On November 14, 2025, the Centers for Medicare & Medicaid Services (“CMS”) issued a letter, which it describes as “preliminary guidance,” concerning two significant restrictions on Medicaid provider taxes set forth in H.R. 1, including: (i) a change in the indirect hold harmless threshold for provider taxes—which, in effect, prohibits states from increasing the rates of their current provider taxes beyond the rates in effect as of July 4, 2025, and prevents states from adopting any new provider taxes after July 4, 2025 (see Section 71115 of H.R. 1); and (ii) the imposition of additional criteria for waiving the uniform tax requirement for provider taxes (see Section 71117 of H.R. 1). A copy of the letter is available here.
This preliminary guidance (“Guidance”) is summarized below.
1. Change in the Indirect Hold Harmless Threshold for Provider Taxes (Prohibiting States from Increasing Provider Tax Rates; Preventing States from Adopting New Provider Taxes)
Section 71115 of H.R. 1
Background
Per federal Medicaid law, a state imposing a provider tax on a class of providers must determine the total amount of tax it collects from all providers in the affected class, and then divide that total amount by the total net patient revenue for that class of providers. The percentage of total net patient revenue so calculated with respect to a provider tax is referred to under federal Medicaid law as the “applicable percent of net patient revenue” (“Applicable Percent of Net Patient Revenue”).
Federal Medicaid law also establishes a maximum Applicable Percent of Net Patient Revenue for a provider tax, above which the tax could be deemed to indirectly, and impermissibly, “hold harmless” providers for their tax costs. Federal Medicaid law refers to this maximum percent as the “hold harmless threshold” (“Hold Harmless Threshold”). According to current federal regulations, the Hold Harmless Threshold for a provider tax is an Applicable Percent of Net Patient Revenue of 6%.
CMS’s Guidance Regarding Section 71115
In part, the Guidance simply summarizes a plain reading of Section 71115’s legislative text:
- Effective October 1, 2026, for non-expansion states, the Hold Harmless Threshold for a provider tax enacted and imposed as of July 4, 2025, is the tax’s Applicable Percent of Net Patient Revenue as of July 4, 2025.
- For example, if a provider’s Applicable Percent of Net Patient Revenue as of July 4, 2025, was 5.5%, the Hold Harmless Threshold for the tax, effective October 1, 2026, would be 5.5%. Given how a provider tax’s Applicable Percent of Net Patient Revenue is calculated (see the description above), an increase in the rate of the provider tax would likely operate to increase the tax’s Applicable Percent of Net Patient Revenue above the July 4, 2025, level of 5.5%. If so, the resulting Applicable Percent of Net Patient Revenue for the tax would, as of October 1, 2026, impermissibly exceed the 5.5% Hold Harmless Threshold for the tax.
- Effective October 1, 2026, for expansion states, the Hold Harmless Threshold for a provider tax on nursing facility services or intermediate care facility services, is the Applicable Percent of Net Patient Revenue for that provider tax as enacted and imposed as of July 4, 2025.
- Effective October 1, 2026, for expansion states, the Hold Harmless Threshold for a provider tax (other than a provider tax on nursing facility services or intermediate care facility services) is initially the Applicable Percent of Net Patient Revenue for that provider tax as enacted and imposed as of July 4, 2025. However, that Hold Harmless Threshold will gradually reduce to 3.5% between federal fiscal years 2028 (which begins October 1, 2027) and 2034. Here is the reduction schedule:
- FFY 2028: the lower of the tax’s Applicable Percent of Net Patient Revenue as of July 4, 2025, or 5.5%;
- FFY 2029: the lower of the tax’s Applicable Percent of Net Patient Revenue as of July 4, 2025, or 5%;
- FFY 2030: the lower of the tax’s Applicable Percent of Net Patient Revenue as of July 4, 2025, or 4.5%;
- FFY 2031: the lower of the tax’s Applicable Percent of Net Patient Revenue as of July 4, 2025, or 4%; and
- FFY 2032 and each subsequent FFY: the lower of the tax’s Applicable Percent of Net Patient Revenue as of July 4, 2025, or 3.5%.
For example, if a provider’s Applicable Percent of Net Patient Revenue as of July 4, 2025, was 5.9%, the Hold Harmless Threshold for the tax, effective October 1, 2026, would be, initially, 5.9%. An increase in the rate of the provider tax would likely operate to increase the tax’s Applicable Percent of Net Patient Revenue above the July 4, 2025, level of 5.9%. If so, the resulting Applicable Percent of Net Patient Revenue for the tax would, as of October 1, 2026, impermissibly exceed the 5.9% Hold Harmless Threshold for the tax. However, beginning with federal fiscal year 2028 (commencing October 1, 2027), the Hold Harmless Threshold for the tax will be 5.5%. Unless the rate of the provider tax is reduced for FFY 2028, the tax’s Applicable Percent of Net Patient Revenue would likely impermissibly exceed the 5.5% Hold Harmless Threshold for FFY 2028 (and the subsequent lower Hold Harmless Thresholds for FFYs 2029 through FFY 2032 and beyond would likely be impermissibly exceeded if corresponding reductions in the rate of the tax are not implemented).
- The Hold Harmless Threshold for any new provider tax enacted or imposed by a state after July 4, 2025, is 0%, thereby effectively preventing states from adopting any new provider taxes after July 4, 2025.
