Recent weeks and months have witnessed several Medicaid developments that may significantly impact Medicaid funding across the country. Not all of these developments are related to the Medicaid-related provisions of H.R. 1 (Public Law 119-21 (July 4, 2025), otherwise known as the “One Big Beautiful Bill”). This article summarizes three developments that are unrelated to H.R. 1:
- U.S. Fourth Circuit Court of Appeals (“Fourth Circuit”) remands intergovernmental transfer (“IGT”) funding case back to the Centers for Medicare & Medicaid Funding (“CMS”) (but does not vacate CMS’s IGT funding decision).
- The U.S. Second Circuit Court of Appeals (“Second Circuit”) holds that a provider class for a state-directed payment program must be based on a shared identifiable characteristic that “plausibly furthers some permissible Medicaid-related goal.”
- Federal district court rules that CMS may not prohibit health care providers that pay Medicaid provider taxes from agreeing to redistribute Medicaid payments between and among themselves so that all or some of the taxpaying providers receive at least a portion of their tax costs back.
1. Fourth Circuit Remands IGT Funding Case Back to CMS (But Does Not Vacate CMS’s IGT Funding Decision)
In a November 25, 2024, final administrative decision disapproving three South Carolina proposed Medicaid state plan amendments, #16-0012-A, #17-0006-A and #18-0011-A (“SPAs”), CMS stated two novel and problematic legal conclusions concerning IGTs. First, CMS concluded that IGTs may only be funded with state or local taxes, or state or local government appropriations. Per CMS:
- “Section 1906(w)(6)(A) of the Social Security Act provides that only IGTs which are derived from State and local taxes or certain appropriations are protected sources of the State’s share.” (emphasis added)[1]
- “The revenue collected . . . is not derived from State or local taxes as required by the statute to support a protected IGT, but instead from previously uncollected patient revenue which are to be used to fund the amount of physician payments the provider hospitals expect to receive. As such, the revenue is not a protected source for use as an IGTs to serve as the non-Federal share of the supplemental payments under the proposed SPAs.”[2]
Second, for reasons closely interrelated with its conclusion that IGTs may only be funded with taxes or government appropriations, CMS further concluded that the transfer of governmental hospital revenues to South Carolina’s Medicaid agency would not constitute a permissible “bona-fide” donation and, consequently, such transfer would constitute a prohibited provider-related donation. CMS stated:
- “[T]he source of the funds involves collected debt from the medical services of the health care provider and are directly related to the amount these same entities are to receive for physician payments and thus, comprising non-bona fide provider donations.” (emphasis added)[3],[4]
In reaching these two conclusions, CMS appears to have disregarded its previous guidance issued since 1991 regarding the types of public funds that may serve as the non-federal share of Medicaid expenditures. Because a detailed analysis of the relevant legal principles is not possible in this brief summary, suffice it to say that CMS’s conclusions appear to conflict with the legislative history of the statutes governing the treatment of public funds for Medicaid expenditures, and also appear to conflict with certain Department of Health and Human Services (“HHS”) Appeals Board decisions concerning IGTs. Furthermore, the conclusions appear not to align with IGT-related policy statements made by CMS in the preamble of various rules and proposed rules issued by CMS, or with the findings made by the HHS Office of Inspector General in certain IGT-related investigations.[5]
Pursuant to federal Medicaid law, South Carolina appealed CMS’s disapproval of the three proposed SPAs directly to the Fourth Circuit. In doing so, South Carolina objected to the IGT-related legal conclusions upon which CMS based its disapproval.
However, on May 27, 2025, the Fourth Circuit granted CMS’s request for a voluntary remand (back to CMS) of its disapproval of South Carolina’s proposals. CMS sought the remand (which did not vacate CMS’s disapproval of South Carolina’s proposals) “to permit the new CMS Administrator to review and reconsider South Carolina’s proposed state plan amendments.”
It is not clear when CMS will complete its reconsideration of the proposed SPAs. The review and disposition of the proposals has been time consuming: the process began on July 9, 2019, when CMS originally notified South Carolina of the disapproval of the SPAs, the proposed decision of the administrative presiding officer was issued on December 23, 2021, and CMS’s final administrative decision was issued on November 25, 2024.
