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What CMS proposed
The proposed rule, released July 21, would retire the single 6% indirect hold-harmless threshold that has governed provider taxes for years. In its place, each state and each class of provider would get its own threshold, anchored to the taxes a state had enacted and imposed as of July 4, 2025. CMS says the aim is to stop tax arrangements in which providers effectively get their payments back.
For states that expanded Medicaid, allowable thresholds would step down starting in federal fiscal year 2028. The rule also sharpens the definitions of an “enacted” and “imposed” tax, building on preliminary guidance CMS issued in November 2025, would sunset the alternative 75/75 compliance test, and would add health insurer services as a new taxable class so that existing state taxes on insurers come under federal review.
Comments are due 60 days after the rule appears in the Federal Register.
Why the stakes are high for hospitals
Provider taxes are not a niche financing tool. According to the AHA, 49 states and the District of Columbia imposed at least one health care-related tax in fiscal 2024. Hospital assessments often fund the non-federal share of supplemental payments and higher Medicaid rates, so any cap on the tax tends to cap the payments that flow back to hospitals.
Freezing thresholds at July 2025 levels also removes a lever many states used to respond to budget pressure: raising or adding a tax to draw more federal matching dollars. Hospitals in expansion states face the most direct exposure, because their ceilings fall each year once the phase-down begins.
What finance teams should model now
- Map your dependence. Identify every Medicaid supplemental or directed payment that depends on a provider or managed care tax, and calculate net benefit after the assessment.
- Run a phase-down scenario. If you operate in an expansion state, model the net benefit at each step of the reduction beginning in FY 2028, alongside the state-directed payment limits CMS proposed in May.
- Check insurer-tax exposure. If your state funds Medicaid through a tax on insurers, ask your hospital association how the new class would treat it.
- Engage early. State Medicaid agencies will need data from hospitals to defend current structures and to file comments. Offer it now.
This is a proposed rule, and details can change. But the direction is set by statute, so the financial planning should start before the final rule arrives.
Archive entry for Jul 21, 2026, added Nov. 11, 2026.