The part of the Guidance addressed above does not provide any new insights or interpretations that are not readily obtained from a review of the text of Section 71115. However, the newsworthy part of the Guidance regarding Section 71115 is CMS’s identification of certain provider tax-related actions taken by states—that could otherwise increase a tax’s Applicable Percent of Net Patient Revenue up to the current 6% Hold Harmless Threshold—that CMS will not consider when calculating the tax’s Applicable Percent of Net Patient Revenue as of July 4, 2025. These disregarded actions include the following:
- Administrative adjustments (e.g., through a state agency) or legislative adjustments to a tax, including tax revenue increases that would operate to increase the tax’s Applicable Percent of Net Patient Revenue after July 4, 2025, even if retroactively applicable.
- Tax revenues associated with tax waiver proposals that were pending on or submitted after July 4, 2025 (instead, with respect to a provider tax for which a tax waiver has been approved on or before July 4, 2025, CMS will calculate the tax’s Applicable Percent of Net Patient Revenue based on the tax structure in effect with the most recent waiver approval for the tax, and for which the state is actively collecting tax revenue).
Future Guidance and Rulemaking
According to CMS:
“CMS is gathering more detailed data about existing taxes to ensure the new thresholds are applied appropriately and consistently. This should aid federal oversight and state planning efforts by providing an early indication of where their thresholds may fall, until states are notified of their final indirect hold harmless thresholds for each permissible class following rulemaking. This information is preliminary in nature and final policies will depend on the contents of a final rule.”
Increased Reliance on Intergovernmental Transfers (“IGTs”)
The Guidance did not mention IGTs, but stakeholders should note that the ability of states to fund the non-federal share of Medicaid reimbursement through increased provider tax rates is now effectively blocked due to Section 71115. Consequently, states looking to increase Medicaid reimbursement rates or implement new Medicaid programs will likely turn to IGTs to fund those initiatives. IGTs are voluntary, and providers eligible to make IGTs may play an important role in such efforts.
2. Additional Criteria for Waiving the Uniform Tax Requirement for Provider Taxes
Section 71117 of H.R. 1
Background
Section 71117 of H.R. 1 codifies the core aspects of a CMS proposed rule, published on May 15, 2025 (see 90 FR 20578 (May 15, 2025)), which aims to close a “loophole” (as described by CMS) in the current provider tax regulatory scheme by imposing additional criteria for waiving the uniform tax requirement for provider taxes involving non-governmental providers. These additional criteria (“Additional Criteria”) established in Section 71117 generally include (subject to some exceptions) the following:
- Non-governmental providers with lower Medicaid utilization may not be taxed at a lower rate than providers with higher Medicaid utilization.
- Provider tax rates on non-Medicaid taxable units (of non-governmental providers) may not be lower than tax rates on Medicaid taxable units (of non-governmental providers).
- A provider tax on non-governmental providers may not have the same effect as described (i) and (ii) above, regardless of how the state describes the tax or describes the taxpayers subject to the tax.
CMS’s Guidance Regarding Section 71117
The Guidance largely focuses on the transition periods established under section 71117 for states with provider taxes that currently do not satisfy the aforementioned Additional Criteria. Here is a summary:
- For provider taxes on managed care organizations (“MCOs”), which currently do not satisfy the Additional Criteria and for which a tax waiver was approved by CMS before July 4, 2025: the tax must be amended to come into compliance with the Additional Criteria by the end of the applicable state’s fiscal year ending in calendar year 2026.
- According to CMS, this is the minimum transition period that may be available for provider taxes on MCOs; additional time, up to the statutory three-fiscal-year maximum, may be provided, and final policies will depend on the contents of the final version of the proposed rule noted earlier.
- For provider taxes other than MCO taxes, which currently do not satisfy the Additional Criteria and for which a tax waiver was approved by CMS before July 4, 2025: the tax must be amended to come into compliance with the Additional Criteria by the end of the applicable state’s fiscal year ending in calendar year 2028, but no later than October 1, 2028.
Future Guidance and Rulemaking
According to CMS:
“We intend to address the information and issues identified in this letter through notice-and-comment rulemaking. With respect to the section 71117(c) transition periods, CMS recommends that affected states carefully consider how to avoid or mitigate any possible budgetary and/or program challenges in this interim period and take appropriate action. Uniform increases in provider tax rates after . . . [July 4, 2025] are not covered by the transition, nor are new or pending waiver requests. The transition period policy discussed in this letter represents the minimum transition period (in the case of MCO taxes that exploit the loophole) that states will have to bring non-compliant tax waivers into conformity with the requirements added by section 71117 . . . . ”
Resulting Issues
The provider tax methodology adopted by a state is usually the product of compromises involving various policy, fiscal and political interests, especially with respect to provider taxes to be paid by providers with lower Medicaid utilization. For some states (perhaps many states), Section 71117 threatens to significantly disrupt the fiscal modeling and political compromises upon which a current provider tax is based. At least for provider taxes (as described above) other than MCO taxes, the approximately three-fiscal-year transition period announced in the Guidance will hopefully provide sufficient time to develop an amended tax methodology that will be as minimally disruptive as possible. Providers with lower Medicaid utilization that are currently exempt from a provider tax, or receive a discounted tax rate, should be aware of the tax changes required by Section 71117 and the aforementioned proposed rule.
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.
