On January 29, 2025, the Centers for Medicare & Medicaid Services (CMS) issued a final rule implementing the H.R. 1 provision prohibiting certain “uniformity waiver” provider taxes that states use to support their Medicaid programs. (The rule is scheduled to be published in the Federal Register on February 2, 2026).
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 longstanding federal requirements: they must be uniform and broad-based and cannot hold taxpayers harmless. States may comply with the federal uniformity requirement for provider taxes by obtaining a waiver, if they can demonstrate the tax is still “generally redistributive” by satisfying a mathematical test. However, as we explain in our comprehensive summary and analysis, upon date of enactment, section 71117 of H.R. 1 — the budget reconciliation law also known as the One Big Beautiful Bill Act — prohibits any tax on providers 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 implicates taxes on other providers including hospitals and nursing homes. 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. If states are unable to fully replace revenues raised by newly prohibited uniformity waiver provider taxes with other state revenues to support their Medicaid programs, as is likely, they will have to sharply cut Medicaid eligibility, benefits, and provider payments.
As we previously explained, in November 2025, CMS provided preliminary guidance on how it will implement this prohibition. But CMS noted that its guidance was subject to change as implementation of the prohibition on certain uniformity waiver taxes will “depend upon the contents” of any final rule. The final rule differs from the guidance in several notable respects:
- Establishing transition periods for prohibited uniformity waiver taxes based on provider type and most recent renewal. In the final rule, CMS provides 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 and by how recently such uniformity waivers were approved or renewed. For prohibited taxes on managed care organizations whose most recent waiver approval was within 2 years or less of April 3, 2026, the transition period will be through the end of this calendar year (with the state needing to come into compliance by January 1, 2027). For prohibited taxes on managed care organizations whose most recent waiver approval was more than two years before April 3, 2026, the transition period will be through the end of state fiscal year 2027 (with the state needing to come into compliance by the start of their state fiscal year 2028 which in most states is July 1, 2027). For prohibited taxes on all other providers including hospitals and nursing homes, the transition period will be through the end of state fiscal year 2028 (with the state needing to come into compliance by the start of fiscal year 2029 which in most states is July 1, 2028). The transition periods for prohibited managed care organization taxes are somewhat longer than under the November guidance, which would have provided a transition period for all prohibited managed care organization taxes only through the end of the current state fiscal year (which in most states ends of June 30, 2026).
- Providing more information on what existing uniformity waiver provider taxes are prohibited under H.R. 1. CMS issued a proposed rule on May 12, 2025 that would have prohibited certain uniformity waiver taxes in a manner similar to H.R. 1 (which is being finalized in this January rule after taking into account enactment of section 71117 of H.R. 1.) CMS indicated in the preamble 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 Medicaid expansion states.) CMS now indicates that there are at least 9 existing taxes in those 7 states which are prohibited. It newly includes a tax on nursing homes (though separately in the preamble to the final rule, CMS states that there may be 2 current nursing home taxes that are now prohibited).
- Failing to fully clarify that prohibited uniformity waiver taxes can be modified to come into compliance with the new H.R. 1 requirements without violating the prohibition against new or increased taxes. Section 71115 of H.R. 1 bars states from imposing new taxes or increasing other existing taxes to replace lost revenues from uniformity waiver taxes that are now prohibited. In the November guidance, CMS implied 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 such prohibition against new or increased taxes. The preamble to the final rule notes that CMS will provide any necessary technical assistance to states to help them modify their prohibited uniformity waiver taxes to come into compliance with section 71117 of H.R. 1. CMS also notes that states will be permitted to make their taxes compliant without requiring a whole new uniformity waiver proposal, such as by making their tax rates uniform. But the preamble never clearly explains how the final rule will interact with section 71115. Some public comments to the proposed rule raised this very question: how will the prohibition on new taxes or increases in existing taxes affect the ability of states to modify their newly prohibited uniformity waiver taxes. CMS seemed to misunderstand these comments, believing that they instead refer to the part of section 71115 reducing the maximum “safe harbor” threshold for most provider taxes in expansion states. It states that as long as modified taxes do not exceed any lower safe harbor threshold, any adjustments to uniformity taxes would be permissible. CMS, however, never explicitly states that modifying a prohibited uniformity waiver tax to come into compliance with section 71117 does not violate the prohibition against new taxes and increases in existing taxes under section 71115. Of course, even if CMS provides this needed clarification, it 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 at all).
- Providing CMS with discretion to take into account “legitimate public policy purposes” in evaluating state compliance with the prohibition of certain non-uniform provider taxes. Section 71117 effectively prohibits differential tax rates based on Medicaid revenues or patients including differences “based on or defined by any description that results in the same effect” as explicitly setting rates based on Medicaid revenues or patients. Unlike section 71117, the preamble to the original proposed rule clarified that existing provider taxes that treat some providers differently would continue to be permissible under this so-called “proxy” requirement if these adjustments have legitimate public policy goals, such as excluding or instituting differential tax treatment for sole community hospitals, rural hospitals, psychiatric hospitals, and continuing care retirement communities because of the vital roles they play in their communities. The preamble to the final rule reiterates that CMS will take into account legitimate public policy goals in evaluating state compliance with the prohibition against certain uniformity waiver taxes. That being said, as many public comments to the proposed rule raised, the lack of a specified definition of what constitutes a legitimate purpose grants CMS considerable discretion to determine if other existing uniformity waiver taxes are permissible or not. Such discretion not only creates uncertainty for states and their Medicaid financing but also risks CMS abusing that authority to inappropriately restrict state financing in disfavored states. Notably, lack of certainty and undue discretion were some of the major concerns with the harmful “Medicaid Fiscal Accountability Rule” proposed, and then withdrawn, by the first Trump Administration.