In a message to state Medicaid programs, the Centers for Medicare and Medicaid Services has laid preliminary groundwork for how it intends to interpret new limits on Medicaid provider taxes enacted under H.R. 1, a law passed in July that brought significant changes to U.S. tax law and major changes in Medicare and especially Medicaid; the bill also has become known as the “One Big Beautiful Bill Act.”

With all but one state using Medicaid provider taxes to help finance their share of Medicaid spending and many states increasingly dependent on such taxes, this issue is of considerable importance to health care providers – especially those that care for large numbers of Medicaid patients – because it addresses states’ ability to introduce and increase such taxes in the future.

The letter focuses on two provisions in H.R. 1.

  • Section 71115 of the law addresses the date by which increases in existing provider taxes or a new provider tax must be enacted or imposed for it to be approved by CMS. This section grandfathers existing Medicaid provider taxes in expansion states at the percentage of net patient revenue for taxes that were enacted and imposed as of the law’s implementation date of July 4.  According to CMS, the law prohibits new provider taxes or increases in existing taxes that would exceed the grandfathered threshold.  CMS notes that revenues associated with tax waivers that were pending on the date of enactment or submitted after the date of enactment will not meet the requirements for approval.  CMS will  base tax thresholds on a state’s current tax structure currently approved and in effect and for which the state is actively collecting revenue.
  • Section 71117 addresses standards for provider tax uniformity and provides for CMS to administer a transition period for compliance. This section of H.R. 1 introduces new standards to assess when a Medicaid provider tax would not be considered “generally redistributive” or “uniform.”  The law permits CMS to give states a transition period not to exceed three years to bring provider taxes into compliance with the new standards.  This guidance establishes two different transition periods for taxes on managed care organizations and for all other providers.

The letter notes that this guidance is preliminary and intended to help states with their planning but that the final policy will eventually be presented in a proposed rule.

Learn more from CMS’s letter to state Medicaid programs and this CMS news release.  In addition, CMS has established a new web page that provides resources on these and other aspects of H.R. 1’s health care provisions.  Find that web page here.