[Federal Register Volume 90, Number 93 (Thursday, May 15, 2025)]
[Proposed Rules]
[Pages 20578-20600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-08566]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Part 433
[CMS-2448-P]
RIN 0938-AV58
Medicaid Program; Preserving Medicaid Funding for Vulnerable
Populations--Closing a Health Care-Related Tax Loophole Proposed Rule
AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of
Health and Human Services (HHS).
ACTION: Proposed rule.
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SUMMARY: This proposed rule is intended to address a loophole in a
regulatory statistical test applied to State proposals for Medicaid tax
waivers. The test is designed to ensure, as required by statute, that
non-uniform or non-broad -based health care-related taxes, authorized
under a waiver, are generally redistributive. The inadvertent loophole
currently allows some health care-related taxes, especially taxes on
managed care organizations, to be imposed at higher tax rates on
Medicaid taxable units than non-Medicaid taxable units, contrary to
statutory and regulatory intent for health care-related taxes to be
generally redistributive. The proposed provisions would better
implement the statutory requirements by adding additional safeguards to
ensure that tax waivers that exploit the loophole because they pass the
current statistical test, but are not generally redistributive, are not
approvable.
DATES: To be assured consideration, comments must be received at one of
the addresses provided below, by July 14, 2025.
ADDRESSES: In commenting, please refer to file code CMS-2448-P.
[[Page 20579]]
Comments, including mass comment submissions, must be submitted in
one of the following three ways (please choose only one of the ways
listed):
1. Electronically. You may submit electronic comments on this
regulation to http://www.regulations.gov. Follow the ``Submit a
comment'' instructions.
2. By regular mail. You may mail written comments to the following
address ONLY: Centers for Medicare & Medicaid Services, Department of
Health and Human Services, Attention: CMS-2448-P, P.O. Box 8016,
Baltimore, MD 21244-8016.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
3. By express or overnight mail. You may send written comments to
the following address ONLY: Centers for Medicare & Medicaid Services,
Department of Health and Human Services, Attention: CMS-2448-P, Mail
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.
FOR FURTHER INFORMATION CONTACT: Jonathan Endelman, (410) 786-4738, and
Stuart Goldstein, (410) 786-0694, for Health Care-Related Taxes.
SUPPLEMENTARY INFORMATION:
Inspection of Public Comments: All comments received before the
close of the comment period are available for viewing by the public,
including any personally identifiable or confidential business
information that is included in a comment. We post all comments
received before the close of the comment period on the following
website as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that website to
view public comments. CMS will not post on Regulations.gov public
comments that make threats to individuals or institutions or suggest
that the commenter will take actions to harm an individual. CMS
continues to encourage individuals not to submit duplicative comments.
We will post acceptable comments from multiple unique commenters even
if the content is identical or nearly identical to other comments.
Plain Language Summary: In accordance with 5 U.S.C. 553(b)(4), a
plain language summary of this rule may be found at https://www.regulations.gov/.
I. Background
A. Overview
Title XIX of the Social Security Act (the Act) authorizes Federal
grants to the States for Medicaid programs to provide medical
assistance to persons with limited income and resources. While Medicaid
programs are administered by the States, the program is jointly
financed by the Federal and State governments. The Federal government
pays its share of Medicaid expenditures to the State on a quarterly
basis according to a formula described in sections 1903 and 1905(b) of
the Act. The amount of the Federal share of Medicaid expenditures is
called Federal financial participation (FFP). The State pays its share
of Medicaid expenditures in accordance with section 1902(a)(2) of the
Act. As described in more detail in the next section, the State may
raise its non-Federal share obligation in various ways, subject to
certain requirements, including through health care-related taxes
(generally, taxing health care items or services, or providers of such
items and services).
The Medicaid Voluntary Contribution and Provider Specific Tax
Amendments of 1991 (Pub. L. 102-234, enacted December 12, 1991) amended
section 1903 of the Act to specify limitations on the amount of FFP
available for medical assistance expenditures in a fiscal year when
States receive certain funds donated from providers or certain related
entities, and revenues generated by certain health care-related taxes.
The Centers for Medicare & Medicaid Services (CMS) issued regulations
to implement the statutory provisions concerning provider-related
donations and health care-related taxes in an interim final rule (with
comment period) published in November 1992 (57 FR 55118 (Nov. 24,
1992). CMS issued the final rule in August 1993 (58 FR 43156 (Aug. 13,
1993)). The Federal statute and implementing regulations were intended
to prevent States from shifting a disproportionate amount of the tax
burden to entities with a high percentage of Medicaid business, thus
shifting the State responsibility for financing of the program to the
Federal government. In these financing-shifting scenarios, Medicaid
payments to providers would be made up of the Federal share plus non-
Federal share raised from the providers themselves, rather than
obtained from general revenue or other permissible source or non-
Federal share. In part, the statute addresses this concern by requiring
that health care-related taxes be broad-based (generally, applicable to
an entire permissible class of health care items and services, or to
providers of the same) and uniform (generally, applied at the same rate
to all health care items and services, or providers, in a permissible
class). The statute does permit waivers of the broad-based and uniform
requirements under certain circumstances, including that the Secretary
of Health and Human Services (Secretary) must determine that the net
impact of the tax and associated Medicaid expenditures as proposed by
the State would be generally redistributive in nature, which is at
issue in these provisions and which we discuss more fully later.
However, since that time, we have discovered that, due to an unintended
loophole in the statistical test used to determine if a health care-
related tax is generally redistributive, as specified in the August
1993 final rule, some States are still able to shift the financial
burden of the non-Federal share of Medicaid program expenditures to
entities with a high percentage of Medicaid business, and thus
ultimately to the Federal government, contrary to the statutory
framework.
B. Medicaid Program Financing
Shared responsibility for financing lies at the foundation of the
Medicaid program. Sections 1902(a), 1903(a), and 1905(b) of the Act
require States to share in the cost of medical assistance and in the
cost of administering the State plan. Under this statutory framework,
Medicaid expenditures are jointly funded by the Federal and State
governments. Section 1903(a)(1) of the Act provides for payments to
States of a percentage of medical assistance expenditures authorized
under their approved State plan. Generally, FFP is available when a
covered Medicaid service is provided to a Medicaid beneficiary, which
results in a Federally matchable expenditure that is funded in part
through non-Federal funds from the State or a non-State governmental
entity.\1\ The share of Federal funding for medical assistance
expenditures is determined by the Federal medical assistance percentage
(FMAP), which is calculated for each State using a formula set forth in
section 1905(b) of the Act, or other applicable FFP match rates
specified by the statute.
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\1\ See the Medicaid and CHIP Payment and Access Commission's
(MACPAC) list of ``Federal Match Rate Exceptions'' for a
comprehensive list of higher FMAPs at https://www.macpac.gov/federal-match-rate-exceptions/.
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Section 1902(a)(2) of the Act and its implementing regulation in 42
CFR part 433, subpart B requires States to share in the cost of
Medicaid expenditures, with financial participation by the State
[[Page 20580]]
of not less than 40 percent of the non-Federal share of expenditures.
These requirements also permit other units of non-State government to
contribute to the financing of the non-Federal share of medical
assistance expenditures up to the remaining 60 percent of the non-
Federal share. As a result, States must participate in operating an
efficient and fiscally responsible system for providing health care
services to eligible beneficiaries. Because States must invest some of
their own dollars to pay for the program, they have an incentive to
monitor and operate their programs competently to ensure the best value
for the dollars that they spend.
There are several manners in which States can finance the non-
Federal share of Medicaid expenditures, including: (1) State general
funds, typically derived from tax revenue appropriated directly to the
Medicaid agency; (2) revenue derived from health care-related taxes
when consistent with Federal statutory requirements at section 1903(w)
of the Act and implementing regulations at 42 CFR part 433, subpart B;
(3) provider-related donations to the State which must be ``bona fide''
in accordance with section 1903(w) of the Act and implementing
regulations at 42 CFR part 433, subpart B; (4) intergovernmental
transfers (IGTs) from units of State or local government that
contribute funding for the non-Federal share of Medicaid expenditures
by transferring their own funds to and for the unrestricted use of the
Medicaid agency; and (5) certified public expenditures whereby units of
government, including health care providers that are units of
government, incur FFP-eligible expenditures under the State's approved
State plan, consistent with section 1903(w)(6) of the Act and Sec.
433.51(b).
C. Health Care-Related Taxes
Section 1903(w) of the Act specifies certain requirements to which
permissible health care-related taxes must adhere. Specifically,
section 1903(w)(1)(A) of the Act states that the Secretary will reduce
a State's medical assistance expenditures, prior to calculating FFP, by
the sum of any revenues from health care-related taxes that do not meet
the requirements under section 1903(w) of the Act. This reduction in a
State's claimed expenditures is codified in regulation at Sec.
433.70(b). Because of the way that the statute is constructed, the
baseline assumption is that all health care-related taxes are
impermissible with limited exceptions for health care-related taxes
that satisfy the parameters specified by the statute.
Health care-related taxes may only be imposed permissibly on
certain groups of health care items or services known as permissible
classes that are outlined in section 1903(w)(7) of the Act and expanded
upon in Sec. 433.56 of the implementing regulations. In general, and
as discussed in the introduction to this section, such health care-
related taxes must be broad-based, or apply to all non-governmental
providers within such a class as specified by section 1903(w)(3)(B) of
the Act and Sec. 433.68(c). They generally must also be uniform, such
that all providers within a class generally must be taxed at the same
rate or dollar amount as specified by section 1903(w)(3)(C) of the Act
and Sec. 433.68(d). Additionally, the tax must not have in effect any
hold harmless provisions as specified in section 1903(w)(4) of the Act
and implementing regulations in Sec. 433.68(f).
There is no possibility under the statute of waiving the
permissible class or the hold harmless requirements. However, a State
can request a waiver of the broad-based and/or uniformity requirements.
As discussed earlier, section 1903(w)(3)(E) of the Act states that the
Secretary shall approve a health care-related tax waiver for the broad-
based and/or uniformity requirements if the net impact of the tax and
associated expenditures is ``generally redistributive'' in nature and
the amount of the tax is not directly correlated to Medicaid payments
for items and services with respect to which the tax is imposed. As
previously stated, in the preamble of the August 1993 final rule, CMS
interpreted ``generally redistributive'' to mean ``the tendency of a
State's tax and payment program to derive revenues from taxes imposed
on non-Medicaid services in a class and to use these revenues as the
State's share of Medicaid payments (58 FR 43164). The preamble stated
that assuming a State imposes a non-Medicaid tax and uses the funds
solely for Medicaid payments, we believe a complete redistribution
would exist.
States are not required to use health care-related taxes to finance
the non-Federal share of Medicaid payments; in practice, it is
frequently done. When this occurs, taxes that are generally
redistributive have some entities that benefit financially as a result
of the tax and the associated payment(s) funded by the tax, and some
entities that lose money because the amount of tax they pay is greater
than the amount of tax-funded payments they receive. Under a health
care-related tax that is generally redistributive, entities that have
more Medicaid business would expect to receive greater Medicaid
payments than entities with less Medicaid business. Although the
entities with a higher percentage of Medicaid business may also pay the
tax, they often receive more total Medicaid payments than they pay in
tax, and therefore benefit from these arrangements. By contrast,
entities that serve a relatively low percentage of Medicaid
beneficiaries or no Medicaid beneficiaries often do not receive
Medicaid payments in an amount equal to or higher than their cost of
paying the tax. These entities do not benefit financially because they
do not receive Medicaid payments sufficient to cover their tax
payments. These results are inherent in a system of Medicaid payments
supported by a health care-related tax that is generally
redistributive, as discussed in the preamble to the August 1993 final
rule.
Entities that do not benefit from a tax and tax-supported payments
are unlikely to support a State or locality establishing or continuing
a health care-related tax because the tax would have a negative
financial impact on them. Hold harmless arrangements often eliminate
this negative financial impact or turn it into a positive financial
impact for most or all taxpaying entities, likely leading to broader
support among the taxpayers for legislation establishing or continuing
the tax. Hold harmless arrangements often result in the Federal
government as the only net contributor to Medicaid payments that are
supported by the tax program, since the non-Federal share is both
sourced from and paid back to the taxpaying providers. This
circumstance allows States and/or local governments to garner
widespread support among taxpayers to successfully enact or continue
tax programs that support increased payments to providers.
As stated earlier, tax programs can result in taxpayers that
receive relatively lower Medicaid payments (typically because they
furnish a lower volume of Medicaid services) than they pay in taxes,
experiencing a negative financial impact. States and providers have
sought out ways to avoid this result and to ensure greater support
among taxpayers for the tax program. For example, groups of providers
may collaborate to ensure that no provider is financially harmed for
the cost of the tax. We described an example of this type of this
arrangement, known as redistribution arrangements, in a February 17,
2023, Center for Medicaid and CHIP Services Informational Bulletin
(CIB) entitled, ``Health Care-Related Taxes and Hold Harmless
Arrangements Involving the
[[Page 20581]]
Redistribution of Medicaid Payments.'' \2\ In these redistribution
arrangements, entities that benefit financially because their Medicaid
payments supported by the tax are greater than their tax amount will
redirect a portion of their Medicaid payments to those that are harmed
financially, to achieve the effect of holding providers harmless for
the cost of the tax.
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\2\ https://www.medicaid.gov/federal-policy-guidance/downloads/cib021723.pdf.
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States are aware that arrangements explicitly guaranteeing to hold
taxpayers harmless, whether directly or indirectly, such as through the
aforementioned redistribution arrangements, are unallowable . If CMS
identifies such an arrangement, it would then reduce the State's total
medical assistance expenditures by the amount of revenue collected from
the impermissible tax before the calculation of FFP as mandated by
section 1903 (w)(1)(a)(iii) of the Act.\3\ These types of arrangements
are problematic as they improperly shift the burden of financing the
Medicaid program to the Federal government, and have been identified as
such by oversight entities including the Governmental Accountability
Office (GAO) and the HHS Office of Inspector General
(OIG).4 5 In an effort to achieve a similar effect as a hold
harmless arrangement, some States have attempted to impose taxes using
variable rates or provider exclusions (described in further detail
later in this proposed rule) to increase the tax burden on the Medicaid
program, thus mitigating or eliminating the tax burden on entities with
relatively lower Medicaid business that may not be able to receive the
amount of the tax they paid through increased Medicaid payments funded
by the tax. Essentially, health care-related taxes designed to tax
Medicaid business more than its fair share, makes it easier for States
to guarantee taxpayers are reimbursed their tax payments through
increased Medicaid payments. Due to the current regulations governing
health care-related tax waiver determinations, this can occur in
certain circumstances despite the regulatory statistical test designed
to ensure that non-uniform or non-broad-based health care-related taxes
meet the statutory requirement to be generally redistributive.
