CMS Proposes Medicaid Provider Tax Overhaul to Cut Federal Spending

The Centers for Medicare & Medicaid Services (CMS) released a proposed rule that would overhaul the Medicaid provider tax system. The rule would replace the current uniform 6% federal threshold with state‑ and provider‑specific limits, phase down allowable taxes in Medicaid expansion states, and add a new tax class for health insurers. CMS estimates the changes would reduce federal Medicaid spending by roughly $246 billion over the 2026‑2035 period and lower overall Medicaid payments to providers by about $220 billion, while states would see a net deficit of about $60 billion despite reduced revenues.

The proposal also tightens oversight by eliminating the alternative compliance test and strengthening data‑reporting requirements. Providers would no longer benefit from a “safe harbor” that allowed taxes up to 6% of net patient revenue without demonstrating that providers are not being held harmless. The comment period for the rule runs through September 21, after which CMS may finalize the regulations.