The Centers for Medicare & Medicaid Services (CMS) has issued a final rule to close what the agency describes as a long-standing “financing gimmick” that let some states shift their share of Medicaid costs to the federal government.
The changes were first proposed in May 2025 and later incorporated into the “One Big Beautiful Bill Act.”
The final rule aims to ensure states invest their fair share in the Medicaid program instead of taking advantage of tax structures to draw down extra Medicaid dollars.
“We are bringing fairness, accountability, and integrity to Medicaid by restoring the Federal-State partnership,” said CMS Administrator Dr. Mehmet Oz in the announcement. “Medicaid only works when every partner meets its obligations. States that have relied on loopholes to offload their responsibilities onto federal taxpayers undermined the law and directed additional Medicaid spending to favored providers instead of focusing on families who depend on this program. With this rule, CMS is ending these inappropriate schemes and ensuring every federal Medicaid dollar is used as Congress intended.”
For years, CMS said, some states used health care–related tax structures to effectively offload their financial responsibilities. From fiscal year 2012 to fiscal year 2024, the federal financing share of Medicaid increased from approximately 57 percent to 64.5 percent. The tactics imposed higher tax rates on Medicaid Managed Care Organizations (MCOs) or other Medicaid providers while using the proceeds to obtain federal matching dollars, effectively repaying providers for their tax costs with federal funds and sometimes producing massive state windfalls at federal expense.
CMS estimates that the loophole has generated more than $24 billion annually for states, with one state reaping more than $13 billion.
The new rule:
- Prohibits higher tax rates on Medicaid business, shutting down the main mechanism states used to generate disproportionate revenue generation.
- Closes indirect pathways that allowed states to disguise disproportionate burdens on Medicaid providers.
- Finalizes safeguards proposed in May 2025, strengthening CMS’ enforcement of federal financing rules.
- Implements statutory requirements included in the congressional direction in the Working Families Tax Cuts legislation (Public Law 119-21).
CMS is giving states a phased timeline to comply:
- For taxes on MCO services with waiver approvals within two years of April 3, 2026: States have until December 31, 2026.
- For taxes on MCO services with waiver approvals two or more years before April 3, 2026: States must comply by the end of state fiscal year 2027.
- For taxes on all other permissible provider classes: States have until the end of state fiscal year 2028.
The phased approach aims to give states enough time to redesign their financing structures while ensuring federal Medicaid dollars are used appropriately and as Congress intended.