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\3\ As we stated in the 2008 tax rule described below, ``We
chose to use the term reasonable expectation because we recognized
that State laws were rarely overt in requiring that State payments
be used to hold taxpayers harmless.'' https://www.govinfo.gov/content/pkg/FR-2008-02-22/pdf/E8-3207.pdf.
\4\ See, for example, ``Medicaid Financing: Long-Standing
Concerns about Inappropriate State Arrangements Support Need for
Improved Federal Oversight,'' Governmental Accountability Office
(GAO), November 1, 2007; ``Medicaid: CMS Needs More Information on
States' Financing and Payment Arrangements to Improve Oversight,''
GAO, December 7, 2020.
\5\ https://oig.hhs.gov/oas/reports/region3/31300201.pdf.
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As previously discussed, a tax seeking a broad-based and/or
uniformity waiver must be ``generally redistributive,'' which we have
established in this context means the tax program generally generates
tax revenues from entities that serve relatively lower percentages of
Medicaid beneficiaries and uses the tax revenue as the State's share of
Medicaid payments. Therefore, a tax that does the opposite, by
establishing lower tax rates on entities that serve relatively lower
percentages of Medicaid beneficiaries or on non-Medicaid items or
services (compared to entities that serve relatively higher percentages
of Medicaid beneficiaries) to prevent the redistribution of tax revenue
is clearly not generally redistributive or consistent with the
statutory requirement that a tax program be generally redistributive to
qualify for a waiver.\6\
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\6\ See Congressional Record-House, November 26, 1991, 35855
https://www.congress.gov/102/crecb/1991/11/26/GPO-CRECB-1991-pt24-1-2.pdf.
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To enforce the requirement that taxes have a net impact that is
``generally redistributive'' in accordance with section
1903(w)(3)(E)(ii)(I) of the Act, CMS established certain tests when a
State is seeking a broad-based and/or uniformity waiver. If a State is
seeking a waiver of the broad-based requirement for its health care-
related tax, the tax must comply with Sec. 433.68(e)(1) to be
considered generally redistributive, which establishes the test known
as the P1/P2 test. If the State seeks a waiver of the uniformity
requirement, whether or not the tax is broad-based, the tax must comply
with Sec. 433.68(e)(2) to be generally redistributive, which
establishes the test known as the B1/B2 test. These tests, where
applicable, are intended to demonstrate that the State's tax program
does not impose a higher tax burden on the Medicaid program compared to
a broad-based and uniform tax.\7\
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\7\ ``The Federal statute and implementing regulations were
designed to protect Medicaid providers from being unduly burdened by
health care related tax programs. Health care related tax programs
that are compliant with the requirements set forth by the Congress
create a significant tax burden for health care providers that do
not participate in the Medicaid program or that provide limited
services to Medicaid individuals.'' 73 FR 9685 (Feb. 22, 2008).
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The P1/P2 test applies on a per class basis to a tax that is
imposed on all items or services at a uniform rate, but is not broad
based because it excludes certain providers. The State must divide the
proportion of the tax revenue applicable to Medicaid if the tax were
broad-based and applied to all providers or activities within the class
(called P1), by the proportion of the tax revenue applicable to
Medicaid under the tax program for which the State seeks a waiver
(called P2). The resulting quotient is the P1/P2 figure. Generally, to
be granted a waiver of the broad-based requirement, this figure must be
at least 1, with some exceptions noted in Sec. Sec. 433.68(e)(1)(iii)
and (iv). For taxes enacted and in effect prior to August 13, 1993,
States may pass the P1/P2 test if they have a value of at least 0.90
and only exclude one or more of the following provider types: providers
that furnish no services within the class in the State, providers that
do not charge for services within the class, rural hospitals as defined
at Sec. 412.62(f)(1)(ii), sole community hospitals as defined at Sec.
412.92(a), physicians practicing in medically underserved areas as
defined in section 1302(7) of the Public Health Service Act,
financially distressed hospitals under certain circumstances,
psychiatric hospitals, and hospitals owned and operated by Health
Management Organizations (HMOs). For taxes in effect after that date,
the same exceptions would apply, and the passing value is 0.95 rather
than 0.90.
The B1/B2 test also applies on a per class basis to a non-uniform
tax (whether or not it is broad based) that applies different rates to
different tax rate groups of providers within the permissible class.
Under the B1/B2 test, the State calculates and compares the slope
(designated as B) of two linear regressions. Univariate linear
regression attempts to find the line that best fits a series of points,
plotted on a graph using two variables, an independent variable X and a
dependent variable Y.\8\ In the B1/B2 test, the independent variable or
X-axis, for both regressions, represents the ``the number of the
provider's taxable units funded by the Medicaid program during a 12-
month period'' or the ``Medicaid Statistic.'' \9\ The regression
measures how much impact for the average provider a one-unit increase
in the Medicaid Statistic has on how much that provider is taxed. For
example, if the tax were based on provider inpatient days, the number
of providers' inpatient Medicaid days during a 12-month period would be
its
[[Page 20582]]
``Medicaid Statistic.'' Or, if the tax were based on member months, the
number of Medicaid member months for a managed care organization (MCO)
would be the Medicaid Statistic. The Y variable, or the dependent
variable, is the percentage of the tax paid by each provider in the tax
program compared to the total tax amount paid by all providers during a
12-month period. Through this test, CMS seeks to ensure that, as
Medicaid units increase, the tax paid by the provider does not increase
more under the State's waiver proposal (the B2 regression) than would
occur in a broad-based and uniform tax (the B1 regression).
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\8\ Linear regression attempts to model the relationship between
two variables by fitting a linear equation to observed data. One
variable is considered to be an explanatory variable, and the other
is considered to be a dependent variable. Linear Regression
(yale.edu) http://www.stat.yaleedu/Courses/1997-98/101/linreg.htm.
\9\ 42 CFR 433.68(e)(2)(A).
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The first linear regression represents the slope of the line for
the tax if it were broad-based and applied uniformly (B1). In other
words, a State would submit data regarding all taxable payers in the
permissible class for the tax and apply a uniform tax rate. The B1 is
the slope of the line for that data. The second linear regression
represents the slope of the line for the tax program for which the
State is requesting a waiver (B2). To calculate the test value figure,
B1 is divided by B2. If the quotient is at least 1 the tax passes the
test, as specified in Sec. 433.68(e)(2)(ii), with certain limited
additional flexibility under Sec. 433.68(e)(2)(iii) and (iv). This B1/
B2 test was intended to indicate that when the B1/B2 figure is equal to
or greater than one (1), the State's proposed tax is not more heavily
imposed on the Medicaid program compared to a tax that is levied on all
providers at the same rate.
D. Concerns About the B1/B2 Test
Since the early 1990s, the B1/B2 test has generally worked well to
ensure health care-related taxes for which States seek waivers of the
uniformity requirement (whether or not the tax is broad based) are
generally redistributive. However, over the last decade, CMS became
aware that some States are manipulating their health care-related taxes
to impose tax structures that the State intends not to be generally
redistributive, but that were still able to pass the B1/B2 test. In
these cases, the State does not impose taxes on non-Medicaid services
in a class to then use the tax revenue as the State's share of Medicaid
payments. Instead, the States derive the vast majority of their tax
revenue from Medicaid services, which they then use to fund the non-
Federal share of Medicaid payments. In essence, this process results in
a simple recycling of Federal funds to unlock additional Federal funds.
Generally, health care-related tax programs can accomplish this by
taking advantage of linear regression analyses' statistical sensitivity
to outliers.\10\ See Figure 1.
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\10\ In statistics, an outlier is ``an observation that lies an
abnormal distance from other values in a random sample from a
population.'' Information Technology Laboratory National Institute
of Standards and Technology (NIST) Engineering and Statistics
Handbook 7.1.6 ``What Are Outliers in Data?'' https://www.itl.nist.gov/div898/handbook/toolaids/pff/prc.pdf.
[GRAPHIC] [TIFF OMITTED] TP15MY25.000
In Figure 1, the two data sets, represented by squares (example 1)
and triangles (example 2), have similar data with the exception of the
last data point. In Example 2, this data point is an outlier. As a
result, the line that fits the triangle data set is at a different
angle, or slope, from the square data set. We note that this example
uses basic data, not a B1/B2 analysis, to show the effect of an outlier
on a linear regression.
Using these approaches, this loophole, counterintuitively, allows a
tax program to place a much higher tax burden on Medicaid activities
compared to commercial activities and to still pass the B1/B2 test.
Health care-related taxes that exploit the loophole effectively permit
a State to shift most of the tax burden, disproportionately, onto the
Medicaid program, which is the exact result the B1/B2 test was intended
to prevent. The State may then use the tax revenue to fund the non-
Federal share of Medicaid payments to the same Medicaid entities
subject to the health care-related tax. As a result, the Federal
government pays an artificially inflated percentage of Medicaid
expenditures on health care services, far beyond the Federal matching
rates the Congress has specified in statute, because payments to
providers consist of Federal funds and funds the providers have
contributed themselves through taxes,
[[Page 20583]]
without the full contribution of non-Federal share the statute requires
from the State.
At its core, the B1/B2 test is centered on averages. As noted
previously, the regression measures how much impact a one-unit increase
in the Medicaid Statistic has on how much a provider is taxed. The rate
at which each entity's tax changes with every unit of change to the
entity's Medicaid Statistic is based on the average rate of change for
all of the entities in the regression analysis. In many cases, taking
an average of all the points does not necessarily give a useful picture
of the typical participant or the general nature of the population.
Averages can be misleading when they include outliers or other
irregularities. Similarly, outliers can distort the regression model,
masking important deviations within the data. For instance, imagine one
wanted to assess the relationship between education level and annual
salary for a group of employees at a corporation. At this corporation,
employees with a high school diploma make between $40,000 to $45,000.
Employees with a bachelor's degree make between $65,000 to $70,000.
Employees with a master's degree make between $80,000 to $90,000.
Employees with a doctoral degree make between $100,000 to $115,000. The
founder of the company's highest education level is a high school
diploma, but they make $1.6 million per year. If one were to exclude
the company founder from the linear regression, the line would have a
positive upward slope indicating an increase in salary with each
increasing level of education. However, if one were to include the
founder, the regression line would be diverted sharply to accommodate
the $1.6 million salary. The founder only represents one data point in
the regression analysis, but since this point is drastically different
than the rest, it potentially distorts the relationship that the
regression analysis is trying to assess. In this example, the average
value, while accurate, only represents a mathematical mean in the data
that is not necessarily useful for the purpose of assessing the
relationship between level of education and salary among the
corporation's employees. Likewise, in the case of the B1/B2 linear
regressions, outliers can skew our ability to use the data to assess
effectively if a tax is generally redistributive.
We have found that States can manipulate B2 by excluding from the
tax a few larger providers with much higher Medicaid taxable units than
the average provider in the taxable universe. Doing so drastically
affects the B-coefficient value for B2. Therefore, because the Medicaid
taxable units are not evenly distributed among all providers, States
can effectively charge higher rates on the remaining Medicaid taxable
units that make up most of the tax without running afoul of the B1/B2
test. In other words, excluding a few large providers with high
Medicaid utilization from the tax, but including them in the regression
calculation alters the slope of the line of the regression in a way
that allows the State to pass the statistical test, while
simultaneously imposing outsized burden on the Medicaid program. In
these cases, the proportional percentage of the tax imposed on the
Medicaid program becomes greater than Medicaid's proportion of the
total taxable units.
There are several other mechanisms that States have used to
undermine the efficacy of the B1/B2 test. Some States create tax
programs with extraordinary differences in tax rates within a provider
class based on taxpayer mix of Medicaid taxable units versus non-
Medicaid taxable units. Tax rates imposed on Medicaid-taxable units are
often much higher, sometimes more than one hundred times higher, when
compared with comparable commercial taxable units (for example,
Medicaid member months are taxed $200 per member month compared to $2
for comparable non-Medicaid member months). The ``tiering'' structure
on some of these tax waivers enable States with these disparate tax
rates to pass the B1/B2 test. Consider an MCO tax with tax rates that
vary by an MCO's member months. Medicaid- member months from zero to
1,000,000 are excluded from the tax. Medicaid- member months from
1,000,001 to 2,000,000 are taxed $300 per member month. Medicaid-
member months in excess of 2,000,000 are excluded from the tax.
Commercial member months from zero to 1,000,000 are excluded from the
tax. Commercial- member months from 1,000,001 to 2,000,000 are taxed $3
per member month. Commercial member months in excess of 2,000,000 are
excluded from the tax. The ``middle tier'' of member months, the only
one that is taxed at all, has a tax rate of 100 times on Medicaid-
member months compared to their commercial counterparts. The State
passes the B1/B2 test because certain Medicaid-paid member months in
excess of 2,000,000 artificially ``pull'' the slope of B2 down making
it appear as though the State is giving a larger break to Medicaid-
member months than it actually is.
Historically, these taxes that targeted Medicaid first began with
MCO taxes, one of the permissible classes for health care related
taxes. We note that in all of these arrangements, Federal rules
prohibit States from taxing Medicare Advantage Plans,\11\ or certain
plans that contract with the Office of Personnel Management to provide
health care for Federal employees through the Federal Employee Health
Benefits (FEHB) program \12\ or plans that contract with the Department
of Defense to provide care to military personnel, retirees and their
families under the TRICARE system.\13\ According to Sec. 422.404,
States are prohibited from imposing premium taxes, fees, or other
charges on payments made by CMS to Medicare Advantage (MA)
organizations, payments made by MA enrollees to MA plans, or payments
made by a third party to an MA plan on a beneficiary's behalf.
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\11\ Under Medicare regulations at Sec. 422.404(a), States are
prohibited from taxing Medicare MCOs. Therefore, a State's taxation
of MCO services is limited to commercial payers and Medicaid. As a
result, taxes that exclude or sharply curtail the tax amount paid by
commercial payers fall exclusively on Medicaid and to a lesser
extent BHP if applicable.
\12\ 5 U.S. Code Sec. 8909--Employees Health Benefits Fund.
\13\ 5 U.S.C. 8909(f). 32 CFR 199.17 (a)(7).
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Over several years, the Congress and CMS have actively attempted
through Federal statutes and regulations, to prevent States from
designing MCO taxes to target Medicaid MCOs or Medicaid activities.
Before the Deficit Reduction Act of 2005 (DRA), the statute included a
permissible class, under which States could only tax services of
Medicaid MCOs, but not other MCOs. In the DRA, the Congress broadened
the permissible class to include all MCO services (no longer limited to
Medicaid MCO services). Realizing that States would need time to
address financial impacts within their State budgets and enact
potentially necessary legislative modifications to health care-related
tax programs, the DRA provided a grace period to allow States to come
into compliance by October 1, 2009. CMS issued a final rule entitled
``Medicaid Program; Health Care Related Taxes'' (73 FR 9685) that
implemented the changes in the DRA. After the DRA and the 2008 final
rule, States were no longer permitted to assess health care-related
taxes only on Medicaid MCOs. Instead, States must assess health care-
related taxes on the services of all MCOs, not just Medicaid MCOs, to
qualify as broad-based within the amended permissible class, except for
those excluded by Federal rules from taxation.
