CMS Finalizes Rule Closing Medicaid Provider-Tax Loophole

Overview

• States may no longer impose higher tax rates on Medicaid providers or managed care organizations than on comparable non-Medicaid business.
• CMS also bars indirect or opaque tax designs that previously recycled provider taxes to draw down extra federal matching funds.
• Compliance is staggered: newer MCO tax waivers must comply by the end of 2026, older waivers by the close of FY2027, and other provider-class taxes by the end of FY2028.
• CMS estimates these arrangements generated about $24 billion annually for states and projects more than $78 billion in federal savings over 10 years from closing them.
• The move follows oversight warnings and a rising federal share of Medicaid spending—from roughly 57% in FY2012 to 64.5% in FY2024—implements directives in the Working Families Tax Cuts law, and clarifies that windfalls cannot fund programs outside Medicaid.