Medicaid tax rule blocks some state taxes

The proposed rule implementing the provider tax provisions of the 2025 Medicaid overhaul would block some approved state taxes from going into effect, say hospital advocates.

The provider tax proposed rule is the third regulation issued this year to implement major Medicaid provisions of the One Big Beautiful Bill Act (OBBBA), also known as the Working Families Tax Cut (WFTC). The law froze all provider taxes where they were when OBBBA was enacted on July 4, 2025.

The proposed rule implementing OBBBA provider tax provisions defined enacted provider taxes as those both approved and under active enforcement by the state.

That interpretation of the statute means that states that enacted a provider tax or increased it before the law was enacted but did not begin enforcing it until after that date would be barred under the law.

Minnesota’s legislature passed a new hospital tax and an accompanying state-directed payment (SDP) program before July 4, 2025. But the legislation was not effective until either January 2026 or when the new tax obtained federal approval. The delay stemmed from legislators wanting to avoid imposing an obligation for hospitals to pay before CMS had approved the arrangement, Joe Schindler, a vice president of the Minnesota Hospital Association, wrote in a recent letter to CMS.

“ … Minnesota completed every step within its own control by July 4, 2025, and would nonetheless have the assessment excluded from its permanent threshold calculation,” Schindler wrote.

SDP cut

The Council of the District of Columbia both enacted an FY26 hospital tax prior to WFTC’s enactment, and hospitals had a legal obligation to pay the tax in advance of that date. However, the new tax did not go into effect until Oct. 1, 2025, which is the start of the city’s fiscal year.

Jacqueline Bowens, president and CEO of the District of Columbia Hospital Association, wrote CMS that blocking the new tax will have major financial ramifications for hospitals as early as FY27. The financial hits stem from the District’s use of its hospital tax to fund the city’s portion of its SDP.

Disallowing the new hospital tax “will result in a significant directed payment cut to hospitals in FY27 — much sooner than the intended cuts under WFTC, destabilizing hospitals in the District,” Bowens wrote.  

The two jurisdictions were especially keen to boost their Medicaid hospital taxes ahead of OBBBA implementation because that law also mandates all Medicaid expansion states to begin phasing down those taxes, starting in FY28, to a maximum of 3.5% in FY32.

Nonexpansion states don’t have to reduce their provider taxes, but they are frozen where they were when OBBBA was enacted. Overall, CMS estimated that the proposed rule will cut $246 billion over 10 years.

Hospital advocates in other states raised similar concerns about the proposed rule, which included the Connecticut Hospital Association (CHA), saying it “unnecessarily creates arbitrary consequences.”

“Two states could have enacted materially identical taxes on the same day yet receive different treatment under the indirect hold harmless rules because one legislature made the tax immediately applicable, while the other aligned applicability with the beginning of a fiscal year or another nondiscretionary date,” wrote Jennifer Jackson, president and CEO.

Regulatory role

Hospital advocates in other states raised concerns that the proposed rule did not clarify whether enacted and enforceable provider tax rates could remain compliant if state agencies were authorized to make changes to it.

For instance, the Ohio Hospital Association (OHA) noted that the state’s hospital taxes were enacted and imposed well before July 4, 2025, while a state agency implements it.

“CMS should not reset the applicable baseline merely because the state continues to administer, assess, collect, reconcile or otherwise implement the same long-standing tax after that date,” said Ryan Biles, executive vice president of the OHA.

The proposed rule also failed to clarify whether regular state reauthorizations of their provider taxes would count as new taxes under the federal restrictions, according to The Hospital and Healthsystem Association of Pennsylvania (HAP).

“Programs that were enacted and imposed as of July 4, 2025, for a defined time period will require future legislative language changes as a part of the normal reauthorization process,” HAP wrote to CMS.

Susan Feigin Harris, co-head of healthcare for Norton Rose Fulbright, said in an interview that she was not surprised the proposed rule is affecting state-enacted hospital taxes because it conflicts with previous guidance issued by CMS.

“Having states come forward and identify these issues, I think it’s meaningful because I would hope that CMS would take note of that and make adjustments,” Feigin Harris said.

Under the wire

Some states acted shortly before OBBBA was enacted and celebrated their provider taxes making the cut under the proposed rules — even if the state had not yet begun collecting them.

“We commend CMS for clarifying in this proposed rule that it will not require a tax to have already been collected as of July 4, 2025, to be considered ‘imposed,’” said Kyle O’Brien, president and CEO of the Wisconsin Hospital Association.

Fiscal-year disconnect

The provider tax rate, as of July 4, 2025, will be determined by the actual collections and net patient revenue received in the taxing period.

However, the proposed rules did not address how changes in the tax rates that occurred within that period could affect the tax ceiling imposed by the law, said hospital advocates.

For instance, Delaware’s hospital taxes were newly implemented before OBBBA’s enactment but the actual collected amount in that period was only half of the hospitals’ annual tax obligations, said Brian Frazee, president and CEO of the Delaware Healthcare Association.

CMS would need to address that shortfall by annualizing Delaware’s state fiscal year to determine the actual provider tax rate, he said.

Local government role

The rule also failed to address situations in which hospital taxes are implemented by local governments, said hospital advocates.

For instance, Texas is the only state among the 49 with provider taxes where only local governments can impose them. That arrangement greatly complicates the proposed rule’s use of the statewide provider tax threshold.

“The independent and non-coordinated actions Texas localities take to set individual taxes have no relationship to the actions of other localities,” said John Hawkins, president and CEO of the Texas Hospital Association. “Likewise, those actions are neither guided nor directed by any state entity. Changes to one jurisdiction’s financing could jeopardize the other 34, imperiling statewide financing … .”