In response to these changes, several States attempted to ``mask''
health care-related taxes on Medicaid MCOs within
[[Page 20584]]
broader taxes that included non-health care items and activities. See,
for example, the Office of Inspector General (OIG) Report,
``Pennsylvania's Gross Receipts Tax on Medicaid Managed Care
Organizations Appears To Be an Impermissible Health-Care-Related Tax,''
issued on May 28, 2014.\14\ Some States did this to continue taxing
only Medicaid MCOs and thereby maximizing the burden on Medicaid
without needing to bring in additional MCO lines of business. Section
1903(w)(3)(A) of the Act and in Sec. 433.55(b) establish that a tax is
considered to be a health care-related tax if at least 85 percent or
more of the burden of the tax revenue falls on health care providers.
Section 1903(w)(3)(A)(ii) of the Act and regulations in Sec. 433.55(c)
further specify that taxes will still be considered health care-related
even if they do not reach the 85 percent threshold if the treatment of
individuals or entities providing or paying for health care items or
services is different than the tax treatment provided to other
taxpayers. Some States with these taxes in place argued that, since the
percentage of the tax imposed on health care items and services fell
below the 85 percent threshold and the State did not treat health care
items or services differently than other items being taxed, the portion
of the tax imposed on Medicaid MCOs was not considered health care-
related and was not governed by section 1903(w) of the Act. In a 2014
State Health Official Letter (SHO),\15\ CMS explained that taxing a
subset of health care services or providers at the same rate as a
Statewide sales tax, for example, does not result in equal treatment if
the tax is applied specifically to a subset of health care services or
providers (such as only Medicaid MCOs), since the providers or users of
those health care services are being treated differently than others
who are not within the specified universe. These taxes were attempting
to continue to tax a subset of services within a permissible class when
paid for by Medicaid, but not when the same services were not paid for
by Medicaid.
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\14\ Department of Health and Human Services Office of the
Inspector General, ``Pennsylvania's Gross Receipts Tax on Medicaid
Managed Care Organizations Appears to be an Impermissible Health-
Care Related Tax'' Issued May 2014 (A-03-13-00201). https://oig.hhs.gov/documents/audit/6720/A-03-13-00201-Complete%20Report.pdf.
\15\ SHO #14-001, ``Health Care-Related Taxes,'' issued on July
25, 2014, available at https://www.medicaid.gov/federal-policy-guidance/downloads/sho-14-001.pdf.
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Oversight agencies, including the Health and Human Services OIG,
have noted health care-related taxes as a program integrity concern in
Medicaid financing several times. On January 23, 1996, the Director of
Health Systems at the GAO wrote a letter to the Ranking Member of the
United States House Commerce Committee that outlined some of the ways
that States use ``creative financing mechanisms,'' including health
care-related taxes, to finance the non-Federal share of Medicaid
expenditures.\16\ In 2014 and 2017, the OIG issued reports highlighting
concerns about State taxes that target Medicaid MCOs or Medicaid MCO
business.\17\ Although the 2017 report discussed a different approach
that States used to target taxes on Medicaid MCOs, it reflects the same
State motivations and implicates the same concerns for Federal fiscal
integrity.
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\16\ Letter from Dr. William J. Scanlon to Representative John
Dingell written on January 23, 1996. GAO/HEHS-96-76R State Medicaid
Financing Practices. https://www.gao.gov/products/hehs-96-76r.
\17\ See Department of Health and Human Services Office of the
Inspector General ``Pennsylvania's Gross Receipts Tax on Medicaid
Managed Care Organizations Appears to be an Impermissible Health
Care-Related Tax'' Issued May 2014 (A-03-13-00201) https://oig.hhs.gov/documents/audit/6720/A-03-13-00201-Complete%20Report.pdf
and ``Ohio's and Michigan's Sales and Use Taxes on Medicaid Managed
Care Organization Services Did Not Meet the Broad-Based Requirement
But Are Now In Compliance'' issued on April 2017 (A-03-16-00200)
https://oig.hhs.gov/documents/audit/6782/A-03-16-00200-Complete%20bReport.pdf.
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As the agency responsible for Federal oversight over the Medicaid
program, CMS attempted to address the concerns raised by the OIG, which
mirror our own concerns based on recent experience with particular
health care-related taxes that target Medicaid with a
disproportionately high tax burden. In 2019, we issued a proposed rule
with many financial provisions, one of which proposed to address the
B1/B2 statistical loophole issue (2019 proposed rule (84 FR 63722). The
2019 proposed rule was much broader in scope in terms of the number of
financial topics than this proposed rule. In addition, the terminology
in this proposed rule is more precise and technical than that used in
the corresponding provisions in the November 2019 proposed rule. While
the entirety of the November 2019 proposed rule was subsequently
withdrawn in January 2021, we indicated at the time that the withdrawal
action did not limit CMS' prerogative to make new regulatory proposals
in the areas addressed by the withdrawn proposed rule, including new
proposals that may be substantially identical or similar to those
described therein (86 FR 5105).
Since then, as CMS has reviewed State proposals involving these
problematic tax structures, we have advised States, and in some
instances notified States in writing, regarding our concerns. In some
cases, because a State's health care-related tax waiver proposal
satisfied current regulatory requirements to be considered generally
redistributive, we approved the proposal as required under the current
regulations that include the loophole but gave the State written notice
of our concerns. Specifically, CMS sent States with problematic taxes
``companion letters'' to their most recent tax waiver approvals
outlining why CMS believed that their taxes did not meet the spirit of
the law in terms of being ``generally redistributive'' because of the
much higher tax burden they imposed on Medicaid taxable units compared
to comparable non-Medicaid taxable units. In addition, we put these
States on notice through these letters that CMS was contemplating
rulemaking in this area and that those States should prepare for this
possibility in their budget planning.
Recently, we noticed an increase in both the number of health care-
related taxes that exploit the statistical loophole as well as an
increase in the revenue raised by those taxes. Before Federal fiscal
year (FFY) 2024, CMS was aware of five States with six taxes that
exploited the statistical loophole. The estimated total dollar revenue
collected by States related to these taxes at that time was
approximately $20.5 billion annually. In FFY 2025, CMS approved two
additional States' MCO tax waiver proposals that exploit the
statistical loophole that total $3.5 billion in estimated tax revenue
for the States. Notably, the State with the largest MCO tax that
exploits the statistical loophole submitted an update to its previously
approved MCO tax waiver, which increased the tax revenue from
approximately $8.3 billion per year to about $12.7 billion per year.
CMS estimates the total tax collection by States for all taxes that
exploit the loophole currently is approximately $23.6 billion per year.
Recent examples illustrate what occurs when the B1/B2 test alone
does not ensure that the tax is generally redistributive. In one MCO
tax that exploits the loophole (and that was approved by CMS because it
passed the B1/B2 test and met other applicable regulatory
requirements), Medicaid member months comprise 50 percent of all member
months subject to taxation, but bear more than 99 percent of the tax
burden due to the difference in tax rates for Medicaid and non-Medicaid
member
[[Page 20585]]
months. In a different State, Medicaid member months comprise 53
percent of the total member months taxed, but bear over 94 percent of
the tax burden. Instead of raising revenue by equally taxing non-
Medicaid and Medicaid services in a class, these tax programs raise
only a de minimis amount of revenue from non-Medicaid member months
while imposing a much greater tax burden on Medicaid member months.
They are examples of States maximizing taxation of Medicaid items and
services by design to minimize the impact for entities that serve
relatively lower percentages of Medicaid beneficiaries. This has an
effect similar to taxing only Medicaid MCOs (as opposed to all MCOs),
which is the practice the DRA amendments sought to eradicate, as
discussed previously. Allowing States to achieve something at odds with
the DRA amendments by exploiting a statistical loophole in the current
regulations undermines the cooperative Federalism central to the
structure of the Medicaid statute, as GAO has noted.\18\ For this
reason, CMS believes that it is necessary to address the statistical
loophole to ensure fiscal integrity of the Medicaid program.
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\18\ GAO-08-650T ``Medicaid Financing Long-standing Concerns
about Inappropriate State Arrangements Support Need for Improved
Federal Oversight'' April 3, 2008.
---------------------------------------------------------------------------
When taxes in the Medicaid program are not generally
redistributive, it can result in the Federal government as the only net
payer for payments funded by those taxes (generally, the non-Federal
share is generated by a tax on entities that receive at least their
total tax cost back in the form of increased Medicaid payments, with no
net contribution of any funds that are not Federal funds). Without any
net cost to the entities paying the tax, States and entities in the tax
class have an incentive to maximize health care-related tax collections
and maximize Medicaid payments possibly without regard to the Medicaid
services delivered or programmatic goals or outcomes, such as quality
or patient outcomes. This creates a substantial risk to the fiscal
integrity and effective operation of the Medicaid program, as reflected
in the impacts calculated in section V of this proposed rule.
Given recent State proposals and technical assistance requests,
national proliferation of taxes that utilize the B1/B2 statistical test
loophole presents a substantial and urgent risk to the fiscal integrity
of the Medicaid program. Absent the regulatory changes described in
this proposed rule, we are concerned that there will be significant
increases in Medicaid expenditures and shifting of State Medicaid costs
onto the Federal government, all without commensurate benefit
whatsoever to the Medicaid program or its beneficiaries. As previously
noted, CMS has witnessed the proliferation of MCO taxes that exploit
the statistical loophole and, in some instances, drastically increase
the revenues raised by existing MCO taxes. As a result, CMS is greatly
concerned that such increases will continue and similar tax structures
will be developed, further exacerbating the impact on the Federal
government. Moreover, CMS has learned as part of our review of tax
waiver proposals and communication with States that certain States are
using the revenue to fill shortfalls that exist in their State budgets
as opposed to reinvesting this money in the Medicaid program.
Furthermore, this influx of Federal share to State general funds could
be used as State-only financing for services not eligible for FFP, such
as the provision of non-emergency medical care for non-citizens without
satisfactory immigration status. Although States are permitted to use
health care-related tax revenue for other general revenue purposes, it
nevertheless highlights the importance of ensuring Federal matching
dollars are limited to the appropriate Federal share of financing the
Medicaid program, or else the Federal Medicaid contribution is
effectively financing these other endeavors.
While CMS has found taxes on MCOs to be the predominant class of
health care items and services utilizing this loophole, CMS is also
aware of other permissible classes vulnerable to this approach. CMS is
concerned that absent regulatory action, additional similar tax
programs that exploit the loophole may be developed. We believe that
this proposed rule will substantially address concerns of CMS and
outside oversight agencies by curtailing non-Federal share financing
arrangements that are counter to the statute and do not serve the best
interests of Medicaid beneficiaries, the Federal treasury, Federal
taxpayers, nor the long-term health and fiscal stability of the
Medicaid program as a whole. Health care-related taxes that use the
regulatory B1/B2 loophole create a substantial financial risk to the
Medicaid program (see section V of this proposed rule). This proposed
rule would mitigate this risk, safeguard the fiscal health of Medicaid,
and ensure appropriate use of Federal Medicaid dollars.
II. Provisions of the Proposed Regulations
CMS is clarifying and emphasizing our intent that if any provision
of this proposed rule, if finalized, is held to be invalid or
unenforceable by its terms, or as applied to any person or
circumstance, or stayed pending further action, it shall be severable
from the remainder of the final rule, and from rules and regulations
currently in effect, and not affect the remainder thereof or the
application of the provision to other persons not similarly situated or
to other, dissimilar circumstances. If any provision is held to be
invalid or unenforceable, the remaining provisions which could function
independently should take effect and be given the maximum effect
permitted by law. In this rule, we propose several provisions that are
intended to and will operate independently of each other, even if each
serves the same general purpose or policy goal. Where a provision is
necessarily dependent on another, the context generally makes that
clear.
A. General Definitions (Sec. 433.52)
We are proposing to add new definitions to 42 CFR 433 subpart B at
Sec. 433.52. We propose to add and define ``Medicaid taxable unit'' to
mean ``a unit that is being taxed within a health care-related tax that
is applicable to the Medicaid program. This could include units that
are used as the basis for Medicaid payment, such as Medicaid bed days,
Medicaid revenue, costs associated with the Medicaid program such as
Medicaid charges, or other units associated with the Medicaid
program.'' Although we had previously established the use of taxable
unit in preamble of prior rulemaking,\19\ we believe formalizing a
definition in regulation will allow us to better specify the inclusion
of factors in our consideration of whether a tax is generally
redistributive, which we will discuss in section II.B.
---------------------------------------------------------------------------
\19\ See 57 FR at 55128 (``By the term ``Medicaid Statistic,['']
we mean the number of the provider's taxable units applicable to the
Medicaid program.'')
---------------------------------------------------------------------------
We propose to add and define ``non-Medicaid taxable unit'' to mean
``a unit that is being taxed within a health care-related tax that is
not applicable to the Medicaid program. This could include units that
are the basis for payment by non-Medicaid payers, such as non-Medicaid
bed days, non-Medicaid revenue, costs that are not associated with the
Medicaid program, or other units not associated with the Medicaid
program.'' We believe it is important to define non-Medicaid taxable
units, despite the definition we are adding for Medicaid taxable unit,
to further State and other interested parties' understanding of what is
not
[[Page 20586]]
encompassed in the definition of Medicaid taxable unit.
We propose to add and define ``tax rate group'' to mean ``a group
of entities contained within a permissible class of a health care-
related tax that are taxed at the same rate.'' Our work on the
subsequent provisions of Sec. 433.68 (e)(3)(i), (ii), and (iii) led to
the development of this term to illustrate this concept succinctly, and
we therefore decided it would be beneficial to define it formally in
regulations as well. These provisions referred to groups of providers
or health care items and services taxed at the same rate. For the sake
of clarity and simplicity, we felt it easiest to use a single term to
refer to these types of groupings.
We invite comments on the inclusion of these terms, the definitions
we have proposed, and if there are any other terms used in this
proposed rule that should be included in the regulatory definitions as
well.
B. Permissible Health Care-Related Taxes--Generally Redistributive
(Sec. 433.68(e))
Section 1903(w)(3)(E)(ii)(I) of the Act provides that the Secretary
shall approve a State's application for a waiver of the broad based
and/or uniformity requirements for a health care-related tax, if the
State demonstrates to the Secretary's satisfaction that the tax meets
specified criteria, including that the net impact of the health care-
related tax and associated Medicaid expenditures as proposed by the
State is generally redistributive in nature.
In section II.C. of this proposed rule, we discuss additions we are
proposing to the regulatory language in Sec. 433.68(e)(3) to better
implement the statutory mandate that a tax be generally redistributive.
Those changes would necessitate conforming changes to the preceding
regulatory language to reflect the new requirement, if finalized.
