CMS Finalizes Changes to Medicaid Provider Taxes
- January 30, 2026
The Centers for Medicare & Medicaid Services (CMS) issued January 29 a final rule that prohibits states from taxing Medicaid businesses at higher rates than non-Medicaid businesses as part of an effort to crack down on supplemental payments states use to help finance their Medicaid programs.
“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,” CMS Administrator Dr. Mehmet Oz said in a press release.
CMS said the final rule, which will be published in the February 2 Federal Register, closes an “inadvertent loophole” that allowed states to impose “non-uniform or non-broad-based health care-related taxes” contrary to statutory and regulatory intent.
The final rule also “bars the use of vague language or complex designs to disguise taxes that target Medicaid,” a fact sheet said.
States can impose taxes on providers as part of their state share for Medicaid, but the taxes must be broad based and generally redistributive. Critics argue that states often impose the taxes on a particular type of entity—like the Medicaid businesses of managed care organizations—to draw down a higher federal match, which is then redistributed back to the same entities that were taxed. The arrangements, CMS said, produce a budget surplus for states that they can use in unrelated programs.
According to CMS, states currently generate $24 billion in revenue from the loophole. The regulatory change is expected to save the federal government more than $78 billion over the next ten years, the agency said.
The reconciliation measure enacted in July 2025 codified the policies of CMS' proposed rule on provider taxes. In November 2025, CMS issued preliminary guidance to states on implementing the new limits. The guidance also addressed transition periods for closing financing loopholes.
CMS said the final rule codifies the provisions adopted by Congress and expands on the transition periods detailed in its November guidance.
“Based on how recently the state’s tax waiver was last approved and the permissible class, the rule provides States at least until the end of calendar year 2026, and in some cases the full 3 years authorized by Congress,” CMS noted.