The probable result of CMS’s reconsideration is also not clear. CMS’s final administrative decision concerning the proposed SPAs occurred during the waning days of the Biden administration, but CMS’s request for a voluntary remand of its disapproval of the proposals occurred during the current Trump administration. During the previous Trump administration, CMS issued a proposed rule (which was later withdrawn) that, much like the instant final administrative decision, would have required IGTs to be derived from state or local taxes (or funds appropriated to state university teaching hospitals).[6] However, it should be noted that, in its May 15, 2025, proposed rule regarding the test applied to state proposals for Medicaid tax waivers, CMS appears to acknowledge the permissibility IGTs derived from a governmental entity’s “own funds,” not solely from taxes or government appropriations.[7]
A copy of CMS’s final administrative decision can be found here, and a copy of the administrative presiding officer’s proposed decision upon which the final decision was based can be found here.
Takeaways
Many (if not most) governmental health care entities throughout the country rely upon IGTs, funded by their own patient care revenues, to fund the non-federal share of at least a portion of their Medicaid payments. The importance of IGTs will grow as states and providers, due to H.R. 1’s freeze and subsequent reduction of health care-related taxes, look for other sources to fund the non-federal share of Medicaid payments. However, this funding may, potentially, be jeopardized by CMS’s above-described legal conclusions (or similar conclusions) regarding how IGTs may be funded and used. The extent to which CMS will make similar decisions in other states is not currently clear. Stakeholders are encouraged to be alert for instances in their respective states (for example, when IGTs are proposed to fund new reimbursement initiatives under Medicaid state plan amendments, or when IGTs are proposed to fund state-directed payments) where CMS might apply legal conclusions similar to the conclusions it applied in the South Carolina case described above.
2. Second Circuit Holds That a Provider Class for a State-Directed Payment Program Must Be Based on a Shared Identifiable Characteristic That “Plausibly Furthers Some Permissible Medicaid-Related Goal”
For their state-directed payment programs, states are required to direct expenditures equally, using the same terms of performance, “for a class of providers” furnishing services under the program[8] (however, this requirement does not require that each provider that meets the provider class definition earns the same total dollars for the delivery of services).
In a March 6, 2025, decision, Safe Haven Home Care, Inc. v. U.S. Dep’t of Health & Hum. Servs (“Safe Haven“),[9] the Second Circuit noted that states do not have unlimited flexibility when defining provider classes for their state-directed payment programs. The Second Circuit held that, among other criteria, a provider class definition must be based on a shared identifiable characteristic that plausibly furthers some permissible Medicaid-related goal. The Second Circuit stated the following:
- “[W]e read 42 C.F.R. § 438.6(c)(2)(ii)(B) to require that the shared, identifiable characteristics that the State uses to define a provider class plausibly further some permissible Medicaid-related goal, such as ‘enhancing services and ensuring access’ to care.” (emphasis added)[10]
- “To interpret the provision otherwise ‒ to permit States to propose, and CMS to pre-approve, any provider class as long as the providers shared some identifiable characteristic ‒ would do violence to the regulatory scheme, which is centered on permitting States to direct expenditures only if doing so will further permissible Medicaid-related goals.” (emphasis added)[11]
In a May 14, 2020, informational bulletin, CMS acknowledged the degree of deference afforded to a state’s definition of a provider class for a state-directed payment program, but CMS also stated that a provider class must nevertheless be “reasonable and identifiable.”[12] The Second Circuit examined the bulletin and concluded that a “reasonable” definition of a provider class, as referenced in the bulletin, is a definition that plausibly furthers the goals of the Medicaid program:
