On November 14, 2025, the Centers for Medicare & Medicaid Services (CMS) issued new guidance with some new detail about how it will implement provisions in H.R. 1 — the budget reconciliation law also known as the One Big Beautiful Bill Act — that restrict states’ use of provider taxes to finance their share of Medicaid costs. Because states are expected to be unable to fully replace revenues raised by provider taxes with other state revenues to support their Medicaid programs, they would have to significantly cut Medicaid eligibility, benefits, and provider payments, thereby slashing federal Medicaid spending. According to Congressional Budget Office cost estimates, these provider tax provisions would institute gross federal Medicaid spending cuts of $225.7 billion over ten years and increase the number of uninsured people by 1.2 million by 2034.
Nearly all states use taxes and assessments on hospitals, nursing homes, Medicaid managed care plans and other providers to raise revenues that finance a portion of their share of Medicaid costs. Provider taxes must comply with three federal requirements: they must be uniform and broad-based and cannot hold taxpayers harmless. Under prior law, the “hold harmless” requirement could be satisfied under a safe harbor if the tax did not exceed six percent of net patient revenues.
As we have explained in our comprehensive analysis of H.R. 1, the budget reconciliation law includes three provider tax restrictions:
- Prohibiting all states from raising additional state revenues through new provider taxes or increases in existing provider taxes upon date of enactment (as of July 4, 2025). This means states are restricted to their existing taxes, even if they have applied taxes only to certain providers like hospitals and nursing homes but not to intermediate care facilities, ambulances and managed care plans. They are also confined to the current size of their provider taxes even if they are now below the safe harbor maximum. As a result, states will be unable to raise additional revenues to finance improvements in their Medicaid programs or to avert any budget shortfalls including during an economic downturn or recession. Moreover, they would no longer be able to use new or increased provider taxes to replace revenues from provider taxes that are no longer permitted under H.R. 1 (as described below).
- Prohibiting existing “uniformity waiver” provider taxes upon date of enactment (as of July 4, 2025). States may comply with the federal uniformity requirement for provider taxes by obtaining a waiver. To receive federal approval for a waiver related to a tax, the tax must still be “generally redistributive” which can be demonstrated by satisfying a mathematical test. (States may also comply with the broad-based requirement with a waiver.) While leaving that mathematical test in place, H.R. 1 prohibits any tax from being considered redistributive and thus permissible if it effectively charges lower rates to providers and managed care organizations with less Medicaid revenues or fewer Medicaid patients and higher rates to providers with more Medicaid revenues or more Medicaid patients. While the prohibition is largely targeted at certain taxes on managed care organizations, it may implicate taxes on other providers including hospitals. Under the provision, the Secretary of Health and Human Services could provide a transition period for affected states for up to three fiscal years but is not required to do so.
- Reducing the permissible size of most provider taxes but only in expansion states (starting October 1, 2027). Under H.R. 1, in states that have adopted the Medicaid expansion, the current safe harbor threshold of 6 percent will be reduced to 5.5 percent in fiscal year 2028, 5 percent in 2029, 4.5 percent in 2030, 4 percent in 2031 and then to 3.5 percent in fiscal year 2032 and thereafter. The lower thresholds will apply to existing taxes and assessments on all provider types including hospitals, except for nursing homes and intermediate care facilities for individuals with intellectual disabilities. As a result, expansion states will have to shrink the size of existing provider taxes and thus will have considerably less revenues available to finance Medicaid over time. States will have to raise other taxes such as income taxes or sales taxes, cut other parts of their budget like K-12 education, or, as is far more likely, dramatically cut their Medicaid programs. Moreover, some existing taxes on hospitals that will be subject to these reductions were used to specifically finance the Medicaid expansion. These expansion states will therefore be at particular risk of being unable to continue to finance the Medicaid expansion moving forward.
