Nov, 21, 2025

CMS Issues Preliminary Guidance on Provider Tax Grandfathering and Non-Uniform Tax Transition Periods

Avi Herring, Eric Gold, and Carly Loughran, Manatt Health

Background

On November 14, the Centers for Medicare & Medicaid Services (CMS) issued preliminary guidance interpreting H.R.1’s new limits on Medicaid provider taxes.[1] The guidance appears inconsistent with the statutory language as well as states’ expectations based on messaging in the lead up to H.R.1’s passage and since, and raises questions about how states should interpret and act on the new requirements. Notably, the guidance appears designed to invalidate new or increased provider taxes implemented shortly before H.R.1’s enactment and accelerate the statutory timeline for states to end non-uniform managed care organization (MCO) taxes now prohibited under the law. Although the guidance is preliminary, states should promptly assess its potential impact on their tax structures, share feedback with CMS, and engage their Congressional delegations and  governors on the potential implications if the preliminary guidance is finalized in rulemaking.

This expert perspective provides an overview of CMS’ guidance and key considerations for states as they look to implement H.R.1’s provider tax-related provisions.

H.R.1’s Constraints on Provider Taxes

H.R.1 (P.L. 119-21) establishes several constraints on provider taxes:

  • Effective October 1, 2026 [the start of federal fiscal year (FFY) 2027], the law effectively prohibits states from implementing new or increased provider taxes. Provider taxes that were enacted and imposed as of July 4, 2025, are “grandfathered” until reductions begin (see subsequent bullet).
  • Effective October 1, 2027 (FFY 2028), in expansion states, the law reduces the maximum provider tax rate of 6% of net patient revenue by .5 percentage points per year until the cap reaches 3.5% in FY 2032.[2]

 

In addition to an effective ban on new or increased provider taxes, H.R.1 also bars taxes that impose higher rates on Medicaid volume and/or high-Medicaid providers, even if those taxes otherwise meet the long-standing uniformity waiver standard in federal regulations.

Grandfathered Taxes

H.R.1 allows a provider tax to remain in effect if, as of the date of H.R.1’s enactment (July 4, 2025), the state “has enacted such tax and imposes such tax on such class,” and “the Secretary determines that the tax is within the hold harmless threshold as of that date.”[3] The preliminary guidance details how CMS interprets the phrase “has enacted such tax and imposes such tax.” Despite the compromise in H.R.1 that allows previously enacted provider taxes to remain in effect, CMS guidance appears designed to invalidate state healthcare–related taxes implemented shortly before H.R.1’s enactment.

Enacted. While the guidance defines “enacted” to mean the state has completed the legislative process necessary to authorize the tax, for taxes that require a broad-based (p1/p2) and/or uniformity (b1/b2) waiver, CMS also requires that the state must have received CMS approval of the waiver by July 4, 2025 for the tax to be considered “enacted.”

  • This additional requirement for CMS’ tax waiver approval is contrary to the statute. The requirement does not appear in H.R.1, under which grandfathering depends on when the state enacted the law, not when CMS acted on a waiver.
  • Even if the date of enactment depended on the timing of a waiver, nothing in CMS’ current rules supports a cutoff date based on CMS’ approval of a waiver as the guidance would do. Instead, CMS rules specify that a tax waiver is retroactive to the first day of the quarter in which CMS receives the waiver.[4]

 

Imposed. CMS interprets “imposed” to mean a state was actively collecting revenues under the enacted tax structure as of July 4, 2025.

  • The guidance attempts to clarify this point by stating that taxes implemented as of July 4, 2025, but collected later due to a “delayed schedule consistent with routine collection or billing practices” will be considered imposed by July 4, 2025. However, this language is vague, and it remains unclear how CMS will determine whether a tax that was implemented before July 4, 2025, but first collected after July 4, 2025, meets this standard.
    • One possible reading of the guidance is that a tax that legally takes effect (i.e. was enacted and implemented) prior to July 4, 2025, but due to the state’s billing cycle was not collected until later (e.g. the following quarter or semi-annual period), would still qualify as “imposed.”
    • Another, narrower interpretation is that “routine collection or billing practices” refers only to short administrative lags—for example, where the state issues tax bills on July 1, 2025, and collects payment a few weeks later. Because the guidance does not distinguish between these interpretations, the scope of the grandfathering provision remains uncertain.
    • Under either reading, however, a tax enacted before July 4, 2025, but not legally effective until after that date—for example, August 1, 2025—would not qualify.