“The bulletin, rather than incorporating some specified classificatory scheme, expressly announces CMS’s intention to permit any State definition of a class that is ‘reasonable and identifiable.’ *** In other words, CMS interprets the regulation that requires States to treat classes of providers equally to permit States to direct payments to classes that are defined reasonably, that is, in ways that plausibly further the goals of the Medicaid program.” (emphasis added)[13],[14]
Takeaways
In its legal arguments submitted to the Second Circuit prior to the decision, CMS did not explicitly use the phrase “plausibly furthers the goals of the Medicaid program.” Nonetheless, in its arguments CMS repeatedly asserted that provider class definitions must be “reasonable and identifiable,” and, in that regard, CMS noted with approval how New York’s provider class definition advanced goals of the Medicaid program.[15]
By way of background, the Safe Haven decision focused on the interpretation and application of federal Medicaid regulation 42 C.F.R. § 438.6(c). CMS previously stated that 42 C.F.R. § 438.6(c) is intended to “assist states in furthering the goals and priorities of their Medicaid programs.”[16] CMS also previously stated that it drafted 42 C.F.R. § 438.6(c) so as not to inhibit “a state’s policy goals for the Medicaid program.”[17] According to CMS, its 2016 amendments to the Medicaid managed care regulations, which included 42 C.F.R. § 438.6(c), “strengthened efforts to reform delivery systems that serve Medicaid and CHIP beneficiaries” (emphasis added).[18] However, in none of these instances did CMS explicitly adopt the same rationale as that used by the Safe Haven court.
Going forward, it will be interesting to see the degree to which CMS applies the Second Circuit’s “plausibly furthers the goals of the Medicaid program” standard for provider class definitions. Health care providers may wish to consider the Safe Haven decision, as well as CMS’s other statements regarding the Medicaid-related purposes of 42 C.F.R. § 438.6(c), in the course of considering class definitions applicable to them (or not) under state-directed payment programs.
3. Federal District Court Rules That CMS May Not Prohibit Health Care Providers That Pay Medicaid Provider Taxes from Agreeing to Redistribute Medicaid Payments Between and Among Themselves So That All or Some of the Taxpaying Providers Receive at Least a Portion of Their Tax Costs Back
In 1991, Congress passed legislation governing states’ provider tax programs (“1991 Legislation”). The 1991 Legislation prohibited states from “holding harmless” health care providers that pay Medicaid provider taxes (“Taxpaying Providers”).
On February 17, 2023, CMS issued a bulletin stating that arrangements between Taxpaying Providers, to redistribute Medicaid payments, between and among themselves so that some or all of the Taxpaying Providers receive at least a portion of their tax costs back, are impermissible hold harmless arrangements (“2023 Final Bulletin”). On April 22, 2024, CMS issued another bulletin that similarly asserted that private arrangements between and among Taxpaying Providers, that operate to repay all or some of the Taxpaying Providers for at least a portion of their tax costs, are impermissible hold harmless arrangements (“2024 Final Bulletin”).
On September 24, 2025, in State of Texas, et al., v. CMS, et al., Case No. 6:23-cv-161-JDK, a federal district court in Texas issued an order for the following:
- The vacating, on a nationwide basis, of the 2023 Final Bulletin and the 2024 Final Bulletin. Among other things, the court concluded that the 1991 Legislation’s prohibition of hold harmless arrangements does not apply to private parties in private agreements. Accordingly, the court concluded that both bulletins exceeded CMS’s statutory authority to prohibit hold harmless arrangements.
- The vacating, on a nationwide basis, of the federal regulation at 42 C.F.R. § 438.6(c)(2)(ii)(G), which requires that a state-directed payment program comply with all federal legal requirements for the financing of the non-federal share of Medicaid payments.
- The vacating, on a nationwide basis, of the federal regulation at 42 C.F.R. § 438.6(c)(2)(ii)(H), which requires states to ensure that providers receiving a state-directed payment attest that they do not participate in any hold harmless arrangement for any provider tax.
The court vacated these regulations because they apply to private parties in private agreements. As noted above, the court concluded that the 1991 Legislation’s prohibition of hold harmless arrangements does not extend to such situations. As a result, the court concluded that both regulations exceeded CMS’s statutory authority.