Accordingly, we are proposing to amend Sec. 433.68(e) to provide that
a proposed tax must satisfy proposed new paragraph (e)(3), in addition
to, as applicable, paragraph (e)(1) or (2) of that section. The
addition of paragraph (e)(3) is discussed in section II.C. of this
proposed rule.
We further propose to amend paragraphs (e)(1)(ii), (iii), (iv),
(e)(2)(ii) and (iii) to add that the waiver must [satisfy] the
requirements of paragraph (e)(3) and (f), in addition to existing
requirements, for the waiver request to be approvable. Paragraph (f)
refers to the current regulatory implementation of limitations on hold
harmless arrangements in connection with health care-related taxes,
which we are not proposing to modify in this proposed rule. The
proposed addition of this reference to paragraph (f) in various places
in paragraph (e) is intended to enhance clarity, but not to make any
substantive change concerning hold harmless limitations. We note that
paragraph (e)(1)(iii) references taxes enacted prior to August 13,
1993. Although a new waiver submission for a tax in effect prior to
August 13, 1993, would be unlikely, it is still possible, (for example,
if a State makes a non-uniform change to its longstanding tax and needs
a waiver), and this proposal accounts for that possibility.
We seek comment on our proposed amendments to Sec. 433.68(e),
(e)(1)(ii) through (iv), (e)(2)(ii), (iii), and (iv) and on any
additional conforming regulatory edits that may be needed to reflect
that (e)(3), if finalized, would be a requirement to be approved for a
waiver of the broad-based and/or the uniformity requirement.
C. Permissible Health Care-Related Taxes--Additional Requirement To
Demonstrate a Tax Is Generally Redistributive (Sec. 433.68(e)(3))
CMS is seeking to address health care-related taxes that do not
have the effect of being generally redistributive despite being able to
pass the P1/P2 or B1/B2 test, as applicable, as previously discussed.
We believe that, in large part, the B1/B2 test has served its function
as a straightforward mathematical implementation of the statutory
requirement under section 1903(w)(3)(ii)(I) of the Act that to be
granted a waiver a tax must be generally redistributive. Although the
linear regression used in the B1/B2 analysis is vulnerable to certain
kinds of manipulation by States, as discussed in section I.D., CMS's
experience has shown that the B1/B2 test usually works as intended. In
this proposed rule, we aim to eliminate the possibility these
vulnerabilities will be exploited. As a result, we propose to retain
the B1/B2 test based on the long-term reliance of many States on it,
and its overall utility in accomplishing its purpose of ensuring that
taxes for which waivers are requested are generally redistributive in
conjunction with the proposed regulatory provisions that would close
the loophole. However, as demonstrated by the problematic taxes
discussed earlier that are designed to target Medicaid with increased
tax rates compared to other taxpayers, it is necessary to take our
analysis a step beyond the mathematical result of the B1/B2 test to
ensure we uphold the statutory mandate that a tax for which a waiver is
approved be generally redistributive, which we propose to do through
the addition of the requirements in proposed paragraph (e)(3). In
addition, as specified in existing statute and by cross reference in
regulation at section 1903(w)(1)(A)(iii) of the Act and Sec.
433.70(b), respectively, even if a tax passes the applicable
statistical test, it is still considered impermissible if it contains a
hold harmless arrangement prohibited by section 1903(w)(4) of the Act
and Sec. 433.68(f). Therefore, we propose to add cross-references to
Sec. 433.68(f) in regulatory language we are proposing to update in
Sec. 433.68(e)(1)(ii), (1)(iv), (2)(ii), and (2)(iii) regarding the
approvability of a tax waiver proposal.
As previously discussed, Sec. 433.68(e) specifies the applicable
statistical test for evaluating whether a proposed tax is generally
redistributive: if the State is seeking only a waiver of the broad-
based requirement, paragraph (e)(1) specifies that a State must meet
the test referred to as ``P1/P2'' described in section I.C. of this
proposed rule, while a State seeking a waiver of the uniformity
requirement or both the broad-based and uniformity requirements must
meet the test specified in paragraph (e)(2), referred to as ``B1/B2,''
also described in section I.C.
We propose to add new paragraph Sec. 433.68(e)(3), to ensure that
a health care-related tax is generally redistributive by preventing
taxes that impose higher tax rates on providers that primarily serve
Medicaid beneficiaries than on other providers that serve a relatively
smaller number of such beneficiaries. Specifically, at paragraph
(e)(3), we propose that the new requirements would apply on a per class
basis. We also propose that regardless of whether a tax meets the
standards in paragraph (e)(1) and (e)(2) the tax would not be
``generally redistributive'' if it has certain described attributes
that are contrary to the tax program being generally redistributive in
nature.
The proposed regulations would specify the attributes of a tax that
would violate the generally redistributive requirement in paragraphs
Sec. 433.68(e)(3)(i), (ii) and (iii). The applicability of these
provisions, and the associated analysis of whether a tax violates the
generally redistributive requirement, would differ based on whether the
tax or waiver indicates Medicaid explicitly. We discuss each of these
in turn. We note that, if this policy is finalized, it would not
interfere with a State's ability to implement otherwise permissible
State and locality taxes (that
[[Page 20587]]
is, taxes imposed by units of local government such as counties).
1. Taxes That Refer to Medicaid Explicitly
In Sec. 433.68 (e)(3)(i), we propose that if, within the
permissible class, the tax rate imposed on any taxpayer or tax rate
group based upon its Medicaid taxable units is higher than the tax rate
imposed on any taxpayer or tax rate group based upon its non-Medicaid
taxable units (except as a result of excluding from taxation Medicare
or Medicaid revenue or payments as described in paragraph (d) of this
section) the tax would not be generally redistributive. The proposed
regulations would also specify an example of a tax that would violate
this provision, though the example is not the only example of how a tax
might be structured to violate this requirement. The example we propose
in regulations text specifies that an MCO tax where Medicaid member
months are taxed $200 per member month whereas the non-Medicaid member
months are taxed $20 per member month would violate this requirement.
Medicaid would, in this context, also include descriptions where a
State uses its proper name of its State-specific Medicaid program.
In Sec. 433.68(e)(3)(ii), we propose that if within a permissible
class, the tax rate imposed on any taxpayer or tax rate group
explicitly defined by its relatively lower volume or percentage of
Medicaid taxable units is lower than the tax rate imposed on any other
taxpayer or tax rate group defined by its relatively higher volume or
percentage of Medicaid taxable units, it would not be generally
redistributive. This proposed regulation also would specify two
examples of taxes that would violate this provision, though the
examples are not intended to be the only examples of how a tax might be
structured to violate this requirement. The first example specifies
that a tax on nursing facilities with more than 40 Medicaid-paid bed
days of $200 per bed day while nursing facilities with 40 or fewer
Medicaid-paid bed days are taxed $20 per bed day would violate this
requirement. The second example we include in our proposed regulation
describes a tax on hospitals with less than 5 percent Medicaid
utilization at 2 percent of net patient service revenue for inpatient
hospital services, while all other hospitals are taxed at 4 percent of
net patient service revenue for inpatient hospital services; this tax
structure also would violate this requirement.
Health care-related taxes with the attributes described in the
examples in proposed Sec. 433.68(e)(3)(i) and (ii) are designed to
generate less tax revenue from non-Medicaid sources and more tax
revenue from Medicaid sources for the same amount of taxable services
or revenue, which is inconsistent with a generally redistributive tax.
This is counter to the Congressional intent and statutory direction
that non-broad based and non-uniform taxes that are granted a waiver be
generally redistributive. Based on our analysis, existing State taxes
that use the B1/B2 loophole described previously would all fail the
requirement in proposed Sec. 433.68(e)(3)(i). One existing State tax
that uses the loophole would also fail the requirement in proposed
Sec. 433.68(e)(3)(ii).
In these scenarios, targeting Medicaid taxable units with higher
tax rates than non-Medicaid taxable units helps ensure that taxed
entities, particularly those that serve no or relatively low
percentages of Medicaid beneficiaries that would be less able to be
made whole by additional Medicaid payments are generally not burdened
by any, or more than a de minimis, tax liability. As a result, the
State, its localities, and taxpayers do not appear to shoulder a net
non-Federal share, or appear to shoulder a significantly reduced net
non-Federal share, and the Federal government is the only net payer or
a substantially higher net payer than contemplated by statute. In
addition to this being counter to the statutory framework, this
presents a significant fiscal integrity risk to the Medicaid program as
States have significant flexibility with regard to payment methods,
which increases the financial obligation of the Federal treasury
without any inherent benefit to the Federal taxpayer. Without any non-
Federal entity incurring a net non-Federal share cost (or incurring a
reduced non-Federal share cost), there is reduced incentive for States
to propose payment methods that are efficient, economic, and consistent
with Federal requirements.
2. Waivers That Do Not Refer to Medicaid Explicitly
In Sec. 433.68(e)(3)(iii), we propose to prohibit a State from
imposing a tax that excludes or imposes a lower tax rate on a taxpayer
or tax rate group defined by or based on any characteristic that
results in the same effect as described in paragraph (e)(3)(i) or (ii).
In other words, there does not need to be an explicit reference to
Medicaid in the State's tax program if the State is using a substitute
definition, measure, attribute, or the like as a proxy for Medicaid to
accomplish the same effect. By ``the same effect,'' we mean imposing a
higher tax rate on Medicaid taxable units than on non-Medicaid taxable
units, even if this is accomplished with less mathematical precision
under an approach that does not explicitly reference Medicaid than
would be possible under an approach that violates proposed paragraph
(e)(3)(i) or (e)(3)(ii).
The proposed regulation would specify two examples of taxes that
would violate this provision, but does not provide an exhaustive list
of ways a tax might be structured to violate it. The first example
involves the use of terminology to establish a tax rate group based on
Medicaid without explicitly mentioning ``Medicaid'' (or the State-
specific name of the Medicaid program) to accomplish the same effect as
described in paragraph (e)(3)(i) or (ii). This example specifies that a
tax on inpatient hospital service discharges that imposes a $10 rate
per discharge associated with beneficiaries covered by a joint Federal
and State health care program and a $5 rate per discharge associated
with individuals not covered by a joint Federal and State health care
program would violate this requirement, because joint Federal and State
health care program describes Medicaid, and a higher tax rate is
imposed on Medicaid taxable units. The second example concerns the use
of terminology that creates a tax rate group that closely approximates
Medicaid, to the same effect as described in paragraph (3)(i) or (ii).
This example specifies that a tax on hospitals located in counties with
an average income less than 230 percent of the Federal poverty level of
$10 per inpatient hospital discharge, while hospitals in all other
counties are taxed at $5 per inpatient hospital discharge, would
violate this requirement, because the distinction being drawn between
tax rate groups is associated with a Medicaid eligibility criterion
(income) with a higher tax rate imposed on the tax rate group that is
likely to involve more Medicaid taxable units.
The intent of the proposed regulatory provision in paragraph
(e)(3)(iii) is to address potential efforts by States or local units of
government to mask a health care-related tax that falls more heavily on
Medicaid taxable units using some other terminology or defining factor
to circumvent the requirements in (e)(3)(i) and (ii) by avoiding
explicitly targeting Medicaid taxable units with higher tax rates. For
the same reasons described previously regarding taxes that would
violate (e)(3)(i) or (ii), such taxes would not meet the statutory
generally redistributive requirement and would have a substantially
negative impact on the fiscal integrity of the Medicaid program. Absent
this provision, CMS is concerned that if we
[[Page 20588]]
only finalized the requirements in Sec. 433.68(e)(3)(i) and (ii),
States might choose to pursue taxes that would otherwise be prohibited
under Sec. 433.68(e)(3)(i) and (ii) through the use of a proxy for
Medicaid.
We are proposing to codify this regulatory language with this level
of detail directly in response to feedback we received to a similar
proposal in the November 2019 proposed rule. Although we remain
committed to addressing the statistical loophole, as we were in the
November 2019 proposed rule, we acknowledge that the level of detail in
the November 2019 proposed rule might not have provided enough context
to give commenters an accurate picture of our intent. Under the
analogous provision of the 2019 proposed rule, we would have determined
a tax program not to be generally redistributive if it imposed an
``undue burden'' on the Medicaid program because the tax ``excludes or
imposes a lower tax rate on a taxpayer group defined based on any
commonality that, considering the totality of the circumstances, CMS
reasonably determines to be used as a proxy for the tax rate group
having no Medicaid activity or relatively lower Medicaid activity than
any other tax rate group.'' (84 FR 63778). The 2019 proposed rule may
not have presented a clear idea of how we would apply the requirement
to avoid imposing an undue burden on the Medicaid program. In this
proposed rule, we added language to Sec. 433.68(e)(3) to provide
reassurance to interested parties that these current proposals are
intended only to shut down the loophole to better effectuate the
statutory directive that health care-related taxes for which the broad-
based and/or uniform requirement is waived must be generally
redistributive, and not impact permissible State health care-related
tax programs unrelated to this goal. For example, in section II.A., we
propose to define ``Medicaid taxable unit'' to narrow the scope from
``Medicaid activity'' as used in the November 2019 proposed rule. We
also chose, in all paragraphs of paragraph (e)(3), to propose specific
illustrative examples that demonstrate our commitment to a clear,
specific, and predictable application of our regulations. We believe
that the illustrative examples will provide the public with a better
understanding of what this proposed provision would do and how we would
apply it in practice when evaluating State tax waiver proposals,
compared to the November 2019 proposed rule. We invite comment on other
examples we could provide, whether in final rule preamble or in
regulation text, that could make even clearer how we will implement the
proposed policies, if finalized.
Because the scenarios described in Sec. 433.68(e)(3)(iii) would
not name Medicaid explicitly, CMS would need to assess whether Medicaid
is nevertheless implicated, and whether the tax results in the same
effect as described in paragraph (3)(i) or (ii). Under this assessment,
we would examine the tax and waiver submission, including the
characteristics of each tax rate group description, the entities in the
tax rate group, and the Medicaid taxable units and non-Medicaid taxable
units associated with each tax rate group and entities in each tax rate
group. While no single factor we examine when Medicaid is not named
explicitly would result in an automatic determination by CMS that the
tax rate groups have been designed to target Medicaid, the mere fact
that a State has chosen to use language that does not specify Medicaid
explicitly, but appears to invoke it implicitly, will in and of itself
call for closer scrutiny. For example, if CMS analyzes a Medicaid
utilization table in a tax waiver submission (which lists providers,
their tax rates, and their Medicaid utilization) and observes that a
certain group of excluded providers described as ``Provider Group A''
has little to no Medicaid utilization, we will further scrutinize
``Provider Group A'' to ascertain whether it is a proxy for lack of
Medicaid utilization, as discussed further below.