 

In either case, there is no statutory basis to interpret “imposed” to mean “collected.” Although neither “imposes” nor “collected” are defined in federal statute or regulation, both are used elsewhere in the Medicaid statutes and have unique meanings. “Imposed” typically refers to a legal obligation to pay a tax tied to a defined class of healthcare items or services. For example: “the tax is imposed at a uniform rate for all items and services”[5] and “the amount of the tax imposed is the same for every provider providing items or services within the class.”[6] “Collected,” by contrast, refers to revenues the state has received. For example: each state shall include in its annual report “health care related taxes collected by the state or such units during such fiscal year.”[7]

The guidance also leaves another important question unanswered. H.R.1 specifies that provider taxes grandfathered under the law—called “new indirect hold harmless thresholds” in the guidance—will be limited to the percentage of net patient revenue (NPR) as of July 4, 2025. The guidance does not address, however, how CMS will calculate the new indirect hold harmless thresholds for state taxes that are not imposed as a percentage of NPR (e.g. per bed day, percentage of costs, etc.). The new “indirect hold harmless thresholds” will set maximum provider tax levels under the law and have significant implications for state Medicaid funding. CMS will likely specify the calculation methodology and hold harmless thresholds for each state in rulemaking.

Non-Uniform Tax Transition Periods

CMS’ preliminary guidance specifies transition periods for taxes that do not meet H.R.1’s new standards for a tax to be generally redistributive.

Provider taxes must be “broad-based” and “uniform,” meaning that they apply equally to all providers in a given class (e.g., inpatient hospitals). States have been entitled to waivers of the broad-based and uniformity requirements if they demonstrated to CMS that they met a complex statistical test set out in regulation. H.R.1 changes these regulations to prohibit any tax that:

  1. Imposes a lower tax rate on providers explicitly defined based on their lower Medicaid volumes compared to those providers with higher Medicaid volumes,
  2. Taxes Medicaid units of service (e.g., discharges, bed days, revenue, or member months) at a higher rate than non-Medicaid units of service, or
  3. Has the “same effect” as 1 or 2.

H.R.1 permits CMS to grant states up to a three-year transition period to comply with the new uniformity rules. The November 14 preliminary guidance specifies the following minimum transition periods:

  • Non-uniform MCO taxes: through the end of the state FY ending in calendar year 2026.
  • Non-uniform taxes for other classes (e.g., hospitals): through the state FY ending in calendar year 2028, but no later than October 1, 2028.

 

These periods are shorter than the three-year maximum allowed under H.R.1, but CMS notes that extensions up to the statutory limit may be granted, and final timelines will depend on the final rule.

The transition structure in the November 14th guidance diverges widely from the transition periods outlined in CMS’ proposed rule issued last spring,[8] which did not distinguish between MCO and non-MCO taxes. Instead, the proposed rule provided no transition period for states with recently enacted non-uniform taxes and a one- to two-year transition for states with longer-standing arrangements—an approach that benefited some states and disadvantaged others depending on the age of their tax structure. Importantly, CMS clarifies in the guidance that states may modify these non-uniform taxes to comply with the new uniformity rules, as long as the tax does not exceed the new indirect hold harmless threshold (described above). With many state legislative sessions set to begin shortly, the updated MCO-specific transition deadlines are likely to become a major issue for states that currently rely on these taxes. Absent prompt legislative or regulatory action, states with non-compliant tax structures risk significant reductions in federal matching funds—potentially amounting to billions of dollars.

Looking Ahead

CMS emphasizes that the November 14 guidance is preliminary and formal rulemaking is forthcoming. For the uniformity provisions, CMS has already issued a proposed rule and appears to be moving toward publishing a final rule on the issue (on November 17, CMS’ final rule was sent to the Office of Management and Budget for review, one of the final steps before publication). By contrast, for the grandfathered tax guidance—where CMS has not previously proposed regulatory text—it is unclear whether the agency will proceed with a new proposed rule or move directly to an interim final rule with comment period. If a proposed rule is issued, stakeholders will have the opportunity to submit public comments to highlight legal, policy, or operational concerns and to suggest alternatives.

In any event, it seems likely that if CMS issues a final rule that further limits state provider taxes consistent with the preliminary guidance, one or more stakeholders will file suit challenging CMS’ interpretation under the Administrative Procedure Act as contrary to H.R.1’s clear statutory language.

 

 

[1] For purposes of this expert perspective, provider tax and healthcare-related tax are used interchangeably.

[2] In Medicaid expansion states, taxes on nursing facilities and intermediate care facilities for individuals with intellectual disabilities (ICF/IID) that were already in effect as of the date of enactment are exempt from the phasedown. Social Security Act (SSA) § 1903(w)(4)(D)(iv).

[3] SSA § 1903(w)(4)(D)(i).

[4] 42 CFR 433.72(c)(2).

[5] SSA § 1903(w)(3)(C)(i)(III).

[6] SSA § 1903(w)(3)(C)(i)(I).

[7] SSA § 1903(d)(6)(A)(ii).

[8] See Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations – Closing a Health Care-Related Tax Loophole Proposed Rule, 90 FR 20578 (May 15, 2025).