News: CMS issues final rule to close tax ‘loophole’ for state Medicaid providers

Last week, CMS finalized a rule to close a tax “loophole” regarding funds collected by most states from healthcare providers as well as Medicaid Managed Care Organizations or other Medicaid insurers. Historically, these have been matched anywhere from 50% to 77% by the federal government, which states then distributed back to providers targeting specific areas of care. These changes were first introduced last May in a proposed rule and included in the One Big, Beautiful Bill Act (OBBA), Fierce Healthcare reported.

The rule enforces the guardrails that Congress placed in the OBBA to combat state strategies it states are currently designed to circumvent healthcare-related taxes. In their press release, CMS stated the rule will:

• Prohibit states from imposing higher tax rates on Medicaid business than on non-Medicaid business, eliminating the core mechanism that fueled disproportionate revenue generation
• Close back-door pathways by blocking vague, opaque, or indirect tax structures intended to disguise disproportionate burdens on Medicaid business
• Finalize safeguards proposed in May 2025, strengthening CMS’ ability to enforce federal financing rules
• Implement congressional direction in the Working Families Tax Cuts legislation (Public Law 119-21), reaffirming this Administration is executing clear statutory mandates
• Establish thoughtful transition timelines to give states an achievable path to compliance

The tactics CMS is trying to stop have generated an estimated $24 billion in revenue for seven states, CMS wrote, and estimate that the federal government will save $78.2 billion over the next decade with these changes.

“Medicaid only works when every partner meets its obligations,” CMS Administrator Mehmet Oz, MD, said in a Thursday release. “States that have relied on loopholes to offload their responsibilities onto federal taxpayers undermined the law and directed additional Medicaid spending to favored providers instead of focusing on families who depend on this program. With this rule, CMS is ending these inappropriate schemes and ensuring every federal Medicaid dollar is used as Congress intended.”

Editor’s note: To read Fierce Healthcare’s coverage of this story, click here. To access the CMS fact sheet, click here.