Accordingly, we propose that CMS may examine whether the tax or
waiver uses terminology that describes Medicaid implicitly without
using the term itself, such as the ``joint Federal and State health
care program,'' used in our earlier example. This example is described
in proposed regulations text in Sec. 433.68(e)(3)(iii)(A). We would
also examine if the tax rate group is defined based on criteria that
mirror Medicaid eligibility or other defining characteristics, such as
a data point that is associated with Medicaid or a Medicaid eligibility
criterion like income (such as percentages of low-income individuals in
a geographic area), or a particular provider type that is associated
with high Medicaid utilization (such as State or other public
facilities and university/teaching hospitals). This income-associated
example is described in proposed regulation text in Sec.
433.68(e)(3)(iii)(B).
This initial analysis, and the subsequent analysis for whether the
tax is generally redistributive, would fit into our regular review work
and interactions with States. When CMS reviews a tax waiver submission,
we assess the waiver for compliance with all applicable statutes and
regulations. This assessment is not necessarily limited to the waiver
submission itself, or to the materials as first submitted by the State.
Upon review, we generally tailor a set of questions for the State to
obtain any additional information necessary to adjudicate the waiver
request or request revisions necessary for the submission to meet
Federal requirements. For example, we might ask for clarification based
on something we did not understand, that we want to confirm, or that
may be in error. We regularly have additional discussions with the
State, which may include technical assistance phone calls, and State
submission of updated or additional materials. The process is both
collaborative and iterative, to allow States to vary their taxes in
ways appropriate for their individual circumstances, and to allow CMS
to arrive at an appropriate approvability decision based on Federal
requirements. An assessment of whether or not a State is utilizing a
proxy in violation of proposed paragraph (e)(3)(iii) would be conducted
under this same process. If we analyze a Medicaid utilization table and
observe a disparate set of rates for higher and lower Medicaid
utilization tax rate groups despite the tax passing B1/B2, and we
cannot readily determine how the tax rate groups have been constructed,
we would ask the State for additional information as is part of our
standard practice. Consistent with our existing practice, this allows
the State to identify for CMS any necessary clarifications or
explanations that informed the development of the tax rate groups. The
additional information we obtain from the State could allow us to
determine that the tax rate groups were not constructed to target
taxation to higher Medicaid utilization tax rate groups or away from
lower Medicaid utilization tax rate groups, but instead for a
legitimate public policy purpose not directed at manipulating relative
tax burden.
The proposed provision in Sec. 433.68(e)(3)(iii) is not intended
to prevent States from designing tax rate groups to achieve legitimate
public policy goals, when these do not prevent the tax from being
generally redistributive. In this context, by ``legitimate,'' we mean
any public policy goal that the State may lawfully pursue, which is the
State's actual purpose and not a spurious or fictive or purpose offered
to conceal or negate a true purpose of directing higher relative tax
[[Page 20589]]
burden to the Medicaid program. This type of assessment is already
historically reflected in the consideration CMS gives to certain non-
uniform taxes under Sec. 433.68(e)(2)(iii)(B), where CMS permits a
lower threshold to pass the B1/B2 test for taxes that provide more
favorable tax treatment only for specified types of entities, including
sole community hospitals as defined in 42 CFR 412.92. A ``sole
community hospital'' (SCH) generally is a hospital that is the only
hospital in its geographic area and therefore serves as the sole source
of inpatient hospital services for the vulnerable population in the
area. Because these hospitals play vital roles in providing access to
care to beneficiaries, they were included in the statutory and
regulatory flexibilities built into the statistical test in recognition
of their importance to recipient access to services (57 FR 55118
through 55129).
For example, a State establishing a nursing facility tax program,
within which a tax rate group for a provider type such as continuing
care retirement communities (CCRCs) is subject to a lower tax rate for
public policy reasons, would not, in and of itself, violate
(e)(3)(iii), even if the CCRC tax rate group happens to have lower
Medicaid utilization than other tax rate groups in the tax program. In
this case, we would consider that the designation of CCRCs exists
outside of the health care-related tax domain, and, for taxation
purposes within the CCRC designation, the tax rate is not
differentiated between Medicaid and non-Medicaid taxable units. CCRCs
are licensed by the States in which they are located; this is not a
classification or designation that the State created for the purposes
of establishing health care-related tax provider groups or otherwise to
minimize the impact on non-Medicaid providers or taxable units.
As another example, a State might seek to exclude providers located
in rural areas from taxation. States often afford special consideration
for rural providers as a means of helping preserve beneficiary access
to services in rural areas that otherwise might not have a sufficient
number of qualified providers to serve the needs of Medicaid
beneficiaries. Like sole community hospitals, the existing regulations
in Sec. 433.68(e)(2)(iii)(B) currently provide additional flexibility
for States in designing non-uniform tax waivers that favor rural
hospitals. A tax structure that excluded rural providers without any
explicit reference to Medicaid would likely not fall within the proxy
provision. Generally, because the provider group would be defined by a
pre-existing classification that exists for various public policy
purposes apart from taxation (rural location) and because the tax
treatment within the classification of rural providers would not vary
between Medicaid and non-Medicaid taxable units, there would not appear
to be an indication that the State is using the taxpayer rate group to
direct tax burden to the Medicaid program or away from providers with
relatively lower Medicaid utilization. When, by chance, a State effort
to design a tax program in support of a public policy purpose like
promoting health care access results in a tax rate group that happens
to have lower Medicaid utilization ending up with a tax break, some
States may balance this with a corresponding break for higher Medicaid
utilization providers. Nothing in the proxy provision would prevent
States from being able to balance tax rate groups in this way as they
have in the past. Other possible examples of tax rate groups that
States may wish to give a tax break to for policy reasons not related
to directing higher relative tax burden to the Medicaid program include
psychiatric hospitals and rural hospitals, among others. These
instances would be permissible under proposed paragraph (e)(3)(iii)(B)
because the State has a legitimate public policy reason not related to
directing relative tax burden toward the Medicaid program for giving
preferential tax treatment to the tax rate group for the type of
provider in question.
As noted, the groupings discussed in the previous paragraphs exist
for policy reasons outside of the context of taxation, indicating they
were not created solely for the purpose of the tax and waiver under
review. Conversely, a possible signal that a State is trying to exploit
the loophole for a reason that is not tied to legitimate public policy
would be the State's use of groupings that do not appear to have a
connection to a reasonable policy purpose. This would indicate to CMS
that we need to investigate further to determine if the State's
proposal would lack a legitimate policy purpose and would impose
disproportionate burden on Medicaid. Examples of groupings that could
have a legitimate policy purpose include grouping providers within a
permissible class by number of bed days for an inpatient hospital
services tax and member months for managed care plan services tax. In
these instances, the grouping uses health care-associated
quantification measures. We note that this would not be the sole factor
to determine whether a State has a legitimate public policy interest
when establishing tax groupings; groupings like this would simply not
raise the same red flags as groupings unrelated to health or tax
policy.
An example of a grouping that does not appear to have a connection
to a legitimate policy purpose (and that would prompt further inquiry)
could include a feature of the physical plant of facility in question.
For example, if a State was targeting a specific hospital with very
high Medicaid utilization, and that hospital was unique in having two
separate exterior entrances to the emergency department, the State
might construct inpatient hospital tax rate groups based on the number
of exterior entrances to the emergency department. CMS might see this
on review of a waiver submission, and it would prompt additional
questions to the State as part of our typical practice of assessing
waiver submissions to understand the rationale for assigning tax rates
in this manner, because it is not evident how incentivizing hospital
emergency departments through taxation to have (or not to have) a
particular number of separate exterior entrances to the emergency
department would advance a legitimate State public policy goal.
CMS does not intend for Sec. 433.68(e)(3) to target any taxes
other than those that utilize the loophole in the B1/B2 test. CMS would
apply this proposed provision narrowly, to reach only those situations
where, based on considerations not related to a legitimate public
policy goal as discussed previously, CMS determines that a State is
attempting to mask that it is seeking to apply a higher tax rate based
on a taxpayer's or tax rate group's Medicaid taxable units in a manner
that, if done explicitly, would violate Sec. 433.68(e)(3)(i) or (ii)
of the proposed rule.
D. Permissible Health Care-Related Taxes--Transition Period (Sec.
433.68(e)(4))
We have made every effort to ensure the impact of this proposed
rule would be limited to those health care-related taxes that exploit
the statistical loophole. Moreover, we understand that the updated
requirements proposed in previous sections of this rule would require
those States with such taxes to modify or end them, or experience a
reduction in medical assistance expenditures eligible for FFP. Our aim
is to close the loophole as soon as possible, while acknowledging State
circumstances. Therefore, we are proposing to provide a transition
period only for those currently identified States
[[Page 20590]]
that would be out of compliance with proposed Sec. 433.68 (e)(3), if
finalized, that have not received the most recent approval within the
past 2 years.
If this rule is finalized, States that received the most recent
waiver approval for their tax that does not comply with Sec. 433.68
(e)(3) 2 years or less from the effective date of the final rule would
not be eligible for a transition period. Consistent with the other
policies proposed in this rule, this will not affect any non-loophole
taxes. The transition period, when applicable, would apply to those tax
waivers that have been most recently approved by CMS more than 2 years
prior to the effective date of a final rule. The transition period
length would be the length of time between the effective date of the
final rule and when the State's health care-related tax waiver that no
longer conforms to regulatory requirements would have to be modified or
discontinued to avoid a reduction in medical assistance expenditures.
This timing would allow those affected States at least one full State
fiscal year to adjust the tax in order to come into compliance. It is
our understanding that this timing would give the States that fall into
this category one full budget cycle to come into compliance.
We propose to look at the most recent approval date of the waiver
in which the State utilizes the loophole. For example, if a State has a
health care-related tax for which it most recently obtained approval
for a waiver on July 1, 2016, and the effective date of the final rule
is January 1, 2026, the 1-year transition period would apply because
the initial tax waiver was most recently approved more than two
calendar years before the effective date of the final rule. We invite
comment on the length of time since a waiver was most recently approved
and the time of the transition period applicable to those lengths of
time, including whether the transition periods should be shorter or
longer, and specifically whether the lengths of the transition periods
should be adjusted to account for States that have a 2-year legislative
cycle (see related discussion later in this section).
Specifically, we propose first that States with health care-related
tax waivers that do not meet the requirements of paragraph (e)(3),
where the date of the most recent approval of the waiver that violates
paragraph (e)(3) occurred 2 years or less before [EFFECTIVE DATE OF A
FINAL RULE], are not eligible for a transition period. Any collections
made under that waiver following [EFFECTIVE DATE OF A FINAL RULE] may
be subject to deduction from medical assistance expenditures as
described in Sec. 433.70(b). For example, if a State most recently
received approval for a tax loophole waiver on December 10, 2024, and
the final rule effective date is January 14, 2026, the State's waiver
will no longer be valid on January 14, 2026. To avoid a reduction in
medical assistance expenditures before calculation of FFP, the State
must cease collecting revenue from the health care-related tax that
does not meet the requirements of Sec. 433.68 immediately as of the
effective date of the final rule, because there is no transition period
applicable to this waiver.
Second, we propose that ``States with health care-related tax
waivers that do not meet the requirements of paragraph (e)(3), where
the date of the most recent approval of the waiver that violates
paragraph (e)(3) occurred more than two years before [EFFECTIVE DATE OF
A FINAL RULE],'' must either ``submit a health care-related tax waiver
proposal that complies with paragraph (e)(3) with an effective date no
later than the start of the first State fiscal year beginning at least
one year from [EFFECTIVE DATE OF A FINAL RULE],'' or ``otherwise modify
the health care-related tax to comply with this rule and all other
applicable Federal requirements with an effective date not later than
the start of the first State fiscal year beginning at least one year
from [EFFECTIVE DATE OF A FINAL RULE].'' For example, if we finalize
this policy and the final rule has an effective date of January 14,
2026, and a State's fiscal year begins April 1, 2026, that State would
need to submit a compliant health care-related tax waiver, or otherwise
address the tax waiver's noncompliance, with an effective date no later
than April 1, 2027. If a State's fiscal year begins January 1, 2026,
and again the rule's effective date is January 14, 2026, that State
would need to take corrective action with an effective date no later
than January 1, 2028.
As reflected in the proposed regulatory language, we are proposing
that States with a transition period would have until the start of the
first State fiscal year beginning at least 1 year from the effective
date of the final rule to be in compliance. We believe providing one
full State fiscal year for States with a most recent approval more than
2 years before the effective date of the final rule is an appropriate
timeframe for several reasons. First, we considered that past
rulemaking that involved transition periods often had longer transition
times in consideration of States that might have biennial legislative
sessions. To our knowledge, all the potentially affected States (that
is, States that have currently approved tax waivers that take advantage
of the statistical loophole and would not comply with paragraph (e)(3),
if finalized) have annual legislative sessions, which should give them
sufficient time for their respective legislatures to enact any
necessary changes. Second, we note that Sec. 433.72(c)(2) specifies
that a waiver will be effective for tax programs commencing on or after
August 13, 1993, on the first day of the calendar quarter in which the
waiver is received by CMS. For instance, in the event of an October 15,
2025, effective date for the final rule, a State with a 1-year
transition period and a State fiscal year that begins July 1 would have
until September 30, 2027, to submit a waiver package with a July 1,
2027, effective date. In this case, States would have nearly three
extra months to submit a compliant waiver. Depending on when a State's
fiscal year begins relative to the final rule's effective date, if
finalized, a State eligible for the transition period may have
approximately 2 years to remedy a noncompliant tax waiver under our
proposal.
We are not proposing a transition period for waivers with the most
recent approval date 2 years or less before the effective date of the
final rule for several reasons. States that would fall into this
category, if finalized, obtained their most recent approval knowing
that CMS intended to undertake rulemaking in this area, as was
communicated in a companion letter with the approval. We believe it has
been incumbent upon States to assess the risk of having a waiver deemed
prospectively impermissible in the future if related policy changes are
finalized (including within a short timeframe) when determining whether
to submit a waiver request that exploits the loophole. Although this
circumstance could be administratively burdensome for States to
address, an affected State would have risked that burden by requesting
the exploitative waiver, and by not taking corrective action sooner,
and with no guarantee of any type of transition period. Finally, we
note that States with new tax loophole waiver proposals pending before
CMS as of the effective date of a final rule, if finalized, would
likewise not be eligible for a transition period.
In addition, we previously signaled in the November 2019 proposed
rule that this is a policy area we want to address. As part of our
standard health care-related tax waiver approval letters of the broad-
based and/or uniformity requirements, CMS informs States that ``any
changes to the Federal
[[Page 20591]]
requirements concerning health care-related taxes may require the State
to come into compliance by modifying its tax structure.'' Based on both
these signals, and on this current rulemaking activity, we believe that
States in general should be sufficiently aware of our intent to make
changes in this area and their responsibility to adjust accordingly.
