CMS Issues Final Rule on Medicaid Provider Taxes  

Last week, the Centers for Medicare & Medicaid Services (CMS) announced the release of a new final rule that seeks to limit states’ abilities to use provider taxes to finance state Medicaid spending.  The final rule, “Preserving Medicaid Funding for Vulnerable Populations – Closing a Health Care-Related Tax Loophole,” implements provisions of H.R. 1 and was formally published in the Federal Register on February 2. In short, the final rule prohibits states from imposing higher tax rates on Medicaid than on non-Medicaid businesses. The rule also establishes timelines for states with currently approved waivers, including California, that do not meet the new standards.  

• States with managed care organization (MCO) taxes that received waiver approval within two years of April 3, 2026, will have until the end of calendar year 2026 to comply.  
• States with MCO taxes that received waiver approvals two years or more before April 3, 2026 will have through the end of fiscal year 2027 to comply.  
• States with non-MCO provider taxes, including hospitals and nursing homes, will have until the end of fiscal year 2028 to comply, regardless of when they received waiver approval.  

According to CMS’s fact sheet on the new final rule, the impacted taxes generate $24 billion in revenue for states through the ability to draw down additional funding. States with impacted provider taxes, including California, will need to find alternative funding sources to finance the state share of their Medicaid program or significantly reduce state spending. However, the final rule does allow California’s existing MCO tax to remain operative until the end of 2026, which is what the Governor’s Budget Proposal assumes.