CMS proposes crackdown on ‘money laundering’ provider tax policies

Modern Healthcare – Monday, May 12, 2025
By Bridget Early

The Centers for Medicare and Medicaid Services is proposing to close what the agency dubs a “loophole” in an obscure form of Medicaid funding.

In a proposed rule released Monday, CMS seeks to tighten its oversight of state provider tax policies. The agency said it wants to ensure that states’ provider taxes are either broad-based and uniform as required by law, or that states applying for a waiver from that requirement are qualified to receive one.

The proposed rule would also ban states from taxing Medicaid dollars higher than other payments and set deadlines for states to wind down existing provider tax policies the agency deems to be noncompliant with federal law.

States tax providers and insurers to help fund their share of Medicaid’s federal-state payment structure. The system has garnered heavy criticism from spending hawks, who argue the dollars are returned to providers in the form of Medicaid payments down the line.

By law, provider taxes must be broad-based and uniform, meaning they need to apply to a vast swathe of products and services and they need to be applied at the same rate for all healthcare services within a category. States are also prohibited from reimbursing providers more than 6% of their net revenue.

In instances where states seek to levy a tax that doesn’t meet the parameters, CMS must conduct a series of statistical tests to ensure the payments are permissible under statute. CMS can waive requirements that these taxes be broad-based and uniform in some instances — for instance, when regulators determine that a state’s tax would be generally redistributive, meaning revenue from taxes on non-Medicaid services would be used to fund the state’s Medicaid share.

Now, CMS is looking to tighten its oversight.

The agency says in its proposed rule that it has found loopholes in the statistical test it uses to determine whether states’ provider tax proposals are generally redistributive. Some waivers have passed the test but are not generally redistributive, particularly for taxes on Medicaid managed care organizations, the rule says.

In response, the agency proposes to ban states from effectively taxing provider revenue from Medicaid at higher rates than Medicare or commercial healthcare, even if a state’s tax proposal passes the statistical testing required by law.

The agency estimates finalizing the rule would save more than $30 billion in the next five years, according to a fact sheet on the proposal, adding that the issues in its statistical tests represent “a Medicaid tax loophole exploited by states to inflate federal payments to states.”

“States are gaming the system — creating complex tax schemes that shift their responsibility to invest in Medicaid and rob federal taxpayers,” said CMS Administrator Dr. Mehmet Oz in a news release on the proposed rule.

CMS also proposes to ban “vague language” in states’ proposals that it says conceals taxes focused on Medicaid. The agency says it will closely assess “language that does not specify Medicaid explicitly, but appears to invoke it implicitly,” such as language identifying the providers and services that would be taxed.

All states except Alaska have some form of provider tax, according to a March analysis from KFF: 45 states tax hospitals and 46 tax nursing homes, while 20 states have provider taxes on managed care organizations.

If finalized, the rule would also set timing requirements depending on when a state’s waiver was last approved. States that have had a waiver approved within the last two years would not be eligible for a transition period, CMS proposes, but any states outside that window would have one year from the date of the final rule to come into compliance.

Some hospital groups are criticizing the proposal, which would come as yet another blow to the Medicaid program. Hospitals have been embroiled in a firestorm of lobbying to stave off sweeping funding cuts.

“While we are still reviewing the proposal, any effort to reduce provider taxes would harm long-term care facilities and hospitals’ ability to care for Medicaid patients. These taxes are essential to keeping state Medicaid programs afloat and enabling hospitals to continue providing critical health care services to their communities,” said Marie Johnson, senior director of media relations for the Catholic Health Association of the United States, in an email.

Republicans on Capitol Hill have set their own sights on provider taxes. Lawmakers are looking to curtail certain provider taxes and eliminate others in a sweeping reconciliation package released Monday as lawmakers look to generate substantial savings from the Medicaid program.

The CMS regulation was first listed in a December 2024 Unified Agenda published by the White House Office of Management and Budget in the final weeks of President Joe Biden’s tenure.

Comments are due in July.

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