Furthermore, of the seven States with existing loophole waivers
that we have identified as of the date of this proposed rule, four have
been issued companion letters with their most recently approved tax
waiver letters, and all four waivers with approval dates within 2 years
of a potential final rule effective date are included in those that
received this notice. These companion letters were intended to notify
these States that we viewed their tax structures as problematic and
intended to address the issue through notice and comment rulemaking
soon.
There are three States that have not been issued companion letters
that we expect to be affected by this proposed rule, if finalized.
Although we believe that they should still be sufficiently informed
through previous actions that signaled our intent to address the
loophole issue, we have communicated with these States directly, as
part of our standard practice of offering technical assistance to
States. They also would all be eligible for a transition period under
this proposed rule, if finalized. Likewise, we are offering technical
assistance to all States that we anticipate might be impacted by this
proposed rule to ensure all are aware of the proposed requirements and
timeframes and will be well positioned to meet them in the event these
requirements are finalized as proposed.
Regardless of whether a State would receive a transition period for
its waiver, we would consider a tax waiver proposal to be in compliance
with the requirements proposed in this rule if (and when) the tax in
question is generally redistributive as described in section
1903(w)(3)(E)(ii)(I) of the Act and Sec. 433.68(e). We note that the
proposal would also need to meet all other requirements for tax waiver
proposals and health care-related taxes in general, which still
includes the P1/P2 test and B1/B2 test, where applicable, in addition
to the new requirements in paragraph (e)(3), if finalized. It does not
mean CMS will automatically approve a waiver renewal or amendment
request. CMS will still closely examine any renewals or amendments
associated with taxes that exploit the loophole for any other
violations of statutory and regulatory requirements, including hold
harmless. CMS routinely provides technical assistance to States prior
to the formal submission of a tax waiver proposal and would provide
similar assistance to affected States upon request.
Alternatively, States are permitted to adjust the taxes in question
in such a way as to be compliant with Federal requirements and not need
to submit a new tax waiver proposal. Specifically, States are permitted
to make uniform changes to the structure of a tax without submission of
a new tax waiver. For example, a uniform change might be a change to a
tax that reflects the same percentage tax rate change for every tax
rate group of providers. In this example, assume that a State has a tax
on inpatient hospital services, and it has two tax rate groups:
``Hospital Type A'' and ``Hospital Type B.'' The State has an approved
tax waiver where it charges Hospital Type A $100 per discharge and
Hospital Type B $10 per discharge. The State wishes to make a 10
percent reduction in the tax amount for both tax rate groups: Hospital
Type A would be taxed $90 per discharge and Hospital Type B would be
taxed $9 per discharge. Because the tax rates have changed by the same
percentage for all providers, this constitutes a uniform change, and a
State would not need to submit a new tax waiver to CMS. In addition, a
State might adjust a tax in a manner that no longer requires a waiver,
and therefore does not need to submit a new waiver to CMS. For example,
a State may wish to adjust its tax to be imposed on all non-Federal,
non-public entities, items, and services within a permissible class and
to be applied consistently in amount/rate across all taxable units. The
tax would also need to comply with the hold harmless provisions
specified at Sec. 433.68(f), but we would consider such a tax to be
broad-based and uniform, and it would not require a waiver at all. CMS
intends to monitor the individual circumstances of States that would be
affected by this proposed rule, if it is finalized, to ensure that
affected taxes have been amended if we do not receive a new tax waiver
request for review and approval.
As stated, it is not our intention to be disruptive to States'
health care-related tax programs. We acknowledge that this rule, if
finalized, would require some States to make changes, with different
applicable timeframes. However, we believe the proposed rule would
likely have a minimal impact on the total amount of tax revenue States
could collect because a State's ability to collect taxes will remain
unchanged. In other words, affected States would have ample opportunity
to modify their existing taxes to come into compliance with all
requirements and maintain the same or similar level of revenue
collection, if that is the State's policy choice. Further, CMS
anticipates that loophole taxes modified to comply with the proposed
rule would necessarily result in increased financial benefit to
taxpayers that serve relatively high percentages of Medicaid
beneficiaries, in the sense that they would no longer bear a
disproportionate tax burden in relation to taxpayers that serve
relatively lower percentages of Medicaid beneficiaries. We are also
considering and soliciting comment on whether the final rule should
instead include transition period lengths for each category of State
waivers by permissible class, such as different lengths of time for
inpatient hospital taxes versus MCO taxes. We invite comment on whether
different permissible classes would be more or less burdensome to
rectify a tax waiver that would be impermissible under this proposed
rule, if finalized. Finally, we propose that, once the transition
period for a tax waiver that qualifies under paragraph (e)(4) has
expired, if applicable, CMS may deduct from a State's medical
assistance expenditures revenues from health care-related taxes that do
not meet the requirements of paragraph (e)(3) as specified by section
1903(w)(1)(A)(iii) of the Act and Sec. 433.70(b). For States without a
transition period, this would begin immediately following the effective
date of a final rule. Under Sec. 433.70(b), CMS can deduct from a
State's medical assistance expenditures, before calculating FFP,
revenues from health care-related taxes that do not meet the
requirements of Sec. 433.68. However, we assure States with a
transition period that payments made with revenue collected during the
transition period in accordance with an approved, existing loophole
waiver would not be subject to disallowance on the basis of these new
proposed regulatory requirements, if finalized. In the event that
additional States submit waivers that exploit the loophole, and these
waivers are approved prior to the effective date of any final rule,
they would also be issued a companion letter with their tax waiver
approval letter and would not receive a transition period under an
eventual final rule.
We are proposing multiple alternatives to the transition period
policies proposed in this section. First, we propose, alternatively,
that waivers that do not comply with proposed Sec. 433.68(e)(3)
approved within the past 3 years before the effective date of a final
rule would not receive a transition
[[Page 20592]]
period. As compared to the proposed policy, this 3-year period would
include an additional, currently approved tax waiver that exploits the
loophole, for a total of five loophole tax waivers that would not
receive a transition period, instead of four waivers. We did send a
companion letter with the most recent approval for this additional
loophole tax waiver, so under this alternative transition period, all
States with loophole tax waivers that would not receive a transition
period still would have received a companion letter expressly notifying
the State of our concerns about its tax structure with the most recent
waiver approval. We further propose, alternatively, to extend this
either 2 or 3-year timeframe as may be needed in a final rule to
capture the four most recently approved loophole tax waivers (if we
finalize a 2-year transition period) or five most recently approved
such waivers (if we finalize a 3-year transition period), to ensure
that these specific waivers (with which most recent approval we sent
the State a companion letter) do not receive a transition period.
Finally, we are considering an alternative to our proposal of no
transition period for more recently approved loophole tax waivers and a
1-year transition period for loophole tax waivers with longer-standing
most recent approvals. First, alternatively, we propose to offer no
transition period for any loophole waiver, regardless of the time since
the most recent approval of the waiver. Second alternatively, we
propose that loophole waivers approved in the 2 years (or 3 years)
before the effective date of a final rule would receive a 1-year
transition period instead of no transition period, and the longer-
standing most recent waiver approvals (more than 2 or 3 years before
the effective date of a final rule) would receive a 2-year transition
period. We invite comment on the transition periods, including whether
any of the proposed cutoff timeframes and/or transition period lengths
should be shorter or longer. We also invite comment on whether any of
the policies in this proposed rule would be disruptive to existing
State tax waivers that do not exploit the statistical loophole.
III. Collection of Information Requirements
Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et
seq.), we are required to provide 60-day notice in the Federal Register
and solicit public comment before a ``collection of information,'' as
defined under 5 CFR 1320.3(c) of the PRA's implementing regulations, is
submitted to the Office of Management and Budget (OMB) for review and
approval. To fairly evaluate whether an information collection should
be approved by OMB, section 3506(c)(2)(A) of the PRA requires that we
solicit comment on the following issues:
The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection
burden.
The quality, utility, and clarity of the information to be
collected.
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
We are soliciting public comment on each of these issues for the
following sections of this document that contain information collection
requirements. Comments, if received, will be responded to within the
subsequent final rule (CMS-2448-F, RIN 0938-AV58).
A. Wage Estimates
To derive average costs, we used data from the US Bureau of Labor
Statistics' May 2024 National Occupational Employment and Wage
Statistics for all salary estimates (https://www.bls.gov/oes/tables.htm). In this regard, Table 1 presents BLS' mean hourly wage,
our estimated cost of fringe benefits and other indirect costs
(calculated at 100 percent of salary), and our adjusted hourly wage.
Table 1--National Occupational Employment and Wage Estimates
----------------------------------------------------------------------------------------------------------------
Fringe benefits
Mean hourly and other Adjusted hourly
Occupation title Occupation code wage ($/hr) indirect costs wage ($/hr)
($/hr)
----------------------------------------------------------------------------------------------------------------
Health care Support Worker.................. 31-9099 23.44 23.44 46.88
----------------------------------------------------------------------------------------------------------------
As indicated, we are adjusting our employee hourly wage estimates
by a factor of 100 percent. This is necessarily a rough adjustment,
both because fringe benefits and other indirect costs vary
significantly from employer to employer, and because methods of
estimating these costs vary widely from study to study. Nonetheless, we
believe that doubling the hourly wage to estimate total cost is a
reasonably accurate estimation method.
B. Proposed Information Collection Requirements
The following sections of this rule contain proposed collection of
information requirements (or ``ICRs'') that are or may be subject to
OMB review and approval under the authority of the PRA. Our analysis of
the proposed requirements and burden follow. For this rule's full
burden implications, please see the Regulatory Impact Analysis under
section V. of this preamble.
1. ICRs Regarding General Definitions (Sec. 433.52)
We do not anticipate that any of the proposed definition changes
(adding and defining ``Medicaid taxable unit,'' ``non-Medicaid taxable
unit,'' and ``tax rate group'') will result in the need for States to
amend existing or create new State Plan or policy documents.
Consequently, such changes are not subject to the requirements of the
PRA.
2. ICRs Regarding Tax Waiver Submissions (Sec. 433.68)
The following proposed changes will be submitted to OMB for review
under control number 0938-0618 (CMS-R-148).
Under the current regulations, States may submit a waiver to CMS
for the broad-based requirements (all providers within a defined class
must be taxed) and/or the uniformity requirements (all providers within
a defined class must be taxed at the same rate) for any health care
related tax program which does not conform to the broad based or
uniformity requirements under Sec. 433.68. For a waiver to be approved
and a determination that the hold harmless provision (for example,
guaranteeing to
[[Page 20593]]
repay taxpayers the cost of the tax) is not violated, States must
submit written documentation to CMS which satisfies the quarterly
reporting and recordkeeping requirements under Sec. 433.74(a) through
(d). Without this information, the amount of FFP payable to a State
cannot be correctly determined.
Uniformity Requirements Waiver: 20 A State must
demonstrate that its tax plan is generally redistributive by
calculating the ratio of the slopes of two linear regressions,
generally resulting in a value of 1.0 or higher. Under the changes in
this proposed rule, States would still need to demonstrate this
calculation, and the waiver proposal must reflect a tax that is
generally redistributive under the requirements in proposed new
paragraph Sec. 433.68(e)(3) (entitled, ``Additional requirement to
demonstrate a tax is generally redistributive''). However, this rule
proposes to address an inadvertent regulatory loophole related to the
current statistical test to ensure that taxes passing the test are
generally redistributive. The loophole essentially allows States to
shift the cost of financing the Medicaid program to the Federal
government. As indicated in section II of this preamble, we are
proposing to close the loophole in the statistical test by:
---------------------------------------------------------------------------
\20\ We note that these policies, if finalized, will also apply
to broad-based waivers; however, because we are focusing our
estimates on existing waivers that exploit the loophole, we are only
discussing the uniformity waiver in this section.
---------------------------------------------------------------------------
Prohibiting States from explicitly taxing Medicaid units
at higher tax rates than units of other payors.
Prohibiting State gaming through ``proxy'' terminology.
Including a transition period for States with existing
loophole taxes.
We anticipate that the provisions of this proposed rule may require
seven States to submit a total of eight new waiver proposals within 2
years of the effective date of the subsequent final rule that
demonstrate compliance with the updated requirements. This number is
based on the number of States that currently have tax waivers that
exploit the loophole, and reflects that one State has two waivers.
Although the submission of a new waiver is not the only way to address
the requirements of this proposed rule, for purposes of scoring the
impact of this rule we will assume all seven States will go this route,
as we believe it is the most likely and we have no reliable way of
knowing how each State may choose to proceed. However, some States may
choose to restructure their taxes in a manner that does not require
them to submit a new waiver request. Existing tax waivers that do not
exploit the statistical loophole are not affected and, therefore, have
no added requirements and burden.
Consistent with our active (or currently approved) estimates under
the aforementioned OMB control number, we continue to estimate that it
would take 80 hours at $46.88/hr. for a health care support worker to
prepare and submit the waiver request. In aggregate, we estimate one-
time burden of 640 hours (8 waivers x 80 hrs./waiver) at a cost of
$30,003.20 (640 hr. x $46.88/hr.). When taking into account the Federal
administrative match of 50 percent, we estimate a one-time State cost
of $15,001.60 ($30,003.20 * 0.5).
Consistent with our active collection of information request, this
proposed rule does not provide States with a waiver form or template.
Instead, instruction for preparing and submitting the waiver is
provided the aforementioned rules and what is codified in Sec. Sec.
433.68 and 433.72.
Outside of the revised waiver, we do not anticipate that the
proposed changes will result in the need for States to amend existing
or create new State Plan or policy documents. Consequently, we are not
setting out such burden.
C. Summary of Burden Estimates for Proposed Requirements
Table 2--Proposed One-Time Burden Estimate
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Time per Labor
Regulation Section(s) under Title 42 OMB Control No. (CMS ID Respondents Responses (per State) Total response Total time costs ($/ Total cost State cost
of the CFR No.) responses (hr) (hr) hr.) ($) ($)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Waiver Documentation (Sec. 433.68).. OMB 0938-0618 (CMS-R-148) 7 States.................. 1 or 2................... 8 80 640 46.88 30,003 15,001
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
D. Submission of PRA-Related Comments
We have submitted a copy of this proposed rule to OMB for its
review of the rule's information collection requirements. The
requirements are not effective until they have been approved by OMB.
To obtain copies of the supporting statement and any related forms
for the proposed collections discussed previously, please visit the CMS
website at https://www.cms.gov/regulations-and-guidance/legislation/paperworkreductionactof1995/pra-listing, or call the Reports Clearance
Office at 410-786-1326.
We invite public comments on these potential information collection
requirements. If you wish to comment, please submit your comments
electronically as specified in the DATES and ADDRESSES sections of this
proposed rule and identify the rule (CMS-2448-P, RIN 0938-AV58), the
ICR's CFR citation, and the OMB control number.
IV. Response to Comments
Because of the large number of public comments we normally receive
on Federal Register documents, we are not able to acknowledge or
respond to them individually. We will consider all comments we receive
by the date and time specified in the DATES section of this preamble,
and, when we proceed with a subsequent document, we will respond to the
comments in the preamble to that document.