The court also permanently enjoined CMS from enforcing an interpretation of the 1991 Legislation’s prohibition of hold harmless arrangements found in the bulletins and in the regulations. From the court’s analysis, it appears that the permanent injunction applies on a nationwide basis—but the court did not expressly say so.
Takeaways
Unless CMS obtains a judicial order that temporarily or permanently overturns the court’s decision (or Congress amends the current hold harmless statutes to include private parties in private agreements), Taxpaying Providers may agree, between and among themselves, to redistribute Medicaid payments so that all or some of the Taxpaying Providers receive at least a portion of their tax costs back. Furthermore, subject to subsequent court orders or Congressional action, federal law does not require a state to condition any provider’s receipt of reimbursement under a state-directed payment program on the provider’s attestation that the provider is not party to a hold harmless arrangement for any provider tax.
If you have any questions or would like additional information on these topics, please contact:
- Tim Kennedy at (317) 977-1436 or tkennedy@hallrender.com.
- Camilla Moreno Jimenez at (317) 429-3679 or cjimenez@hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
[1] Final administrative decision (“Review of CMS Presiding Officer Recommended Decision,” Docket No. 2020-01), p. 18 (November 25, 2024).
[2] Id.
[3] Id. at 19.
[4] As a general rule, provider-related donations cannot serve as the non-federal share of Medicaid expenditures. Furthermore, CMS will deduct from a state’s Medicaid expenditures, before calculating the amount of federal financial participation owed to the state, funds from provider-related donations.
[5] Counsel for South Carolina, and counsel for the amicus curiae parties, submitted substantive and persuasive legal arguments to CMS, but to no avail.
[6] See 84 Fed. Reg. 63722 (November 18, 2019).
[7] See 90 Fed. Reg. 20578, 20580 (May 15, 2025).
[8] See 42 C.F.R. § 438.6(c)(2)(ii)(B).
[9] Safe Haven Home Care, Inc. v. U.S. Dep’t of Health & Hum. Servs., 130 F.4th 305 (2d Cir. 2025).
[10] Id. at 317.
[11] Id.
[12] CMCS Informational Bulletin, p. 6 (May 14. 2020) at https://www.medicaid.gov/federal-policy-guidance/downloads/cib051420.pdf.
[13] Safe Haven, at 318.
[14] Factually, the case concerned a New York state directed payment program that featured a provider class limited to the top one-third Medicaid revenue-generating licensed home care services agencies (“LHCSAs”). The lawsuit was filed by certain LHCSAs seeking to invalidate the provider class definition because they were excluded from it. New York justified the definition by asserting that, due to the limited amount of available Medicaid funding, expanding the class definition to include additional LHCSAs would diminish the effectiveness of the funding because the limited amount would be spread over greater numbers of LHCSAs, thus resulting in each of the individual eligible LHCSAs receiving reduced amounts that would not enable any LHCSA to undertake the meaningful and innovative workforce recruitment and retention initiatives ‒ “so as to improve the quality of care for Medicaid members” ‒ for which the funding was intended. The court agreed with New York’s rationale for limiting the class of eligible LHCSAs, concluding that the definition of the class plausibly furthers some permissible Medicaid-related goal.
[15] See CMS’s memorandum of law in support of its “Motion to Dismiss or, in the Alternative, for Summary Judgment,” and CMS’s “Brief for Federal Defendants.”
[16] 85 Fed. Reg. 72754, 72781 (November 13, 2020).
[17] 81 Fed. Reg. 27498, 27586 (May 6, 2016).
[18] 89 Fed. Reg. 41002, 41006 (May 10, 2024), and 82 Fed. Reg 5415-01, 5427 (January 18, 2017) (“[D]elivery system reform … is focused on improved care and quality for Medicaid beneficiaries).” See CMS Informational Bulletin, Delivery System and Provider Payment Initiatives under Medicaid Managed Care Contracts (November 2, 2017) (providing that state-directed payments assist states in achieving their overall objectives for delivery system and payment reform and performance improvement based on the delivery and utilization of services to Medicaid beneficiaries). See also CMS State Medicaid Director Letter (SMD #21-001, January 8, 2021.)