The guidance includes some new information about how CMS will implement some of these provider tax restrictions:
- Clarifying what constitutes an existing provider tax. Under H.R. 1, an existing tax is not subject to the prohibition against new or increased taxes if it has already been enacted and imposed. According to CMS, a tax is considered to have been enacted if the state (or local government) has completed the entire legislative process needed to authorize such tax in effect as of July 4, 2025. Adjustments to a tax after July 4, 2025, even if retroactively applicable, would not be counted as part of an existing tax. A tax is considered to have been imposed if the tax was “actually implemented” and the state (or local government) “was actively collecting revenue” from such tax as of July 4, 2025. (CMS also notes that if a state collects on a delayed schedule consistent with routine collection or business practices but the tax was generally applicable as of July 4, 2025 but not yet collected, that would seem to still satisfy the “imposed” requirement.) If a tax required a waiver of the uniformity or broad-based requirements, such waiver must have been approved by CMS by July 4, 2025, as taxes with pending or submitted waivers as of that date would not be classified as existing taxes. It is our understanding that a number of states enacted provider tax increases just prior to enactment of H.R. 1. The guidance’s clarification about what constitutes an imposed tax — that the tax must have been actively collected as of July 4, 2025 — may result in some of these provider tax increases being barred under H.R. 1 if those last-minute changes are not considered to have been implemented as of H.R. 1’s enactment. This would also be the case for states enacting last-minute provider tax increases that required a uniformity or broad-based waiver that had not yet been approved by CMS as of the date of enactment.
- Setting transition periods for prohibited uniformity waiver taxes based on provider type. CMS indicates that it will provide some transition periods for all prohibited uniformity waiver taxes but will vary the length of such transition periods by the type of provider subject to the taxes. For prohibited taxes on managed care organizations, the transition period will be through the end of a state’s current fiscal year (that ends in calendar year 2026). For prohibited taxes on all other providers including hospitals, the transition period will be through the end of a state’s fiscal year that ends in calendar year 2028 but no later than October 1, 2028. In most states, the fiscal year ends on June 30th. This will offer all affected states more time and allow them to continue to use revenues from managed care organization taxes to support their Medicaid programs into next year (and for a few more years for other prohibited taxes). As noted, while H.R. 1 permitted transition periods for up to three years, there was no requirement that CMS provide any transition period at all.
- Clarifying that states with prohibited uniformity waiver taxes may be able to amend those taxes without violating the prohibition against new or increased taxes. H.R. 1 clearly bars states from imposing new taxes or increasing other existing taxes to replace lost revenues from uniformity waiver taxes that are now prohibited. However, in the guidance, CMS seems to imply that during the transition periods, states may be able to adjust prohibited taxes in ways that eliminate differential rates based on high or low Medicaid revenues and patient volume and satisfy the H.R. 1 prohibitions against certain uniformity waiver taxes without violating the prohibition against new or increased taxes. Of course, this may not be meaningful if such adjustments are not politically viable. They would require increased tax payments by managed care organizations and providers with less in Medicaid revenues and fewer Medicaid patients, as they would benefit less from greater financial support for Medicaid and would be harmed by Medicaid cuts that could be averted by such adjustments to a lesser degree than other plans and providers. In general, opposition by providers less reliant on Medicaid is why not all states have imposed provider taxes on every provider type and set tax rates at the maximum safe harbor threshold prior to enactment of H.R. 1 (and why one state — Alaska — has not instituted any provider taxes).
- Indicating that CMS will still go ahead and finalize a proposed rule related to uniformity waiver taxes. In the guidance, CMS states that “final policies” related to uniformity waiver taxes will “depend upon the contents” of a final regulation. H.R. 1’s prohibition against certain uniformity waiver provider taxes is similar but not identical to the requirements of a proposed rule from the Centers for Medicare & Medicaid Services (CMS) issued on May 12, 2025. In some ways, finalizing this rule would provide greater flexibility for states. For example, the preamble to the proposed rule indicated that some existing uniformity waiver taxes would continue to be permissible such as those excluding or instituting differential tax treatment for sole community hospitals or rural hospitals because of the vital roles they play in their communities. Exceptions for these kinds of providers were not included in H.R. 1 and are not mentioned in the new guidance. On the other hand, CMS indicated in the preamble to the proposed rule that the proposed rule’s prohibition would apply to at least 8 taxes (7 taxes on managed care plans and one on hospitals) in at least 7 states. (It is our understanding that these states are California, Illinois, Massachusetts, Michigan, New York, Ohio and West Virginia, which are all expansion states.) But H.R. 1’s uniformity waiver tax prohibition is very broad and may implicate many more states and taxes. It is possible with enactment of H.R. 1 that the final rule may clarify that H.R. 1’s prohibition would more explicitly apply to additional provider taxes. It could also include other policies that further restrict the ability of states to continue raising revenues from other existing uniformity waiver taxes.