V. Regulatory Impact Analysis
A. Statement of Need
This proposed rule would eliminate an inadvertent loophole in
existing health care-related tax waiver regulations and strengthen
CMS's ability to enforce section 1903(w)(3)(E) of the Act. These
changes are necessary to address taxes that align with existing
regulations but do not meet the requirement of the statute due to a
statistical loophole that exists in the regulations. These provisions
of the proposed rule are narrowly tailored to address this problem and
enable CMS ability to enforce its new requirements, if finalized, with
care to ensure that existing tax waivers that do not exploit the
statistical loophole are not affected. All other changes are conforming
or technical changes and related to this primary objective of closing
the loophole. As reflected further in this section, the financial
impact on the Federal government of the existing problem is large, and
the potential for this problem to proliferate further demands swift
action.
[[Page 20594]]
B. Overall Impact
We have examined the impacts of this rule as required by Executive
Order 12866, ``Regulatory Planning and Review,'' Executive Order 13132,
``Federalism,'' Executive Order 13563, ``Improving Regulation and
Regulatory Review,'' Executive Order 14192, ``Unleashing Prosperity
Through Deregulation,'' the Regulatory Flexibility Act (RFA) (Pub. L.
96354), section 1102(b) of the Social Security Act, and section 202 of
the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4).
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select those regulatory approaches that
maximize net benefits (including potential economic, environmental,
public health and safety, and other advantages; and distributive
impacts;). Section 3(f) of Executive Order 12866 defines a
``significant regulatory action'' as any regulatory action that is
likely to result in a rule that may: (1) have an annual effect on the
economy of $100 million or more or adversely affect in a material way
the economy, a sector of the economy, productivity, competition, jobs,
the environment, public health or safety, or State, local, or tribal
governments or communities; (2) create a serious inconsistency or
otherwise interfere with an action taken or planned by another agency;
(3) materially alter the budgetary impact of entitlements, grants, user
fees, or loan programs or the rights and obligations of recipients
thereof; or (4) raise novel legal or policy issues arising out of legal
mandates, or the President's priorities.
A regulatory impact analysis (RIA) must be prepared for major rules
with significant regulatory action/s and/or with significant effects as
per section 3(f)(1) ($100 million or more in any 1 year). Based on our
estimates using a ``no action'' baseline, OMB's Office of Information
and Regulatory Affairs has determined this rulemaking is significant
per section 3(f)(1)). Accordingly, we have prepared an RIA that to the
best of our ability presents the costs, benefits, and transfers of the
rulemaking. Therefore, OMB has reviewed these proposed regulations, and
the Departments have provided the following assessment of their impact.
Executive Order 14192, titled ``Unleashing Prosperity Through
Deregulation,'' was issued on January 31, 2025. For E.O. 14192
accounting purposes, savings to the Federal government that are
classified as transfers in regulatory impact analyses do not count as
cost savings.
C. Detailed Economic Analysis
To enforce the requirement that taxes have a net impact that is
``generally redistributive'' in accordance with section
1903(w)(3)(E)(ii)(I) of the Act when a State is seeking a broad-based
and/or uniformity waiver, CMS established certain tests such as the P1/
P2 and the B1/B2 tests. These tests are described in detail in section
I.C. of this proposed rule.
To determine the economic impact of this rule, we started with
information collected by CMS on provider taxes that we anticipate would
be affected by these changes, if finalized. We identified eight taxes
in seven States that would be affected by this proposed rule, if
finalized. This data is collected via the Form CMS-64 \21\ and through
State submissions for waivers, and to a lesser extent, as part of State
plan amendments and State-directed payment preprints. The information
collected included: the type of provider or health care-related entity
taxed (for example, MCOs or hospitals); the expected amount of tax
revenue to be collected; the percentage of total tax revenue paid based
on association with Medicaid (the Medicaid taxable units); and the
percentage that Medicaid constitutes of the total tax base for the
relevant permissible class for the tax. In these eight cases, the
amount of tax revenue paid based on Medicaid taxable units would be
used to fund higher provider payments to account for the taxes paid by
the providers to the States.
---------------------------------------------------------------------------
\21\ The Form CMS-64 is a collection under OMB 0938-1265 (CMS
10529).
---------------------------------------------------------------------------
While we acknowledge that there is uncertainty about how States
would respond, our approach does not assume any change in the total tax
revenue; we assume that the burden of the tax would shift from
disproportionately taxing Medicaid taxable units to a more proportional
distribution on all taxable units. We calculated the amount of tax paid
under the expected percentage of the tax paid based on Medicaid taxable
units and compared it to the amount that would be paid if the burden
for Medicaid taxable units was the same as the Medicaid-associated
percentage of the total tax base. For example, for MCO taxes, we
calculated the current tax burden that is assessed on Medicaid tax
units (premiums or member months for Medicaid enrollees) and the
overall amount of tax revenue. Then we calculated the tax burden that
is assessed against Medicaid taxable units assuming that the tax was
assessed evenly across all units (premiums or member months). For
hospital taxes, we did the same analysis using the taxable units for
hospitals (which could be revenue, hospital stays, or days
hospitalized). This data is shown in Table 3.
Table 3--Summary of Current Medicaid Tax Waiver Data
[In billions of 2024 dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Medicaid share Medicaid tax
Number of 2024 estimated Medicaid tax of taxable Medicaid tax burden under
Tax category state waivers annual revenue burden as units as burden proposed rule
(billions) percentage percentage (billions) (billion)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Managed care organization............................ 7 $18.5 96 53 $17.9 $9.8
Hospital............................................. 1 5.1 44 32 2.2 1.6
--------------------------------------------------------------------------------------------------
Total............................................ 8 23.6 85 48 20.1 11.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
For 2024, we estimate that these taxes accounted for $23.6 billion
in revenue for 7 States. (For States with waivers that started in 2025,
we included the first year's revenues in 2024 for this analysis.) Of
this amount, we estimate that $20.1 billion was assessed against
Medicaid taxable units (85 percent), and thus was ultimately paid by
the Medicaid program. We also estimated that if the taxes were assessed
proportionately on all taxable units, that
[[Page 20595]]
only $11.4 billion (48 percent) would have been assessed against
Medicaid taxable units.
The following example illustrates how we calculated the impact of
the proposed policy change. Assume a State has a provider tax that
exploits the loophole and is expected to collect $1 billion in revenue.
Ninety-five percent of the taxes are assessed against Medicaid taxable
units, but only 50 percent of the total taxable units are Medicaid
taxable units. As a result, the Medicaid program (that is, the State
and the Federal government) bears 95 percent of the tax burden, even
though Medicaid only accounts for 50 percent of the basis for taxation
(such as Medicaid member months or hospital stays) for this service in
the State. Under existing regulations with the loophole, the Medicaid
program would be expected to pay for $950 million of the tax revenue
(via higher payments to providers) [95 percent * $1 billion = $950
million]. Under the proposal, the Medicaid program would be expected to
pay for approximately $500 million for the tax revenue [50 percent * $1
billion = $500 million], because $500 million is 50 percent of the $1
billion collected in tax revenue, which reflects the share of the tax
base attributable to Medicaid usage (or total taxable units). In that
case, total expenditures made by the Medicaid program would be
anticipated to decrease by $450 million [$950 million-$500 million].
We estimated that the impact on Federal Medicaid expenditures would
be the difference in the taxes paid by Medicaid under current law
multiplied by the average FFP matching rate. The average Federal share
includes higher Federal matching rates for certain services or
populations, most notably the 90 percent matching rate for expansion
adults in States that expanded Medicaid eligibility under the
Affordable Care Act. For example, if the average Federal share in the
State for expenditures in the relevant permissible class in the
previous example is 70 percent, then the Federal savings would be $315
million [$450 million * 70 percent].
To calculate the impact in future years, we made the following
assumptions. We assumed no new additional waivers would be approved
beyond the 8 currently in place. We also assumed that the 8 current
waivers would be transitioned to new tax waivers over 2 years, with
some States receiving transition periods and some not. We projected
that the amount of tax revenues would increase at the same rate as
Medicaid spending growth in the budget (based on the projections in the
Mid-Session Review of the FY 2025 President's Budget). The Federal
share of these impacts was estimated using the average Federal share
for each State and service category by tax; this would include
adjustments to the base Federal matching rates (notably, the 90 percent
matching rate for costs for expansion adults).
We estimate that the proposed rule would reduce Federal Medicaid
spending by $33.2 billion from 2026 through 2030 (in 2026 dollars).
This estimate accounts for the transition period applicable to four of
the eight known tax loophole waivers (as described in Section II.D.), A
waiver with its most recent approval date within 2 years before the
effective date of a final rule would not be eligible for a transition
period. A waiver with its most recent approval date 2 or more years
before the effective date of a final rule will have through the end of
the first State fiscal year beginning after the effective date of the
final rule to come into compliance with the rule's requirements. The
annual impacts are shown in Table 4. In addition to the Federal
savings, we also project a reduction in State Medicaid expenditures of
$18.8 billion over 2026 through 2030. The annual impacts are shown in
Table 4.
Table 4--Projected Impact of Proposed Rule on Medicaid Expenditures
[In millions of 2026 dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 2026 2027 2028 2029 2030 Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal................................................. -5,600 -6,500 -6,800 -7,000 -7,300 -33,200
State................................................... -3,200 -3,700 -3,800 -4,000 -4,100 -18,800
--------------------------------------------------------------------------------------------------------------------------------------------------------
Because it is possible, and we believe likely, that additional
States may implement new taxes that exploit the waiver statistical
loophole if current policy is unchanged, and that States may increase
the revenues raised by existing taxes, we also developed estimates for
an illustrative scenario where additional States submit similar taxes
over the next several years. In this scenario, we assumed that 2 States
would submit new MCO tax waivers for 2026, and 4 additional States
would submit MCO tax waivers each year from 2027 through 2030 (reaching
25 States by 2030). We also assumed that 2 additional States would
submit hospital tax waivers each year from 2027 through 2030 (reaching
9 by 2030). We produced estimates for both MCO taxes and hospital taxes
based on those for which we have already seen loophole taxes. However,
we note that we believe this loophole could be exploited on any
permissible class. Tax revenue and burden on the Medicaid program is
projected to increase at the same rate as the underlying service
spending in Medicaid based on the mid-session review (MSR) 2025
projections. We assume that the impacts on other States are
proportional to the largest MCO and hospital taxes currently approved,
in the scenarios described herein. For MCO taxes, we assumed that the
Medicaid program would account for 99.8 percent of the tax revenue
using the loophole, and would account for only 50 percent of the
revenue under the proposed policy; we also assumed that the tax revenue
attributable to the Medicaid program would be equal to about 23 percent
of State Medicaid managed care spending. For hospital taxes, we assumed
that the Medicaid program would account for 44 percent of the tax
revenue using the loophole and for only 32 percent under the proposed
policy; and we assumed that that the tax revenue attributable to the
Medicaid program would be equal to about 19 percent of State Medicaid
hospital spending. We note again that this scenario does not reflect
only the current taxes, but the impact if these taxes are allowed to
proliferate. Under the illustrative estimate, the Federal government
would avoid $74.6 billion in Medicaid spending over 2026 through 2030
(in real 2026 dollars) and State Medicaid expenditures would be $40.2
billion lower, as shown in Table 5.
[[Page 20596]]
Table 5--Projected Impact of Proposed Rule on Medicaid Expenditures Under Illustrative Scenario
[In millions of 2026 dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 2026 2027 2028 2029 2030 Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Federal................................................. -5,600 -9,600 -14,600 -19,700 -25,100 -74,600
State................................................... -3,600 -5,100 -7,600 -10,400 -13,500 -40,200
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Transfers (Additional Discussion)
We note that the amounts described in the previous section do not
necessarily represent the total Federal burden that may arise from
loophole taxes, and therefore the total savings that would result from
closing the loophole. As discussed in the preamble section I.C. to this
proposed rule, States can and sometimes do use the tax revenue
generated by shifting the burden to Medicaid (and therefore onto the
Federal government) through the loophole to fund additional payments to
providers. Those subsequent payments can again be claimed as
expenditures and receive Federal match, thus further increasing Federal
spending; to the extent States reduce the revenue collected by provider
taxes and in turn reduce Medicaid spending, the impacts on Federal and
State Medicaid expenditures may be even higher than what we have
estimated here.
However, it should be noted that effects on the Federal budget (as
well as the costs to States and taxpaying entities) are highly
dependent on how States would respond to these proposed changes.
Broadly, we believe States generally have several ways to address these
changes, and they are not mutually exclusive, with varying consequences
for magnitude of regulatory effects and for who pays and receives
transfers. As we estimated previously, States may decide to maintain
the current level of revenue in these tax programs, with less revenue
based on Medicaid taxable units and the burden distributed across other
payers (which could include Medicare for non-MCO taxes--thus generating
some tendency toward overestimation in the Federal budget savings
estimates appearing elsewhere in this regulatory analysis--and private
health insurers). States may choose to reduce or eliminate these taxes
and may make up the revenue elsewhere (for example, through other
taxes, health care-related or not). States may also opt to reduce
spending--in Medicaid or in other parts of the State budget--to account
for the decrease in tax revenue. We expect that these decisions will
depend on several factors beyond our ability to predict, including: the
relative impact these policies have on the State Medicaid program and
overall State budgets; the response from other health care payers and
providers of potentially higher tax burdens; and impacts on other
entities, including on providers and beneficiaries in the State. We
seek comments on how affected States would respond to these proposed
changes.
2. Regulatory Review Cost Estimation
If regulations impose administrative costs on private entities,
such as the time needed to read and interpret this proposed rule, we
should estimate the cost associated with regulatory review. Due to the
uncertainty involved with accurately quantifying the number of entities
that will review the rule, we assume the following entities will
review: State Medicaid Agencies, State governments, MCOs, and health
care providers. We assume at least three people at every State Medicaid
Agency (56) will review and two people in every State and territory
government (56), for a total of 280 reviewers. We then estimate an
additional 20 reviewers in every State Medicaid Agency affected by
these policies, as well as 1,124 members across seven State
Legislatures, for a total of 1,544 reviewers. It is more difficult to
predict how many individuals in how many MCOs and providers will
review, so we are therefore doubling the number from the previous
estimate, for 3,088 total reviewers. We acknowledge that this
assumption may understate or overstate the costs of reviewing this
rule. We welcome any comments on the approach in estimating the number
of entities which will review this proposed rule. We also recognize
that this is a relatively short proposed rule with a single policy
focus, and therefore for the purposes of our estimate we assume that
each reviewer reads 100 percent of the rule. We seek comments on this
assumption.
