On July 21, 2026, CMS issued a proposed rule implementing changes enacted to Medicaid provider taxes by the One Big Beautiful Bill Act (OB3). The rule proposes statutory limits on states’ ability to use provider taxes to generate the non-federal share used to finance Medicaid programs and support Medicaid payments, including supplemental payment programs and certain state-directed payment (SDP) initiatives.
The rule would replace the long-standing 6% indirect hold-harmless threshold with state- and provider-class-specific limits tied to taxes that were enacted and imposed as of July 4, 2025. Expansion states face additional phased reductions beginning in federal fiscal year (FFY) 2028, while nursing facility and intermediate care facility for individuals with intellectual disability (ICF/IID) taxes would be exempt from that phase-down as required by the statute.
The rule affects all 50 states and the District of Columbia, with hospitals expected to experience the largest impact because hospital taxes account for most provider tax revenue nationally. CMS estimates that, assuming state responses are consistent with the agency’s economic modeling assumptions, the provider tax provisions could reduce total Medicaid expenditures by approximately $384 billion from 2026 through 2035.
After accounting for interactions with the proposed rule implementing OB3 changes to SDPs, CMS projects a smaller incremental federal spending reduction and a different rule-specific provider effect, but the agency emphasizes that the combined effect of the provider tax and SDP proposals would still significantly reduce Medicaid payments to providers over time.
States are unlikely to absorb the full reduction in financing capacity using state general funds. Instead, many states may redesign supplemental payment programs, restructure provider taxes, seek alternative financing mechanisms, reduce SDP levels, limit future reimbursement increases, or pursue Medicaid benefit and eligibility changes where legally permissible.
In this article, we explore key takeaways from the proposed rule, potential implications for providers, and actions that executives can take to prepare for the impact.
How Did OB3 Change the Medicaid Provider Tax Framework?
OB3 changed the Medicaid provider tax framework by precluding new provider taxes, freezing existing provider taxes in non-expansion states, and reducing allowable tax levels in Medicaid expansion states. Under prior policy, states generally could collect provider taxes up to 6% of net patient revenue without triggering additional indirect hold-harmless scrutiny.
OB3 replaces that uniform national standard with a provider-class-specific “applicable percentage” based on the tax structure enacted and imposed as of July 4, 2025. If a state did not have a qualifying tax in place for a provider class by that date, the applicable threshold for that class would be 0%, effectively preventing new taxes on that class from supporting the Medicaid non-federal share.
In January 2026, CMS issued a final rule enacting separate OB3 provisions prohibiting non-uniform Medicaid provider tax structures that disproportionately tax providers or health plans that predominantly serve Medicaid beneficiaries. With the new proposed rule, CMS continues its efforts to limit provider tax flexibilities in accordance with OB3.
How Is the Provider Tax Threshold Calculated in the Rule?
A central feature of the proposed rule is CMS’ methodology for operationalizing the new OB3 provider tax threshold framework. For each permissible provider class, CMS would divide total tax collections by total net patient revenue for that class, establishing a permanent baseline threshold that varies by state and provider class.
CMS clarifies that the tax rate and indirect hold-harmless threshold may differ because the threshold calculation is based on all providers in the permissible class, including providers that may not be subject to the tax. The calculation would use actual tax collections and actual net patient revenue from the state fiscal year that includes July 4, 2025 and would aggregate both state and local provider taxes within the same permissible class.
How Does the Rule Define “Enacted” & “Imposed” Provider Taxes?
CMS proposes that a tax may count toward a state’s threshold only if it was both “enacted” and “imposed” by July 4, 2025. “Enacted” means the state or local government completed all legislative steps needed to authorize the tax by this date. “Imposed” means the tax was legally in effect and providers were subject to an enforceable obligation to pay it. Taxes enacted or increased after July 4, 2025, including those made retroactive under state law, would not be counted in the calculation of the applicable threshold for a given provider class. If no qualifying tax existed for a permissible provider class on that date, the class threshold would be 0%.
Notably, the proposed rule revises CMS’ preliminary interpretations of “enacted” and “imposed” from earlier guidance. In its November 2025 “Dear Colleague Letter,” CMS incorporated waiver approval considerations into the definition of “enacted.” In the proposed rule, CMS moves waiver considerations into the definition of “imposed.” The proposed rule appears to be more flexible than the preliminary guidance, because taxes requiring broad-based or uniformity waivers may still qualify if the waiver was approved after July 4, 2025, as long as the waiver’s effective date was July 4, 2025 or earlier. The proposed rule notes this change expands the number of taxes that may count toward a state’s threshold compared with the agency’s prior guidance.
How Does the Rule Treat Taxes on Health Insurers?
CMS proposes adding the services of health insurers as a new permissible class of healthcare services. This class would include health insurers not already captured in the existing managed care organization class, such as individual and group market insurers, short-term limited-duration insurance issuers, dental and vision insurers, Medicare Advantage and Part D insurers, and insurers participating in certain Medicaid premium-assistance demonstrations.
