On Jan. 29, the Centers for Medicare and Medicaid (CMS) issued the final rule titled "Preserving Medicaid Funding for Vulnerable Populations - Closing a Health Care-Related Tax Loophole.” The rule finalizes proposals from the proposed rule [refer to Washington Highlights, May 16, 2025] as well as codifies Section 71117 of the One Big Beautiful Bill Act (OBBBA, P.L.1190-21). The rule revises how states may request waivers of the broad-based and uniform requirements of provider taxes if they demonstrate, using a statistical formula, that the tax is generally redistributive, meaning it uses revenues from non-Medicaid services to fund the state’s share of Medicaid payments. Taxes still must be broad-based, uniform, and cannot hold providers harmless. However, final rule revises the broad-based and uniform waiver requirements in a way that eliminates eligibility for certain taxes that were previously permissible under the waiver. Specifically, this change will prohibit states from imposing higher tax rates on entities with more Medicaid business than those with more non-Medicaid business, even if they are able to pass the statistical test.
For the seven states impacted by this change, CMS finalized a transition timeline for states to modify their provider taxes to come into compliance. States with waivers for Medicaid managed care organization (MCO)-based taxes approved within the last two years will have until the end of calendar year 2026, for MCO-based taxes approved two years or more before April 3, 2026 will have until the end of FY 2027, and taxes based on all other permissible classes will have through the end of the state’s FY 2028. While these transitions are shorter than the three years permitted by the OBBBA, these transitions are longer in length than what was included in both the proposed rule and CMS’ Nov. 14, 2025 guidance [refer to Washington Highlights, Nov. 21, 2025]