026:
  • If a State has not enacted and imposed a tax on a provider class as of July 4, 2025, the hold harmless threshold for taxes on that provider class is zero.
  • If a State enacted and imposed a tax on a provider class as of July 4, 2025, the hold harmless threshold is equal to the applicable percent of net patient revenue attributable to the taxes imposed on that class in that State as of July 4, 2025.Beginning October 1, 2027, for expansion States, further reductions, or “phase-down,” of the maximum hold harmless threshold may apply.

• Beginning October 1, 2027, for expansion States, further reductions, or “phase-down,” of the maximum hold harmless threshold may apply.

CMS also proposes to sunset a secondary prong of the regulatory indirect hold harmless determination “to ensure the thresholds determined as of July 4, 2025, serve as the maximum permissible level.” In addition, the rule proposes to add a new permissible class—“Services of health insurers.”