CMS Issues Guidance on Provider Tax Limits

Late last week, the Centers for Medicare and Medicaid Services (CMS) issued new guidance on how it intends to implement restrictions on Medicaid provider taxes, as required by the One Big Beautiful Bill Act (OBBBA), signed into law by President Donald Trump earlier this year. The guidance outlines a transition timeline for states to follow in addition to details on the limits of the tax.

Provider taxes are arrangements in which providers, nursing facilities and hospitals are taxed by states at a higher rate in order to boost state share of Medicaid spending and subsequently a higher share of federal matching funds. Congressional Budget Office (CBO) cost estimates project that OBBBA cuts to the provider tax system should curb gross federal Medicaid spending by $225.7 billion over ten years. The Georgetown Center for Children and Families explains that the law will now prohibit states from raising additional state revenues through provider taxes, prohibit existing “uniformity waiver” provider taxes and reduce the permissible size of most provider taxes in expansion states.

The CMS guidance clarifies the meaning of “enacted” and “imposed” to establish new indirect hold harmless thresholds effective by October 2026. The American Hospital Association reports that a tax will be considered enacted when the legislative process authorizing the tax is fully completed and any required waiver is approved by CMS as of July 4, 2025. A tax is imposed when the state was collecting revenue under the tax structure as of July 4, 2025. The agency also addressed traditional periods and defined when a provider tax would be considered to be generally redistributive and noncompliant. States with noncompliant taxes will have until the end of fiscal year 2026 to comply, if those taxes were through managed care organizations, and all other provider taxes affected by the law must be brought into compliance by the end of 2028.

CMS Administrator Dr. Mehmet Oz championed the reforms in the CMS Press Release on the new guidance:

CMS is restoring the federal-state partnership by ensuring that Medicaid dollars are spent responsibly, transparently, and in service of the beneficiaries who depend on this program for their health and dignity. While closing a loophole that some states were taking advantage of to shift billions in costs onto federal taxpayers, we have crafted policy that gives states time to transition as the new tax limits are implemented.