Taxes on this new class would be subject to existing provider tax standards, including broad-based, uniformity, and hold-harmless requirements. States with existing health insurer taxes would have thresholds calculated and would be subject to the proposed reporting requirements and, in expansion states, the phase-down rules. Health insurer taxes not enacted and imposed by July 4, 2025 would have a 0% threshold.
How Does the Rule Apply Provider Tax Limits?
The rule would apply thresholds on an FFY basis beginning October 1, 2026. CMS rejects using state fiscal years because state fiscal calendars vary and could delay implementation or create inconsistent compliance periods. This FFY approach means states must evaluate tax collections and net patient revenue for each permissible provider class during each FFY. CMS also emphasizes that compliance will require ongoing monitoring because a state’s indirect hold-harmless percentage can increase even if tax rates remain unchanged, such as when net patient revenue declines.
Expansion states face the most significant long-term financing constraints. For most provider classes in expansion states, the applicable threshold would be the lower of the state’s July 4, 2025 baseline threshold or the following statutory phase-down schedule:
- FFY 2028: 5.5%
- FFY 2029: 5.0%
- FFY 2030: 4.5%
- FFY 2031: 4.0%
- FFY 2032 and thereafter: 3.5%
Non-expansion states would retain their July 4, 2025 threshold indefinitely unless they expand Medicaid in the future, at which point the new expansion state would become subject to the phase-down level applicable for that FFY. Taxes on nursing facilities and ICF/IIDs are exempt from the phase-down and retain their July 4, 2025 baseline thresholds.
How Does the Rule Address Data Reporting & Enforcement?
CMS proposes interim reporting and remediation processes to manage the transition to the new framework. States would submit preliminary tax and revenue information by December 31, 2026, which CMS would use to calculate interim thresholds for planning, oversight, and waiver reviews. States would then submit final tax collection and net patient revenue data by June 30, 2028, and CMS expects to announce final thresholds by September 30, 2028.
CMS generally does not intend to impose penalties based solely on interim thresholds, but approval of a waiver based on interim data will not protect a state if final data later show collections exceeded the applicable threshold. CMS also proposes a two-year remediation period during which states may correct reporting errors, adjust tax collections, or issue proportionate refunds before CMS makes final compliance determinations.
The rule’s enforcement mechanism could create substantial risk for states and providers. CMS proposes evaluating threshold compliance on a permissible-class basis, aggregating all state and local taxes imposed on the same provider class. If collections exceed the applicable threshold, CMS may reduce the state’s Medicaid expenditures before calculating federal financial participation.
Importantly, the penalty could apply to all tax revenues collected within that provider class, not only the amount above the threshold. This creates a strong incentive for states to manage provider tax collections conservatively and may reduce a state’s willingness to maximize supplemental payment programs that depend on provider tax revenue.
How Would the Provider Tax Rule Affect Healthcare Organizations?
For providers, the implications are significant. The proposal would transform provider taxes from a flexible Medicaid financing tool into a largely fixed mechanism tied to July 4, 2025 baseline arrangements. Hospitals and health systems face the greatest risk because hospital taxes are a major funding source for supplemental payments and SDPs, and CMS expects hospitals to bear the largest share of payment impacts.
Expansion-state providers face additional exposure as thresholds phase down toward 3.5%. Nursing facilities may avoid the statutory phase-down but will still operate under fixed, class-specific thresholds and heightened oversight. Providers should expect more state requests for net patient revenue data, closer scrutiny of provider-tax-supported payment arrangements, and growing pressure on Medicaid reimbursement as states decide whether to replace lost revenue, reduce rates, reduce supplemental payments, reduce SDPs, or limit covered services.
Reduced Medicaid financing flexibility may place disproportionate pressure on safety-net and rural providers that rely heavily on Medicaid supplemental payments. Over time, this could accelerate consolidation pressures among financially vulnerable providers, particularly in states with large Medicaid populations and significant reliance on provider-tax-supported payment programs.
How Can Executive Leadership Prepare for Provider Tax Changes?
Executives should consider the following actions to help their organizations prepare for the impact of the rule:
- Assess the organization’s exposure to Medicaid supplemental payments and SDPs supported by provider tax financing.
- Identify the percentage of Medicaid revenue tied to provider-tax-funded payment arrangements.
- Engage state hospital associations and Medicaid agencies regarding anticipated program redesigns.
- Model financial scenarios under reduced supplemental payment and SDP funding levels.
- Monitor state decisions regarding replacement funding, tax restructuring, and Medicaid rate-setting.
- Submit comments to CMS directly or through trade associations before the close of the rulemaking process.
How Forvis Mazars Can Help With Medicaid Provider Tax Changes
Forvis Mazars is committed to helping healthcare organizations understand and adapt to the impact of evolving federal policies and legislation that may affect their reimbursement and financial standing. If you have questions about the impact of provider tax changes and other OB3 provisions on your organization, please reach out to a professional on our team.