On January 29, 2026, CMS finalized the long-anticipated rule, Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations – Closing a Health Care-Related Tax Loophole. In addition to finalizing the rule proposed on May 15, 2025, it implements provisions from Section 71117 of the One Big Beautiful Bill Act (OB3).
The rule addresses non-uniform Medicaid provider tax structures—particularly those programs that tax providers or health plans that predominantly serve Medicaid beneficiaries at disproportionately higher rates than those that serve non-Medicaid populations. CMS states that the final rule, which is effective April 3, 2026, ensures state tax structures comply with statutory requirements that such taxes be “generally redistributive” rather than targeted to maximize federal matching funds.
Prior to the final rule, CMS approved waivers for at least seven states because their proposed provider tax passed existing statistical tests required by regulation. CMS estimates the final rule will save the federal government more than $78 billion over the next 10 years. Affected states will need to restructure any provider tax that does not meet the rule’s new requirements by the compliance date referenced below.
Some states may not be able to resolve the issues with non-compliant provider taxes in a manner that generates the same amount of federal matching funds, or to offset any lost federal matching funds with state dollars. In such circumstances, providers that previously received supplemental payments supported by one of these provider taxes may see a reduction in the Medicaid funding that supports access to care for safety-net populations.
Below is a summary of key changes finalized in the rule.
Prohibition on Higher Tax Rates for Medicaid Providers
States may no longer impose higher tax rates on Medicaid-related units (such as Medicaid member months, Medicaid bed days, or Medicaid revenue) than on non-Medicaid units. This includes any structure in which high-Medicaid-volume providers are taxed more heavily than lower-volume providers—regardless of whether the tax is labeled as Medicaid-specific or an alternative terminology is used as a proxy for Medicaid.
Ban on “Proxy” Tax Structures
CMS also bans the use of proxies—attributes that indirectly identify high-Medicaid providers, e.g., facility types, geography, and income levels—when used to impose higher tax burdens equivalent to targeting Medicaid providers. This prevents states from developing structures that disproportionately levy taxes on Medicaid providers but can still pass statistical tests.
Updated Compliance Requirements for Waivers
Any state seeking waivers of the broad-based or uniformity requirements must now pass both:
- The existing P1/P2 (broad-based) or B1/B2 (uniformity) statistical tests, and
- The new generally redistributive safeguards that prevent disproportionate Medicaid taxation
CMS will deny waivers where Medicaid units bear more than their proportional share of the tax burden, even if statistical tests are satisfied.
Transition Periods
The transition period allowed by the final rule varies by tax type and when the most recent waiver was approved. The table below outlines the transition periods allowed.
| Tax Type | Qualifier | Compliance Date |
|---|---|---|
| Managed Care Organization (MCO) | Approved ≤2 years before rule’s effective date | January 1, 2027 |
| >2 years before rule’s effective date | State Fiscal Year 2028 | |
| Non-MCO | N/A | State Fiscal Year 2029 |
| Pending Waivers for Non-Compliant Taxes | N/A | April 3, 2026 |
How Forvis Mazars Can Help
Our professionals at Forvis Mazars are committed to helping healthcare organizations develop the core capabilities necessary to understand and adapt to the impact of evolving federal policies and Medicaid regulations. If you have questions about these policy changes and how they may affect your organization, please reach out to a professional on our team.