Using the wage information from the BLS (https://www.bls.gov/oes/tables.htm) for medical and health service managers (Code 11-9111), we
estimate that the cost of reviewing this rule is $132.44 per hour,
including overhead and fringe benefits. Assuming an average reading
speed, we estimate that it would take approximately 2 hours for each
person to review this proposed rule. For each person that reviews the
rule, the estimated cost is $264.88 (2 hours x $132.44). Therefore, we
estimate that the total cost of reviewing this regulation is $0.8
million ($264.88 x 3,088).
D. Alternatives Considered
We considered replacing the B1/B2 with another statistical test
(discussed in more detail below) for all waivers of the uniformity
requirements. Updating the statistical test to one that directly
reflected Medicaid burden would have several advantages. First, it
would have been administratively simple for CMS to implement, where one
test would merely be replaced by another during a waiver review.
Second, it would have had the clear effect of eliminating the
statistical loophole. Third, it would have been a purely statistical
test that would not require a separate decision-making process on the
part of CMS.
This test would have measured Medicaid's proportion of the total
business (numerator) compared to Medicaid's share of the expected total
tax revenue (denominator). For example, suppose a tax on nursing
facilities existed where there were 390,000 total bed days of which
330,000 bed days were Medicaid-paid bed days. Divide the second number
330,000 by the first number, 390,000 to receive a percentage of
approximately 84.6 percent Medicaid bed days. Assume further that the
total tax revenue collected was $11,000,000. Assume that the total tax
amount collected based on Medicaid taxable units was $9,000,000. Divide
the second number $9,000,000 by the first number $11,000,000, to
receive a percentage of approximately 81.81 percent of tax revenue
derived from Medicaid taxable units. Divide the first percentage, 84.6
percent, by the second percentage, 81.81 percent, to arrive at the
final percentage, 103.41 percent.
We also considered various figures that would have represented a
``passing'' (that is, approvable) figure under this test, including 90
percent, or 95 percent, which may have allowed more existing taxes that
do not exploit the loophole to pass. However, we ultimately decided
against proposing this overall new statistical test option
[[Page 20597]]
for several reasons. First, we felt that this test would have been
unnecessarily disruptive to our existing approved health care-related
taxes with broad-based or uniformity waivers, many of them
longstanding. Several of these waivers that did not exploit the
statistical loophole would have failed this test, such as some nursing
facility taxes, possibly due to excluding Medicare or other permissible
differences in tax structure. We realize that States and have become
accustomed to the B1/B2 test over a long period of time and wanted to
solve the tax loophole issue while being minimally disruptive to their
legislative and regulatory activities related to the Medicaid program,
including their programs of health care-related taxes that do not
exploit the statistical loophole. Finally, we realized that if we set
the passing figure too low, several taxes that are exploiting the
loophole would be able to continue with their tax programs that are not
generally redistributive. We did not want to undertake a change that
would not close the loophole completely or that risked opening a new
one. In addition, through our experience of testing this new
statistical test, we assessed the disruption to existing taxes and
State processes that would result from replacing the B1/B2 test,
regardless of the specific details of that test. As a result, we did
not contemplate alternate statistical methodologies or tests.
In addition to the wholesale replacement of the B1/B2 by this new
statistical test for all waivers of the uniformity requirement, we also
considered various limiting conditions to the universe of tax waivers
to which it would apply. For example, we considered having this new
test apply only to taxes on services of MCOs, since most of the
loophole exploiting taxes fall in this permissible class. However,
there is at least one tax that we know of on hospitals that has
different, higher, tax rates for Medicaid-payable days than non-
Medicaid payable days. We wanted a fix that would cover this tax as
well, because we believe that the higher rate imposed on Medicaid
taxable units is not consistent with the statutory requirement that
health care-related taxes for which waivers are approved must be
generally redistributive. Additionally, applying this test only to MCOs
would have left the Federal government open to future State tax waiver
proposals that used the B1/B2 loophole in other permissible classes,
including but not limited to inpatient hospital services and outpatient
hospital services. In this proposed rule, we aim to be as comprehensive
as possible to reduce the necessity of pursuing further rulemaking in
this area in the short-term.
We also considered proposing this new statistical test discussed in
the prior paragraphs, but proposing to apply it only to taxes that had
separate tax rates for Medicaid taxable units compared to non-Medicaid
taxable units, or separate tax rates for providers with Medicaid
taxable units compared to providers with taxable non-Medicaid units.
For example, a tax that had a rate of $20 per Medicaid-paid bed day
compared to $2 per non-Medicaid paid bed day would fall under this
category. To take another example, providers with more than 100
Medicaid bed days are taxed $20 per bed day compared to providers with
less than 100 Medicaid bed days are taxed $2 per bed day. This would
have been similar in scope to our current proposal. First, we would
have still needed to adopt some kind of ``Medicaid substitute''
provision similar to Sec. 433.68(e)(3)(iii) to address situations
where the State did not use the word ``Medicaid'' in their descriptions
but achieved the same effect. Second, we believe that this approach
would have been somewhat confusing for States to implement. It would
have required a longer learning process while we instructed States how
to conduct the test. We wanted to adopt the simplest, most
straightforward option. As a result, we decided against adopting this
test into regulation to measure whether a tax waiver is ``generally
redistributive'' in any format at the present time.
In addition, we considered not proposing that Medicaid proxies be
addressed at all in this regulation. Up until this point, we have not
received any proposals that we would consider to be ``Medicaid
substitutes'' in the context of the B1/B2 loophole. However, up until
this point, States have had no incentive for taxes that use the B1/B2
loophole not to describe groups using the word ``Medicaid.'' Under the
provisions in this proposed rule, if finalized, they would have that
incentive since, absent the ``substitute'' provision, the new
regulation would apply only to States that explicitly target Medicaid.
While closing one loophole, we did not wish to open another one with
the exact or very similar effect as the first loophole. We believe that
leaving the door open to this kind of manipulation would undermine the
entire purpose of this rulemaking. We attempted to be as comprehensive
as possible to foreclose the necessity of future rulemaking in the
near-term if we were able to identify and preemptively prevent any
serious deficiencies. This helps to create a stable, level, regulatory
framework, reducing the needs for updates and changes. This is
beneficial for both CMS and the States. States have a clear expectation
of the regulatory framework within which they operate and can plan
their budgets and legislative sessions accordingly. And CMS does not
need to undertake new rulemaking soon after concluding prior rulemaking
on the same subject. As a result, we felt that proposing the ``Medicaid
substitute'' provision was necessary to make sure we were capturing the
full universe of problematic practices that result in tax waivers that
are not generally redistributive and effectively close the regulatory
loophole.
As a result, we believe that the option we chose to propose
mandating that Medicaid taxable units not be taxed at a higher rate
than the rate imposed on any taxpayer or tax rate group based on non-
Medicaid taxable units had several advantages. First, it removes the
full universe of current taxes that exploit the statistical loophole.
Second, it is narrowly tailored only to those taxes that exploit the
statistical loophole. Third, it is not unnecessarily disruptive on
States with currently approved tax waivers of the uniformity
requirement that do not exploit the statistical loophole. All those
factors, combined, make it the option that we have proposed.
Finally, we considered alternatives to our approach in the
transition period section. Within that section, we have proposed some
alternatives on which we invite comment, including no transition period
for any waivers. We are confident that all States engaged in this
practice are aware they are exploiting a loophole, and no transition
period aligned with our intent to close the loophole as quickly as
possible. However, we ultimately decided to initially propose a short
transition period for waivers we had not approved most recently and
therefore had not communicated with the State about this specific issue
as recently. We also considered longer timeframes for transition
periods for all waivers, but we did not want to extend the time that
these loopholes are burdening the Medicaid program any longer than
necessary. Finally, we considered associating the length of transition
periods to how long the tax has been in place.
E. Accounting Statement and Table
Consistent with OMB Circular A-4 (available at https://www.reginfo.gov/public/jsp/Utilities/a-4.pdf), we have
[[Page 20598]]
prepared an accounting statement in Table 6 showing the classification
of the impact associated with the provisions of this proposed rule or
final rule.
Table 6--Accounting Table
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Category Estimate......... Year dollar Discount rate... Period covered
----------------------------------------------------------------------------------------------------------------
Collection of Information
Requirements:
Total..................... $30,003.......... 2025 N/A............. One-time.
State..................... $15,001.......... 2025 N/A............. One-time.
----------------------------------------------------------------------------------------------------------------
Regulatory Review Costs:
$0.8 million..... 2025 N/A............. One-time.
----------------------------------------------------------------------------------------------------------------
Transfers:
Annualized Monetized $6,587 million... 2026 7 percent....... 2026-2030.
(Federal, $/year).
$6,617 million... 2026 3 percent....... 2026-2030.
---------------------------------------------------------------------------------
Annualized Monetized (non- $3,731 million 2026............ 7 percent....... 2026-2030
Federal, $/year).
$3,748 million 2026............ 3 percent....... 2026-2030
----------------------------------------------------------------------------------------------------------------
Quantitative:
Estimated reduction in transfers from Federal government to States, ranging from $5,600 million to
$7,300 million per year over 2026 through 2030, reflecting reduced Medicaid payments associated with certain
health care-related taxes.
Estimated reduction in transfers from State governments to other payers (for example, private insurance
sponsors), ranging from $3,200 million to $4,100 million per year from 2026 through 2030, reflecting reduced
Medicaid payments associated with certain health care-related taxes.
F. Regulatory Flexibility Act (RFA) and Section 1102(b) of the Social
Security Act
Effects on Health Care Providers
The RFA requires agencies to analyze options for regulatory relief
of small entities, if a rule has a significant impact on a substantial
number of small entities. For purposes of the RFA, we estimate that
many of the health care providers subject to health care -related taxes
are small entities as that term is used in the RFA (include small
businesses, nonprofit organizations, and small governmental
jurisdictions). The great majority of hospitals and most other health
care providers and suppliers are small entities, either by being
nonprofit organizations or by meeting the SBA definition of a small
business (having revenues of less than $9.0 million to $47.0 million in
any 1 year).
Individuals and States are not included in the definition of a
small entity. This proposed rule, if finalized, will not have a
significant impact measured change in revenue of 3 to 5 percent on a
substantial number of small businesses or other small entities. We do
not anticipate that States will seek to rebalance the revenues to that
extent through small entities, as the permissible classes affected by
this rule are not small entities. Nearly all of the taxes that this
policy will end are taxes on MCOs. As its measure of significant
economic impact on a substantial number of small entities, HHS uses a
change in revenue of more than 3 to 5 percent. We do not believe that
this threshold will be reached by the requirements in this proposed
rule. Therefore, the Secretary has certified that this proposed rule
will not have a significant economic impact on a substantial number of
small entities. We seek comments on this assessment.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 603 of the RFA. For
purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside of a metropolitan
statistical area and has fewer than 100 beds. We do not believe this
rule will have a significant impact on small rural hospitals. Although
as stated previously we cannot predict the ways a State may respond to
the cessation of a Federal funding stream, we do not anticipate based
on the requirements in this rule those revenues will be sought from
small, rural hospitals, as States often seek to insulate these
providers from increased costs. Therefore, the Secretary has certified
that this proposed rule will not have a significant impact on the
operations of a substantial number of small rural hospitals.
G. Unfunded Mandates Reform Act (UMRA)
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also
requires that agencies assess anticipated costs and benefits before
issuing any rule whose mandates require spending in any 1 year of $100
million in 1995 dollars, updated annually for inflation. In 2025, that
threshold is approximately $187 million. The UMRA's analysis
requirement is met by the analysis included in section V. of this
proposed rule, conducted per E.O. 12866. This proposed rule does not
mandate any requirements for local, or tribal governments, or for the
private sector. Costs may shift from the Federal government to States.
H. Federalism
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on State
and local governments, preempts State law, or otherwise has Federalism
implications. Allowing States to continue to exploit a loophole in
current regulations undermines the statutory framework, and, as GAO has
noted, undermines the cooperative Federalism that lies at the heart of
the Medicaid program.\22\ For this reason, CMS believes that it is
necessary to address the statistical loophole to ensure fiscal
integrity of the Medicaid program.
---------------------------------------------------------------------------
\22\ GAO-08-650T ``Medicaid Financing Long-standing Concerns
about Inappropriate State Arrangements Support Need for Improved
Federal Oversight'' April 3, 2008.
---------------------------------------------------------------------------
Hence, this rule does not impose substantial direct costs on State
or local governments, preempt State law, or otherwise have Federalism
implications.
I. Conclusion
The policies in this proposed rule, if finalized, will enable us to
ensure FFP is distributed equitably and as intended and contemplated by
statute.
[[Page 20599]]
In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.
Mehmet Oz, MD, Administrator of the Centers for Medicare & Medicaid
Services, approved this document on May 9, 2025.
List of Subjects in 42 CFR Part 433
Administrative practice and procedure, Child support, Claims, Grant
programs--health, Medicaid, Reporting, and recordkeeping requirements.
For the reasons set forth in the preamble, the Centers for Medicare
& Medicaid Services proposes to amend 42 CFR Chapter IV as set forth
below:
PART 433--STATE FISCAL ADMINISTRATION
0
1. The authority citation for part 433 continues to read as follows:
Authority: 42 U.S.C. 1302.
0
2. Amend Sec. 433.52 by adding the definitions of ``Medicaid taxable
unit'', ``Non-Medicaid taxable unit'' and ``Tax rate group'' in
alphabetical order to read as follows:
Sec. 433.52 General definitions.
* * * * *
Medicaid taxable unit means a unit that is being taxed within a
health-care related tax that is applicable to the Medicaid program.
This could include units that are used as the basis for Medicaid
payment, such as Medicaid bed days, Medicaid revenue, costs associated
with the Medicaid program such as Medicaid charges, or other units
associated with the Medicaid program.
Non-Medicaid taxable unit means a unit that is being taxed within a
health-care related tax that is not applicable to the Medicaid program.
This could include units that are used as the basis for payment by non-
Medicaid payers, such as non-Medicaid bed days, non-Medicaid revenue,
costs that are not associated with the Medicaid program, or other units
not associated with the Medicaid program.
* * * * *
Tax rate group means a group of entities contained within a
permissible class of a health care-related tax that are taxed at the
same rate.
0
3. Amend Sec. 433.68 by--
0
a. Revising paragraphs (e) introductory text, (e)(1)(ii), (e)(1)(iii)
introductory text, (e)(1)(iv) introductory text, (e)(2)(ii) and
(e)(2)(iii) introductory text; and
0
b. Adding paragraphs (e)(3) and (e)(4).
The revision and additions read as follows:
Sec. 433.68 Permissible health care-related taxes.
* * * * *
(e) Generally redistributive. A tax will be considered to be
generally redistributive if it meets the requirements of this paragraph
(e). If the State requests waiver of only the broad-based tax
requirement, it must demonstrate compliance with paragraphs (e)(1) and
(3) of this section. If the State requests waiver of the uniform tax
requirement, whether or not the tax is broad-based, it must demonstrate
compliance with paragraphs (e)(2) and (3) of this section.
(1) * * *
(ii) If the State demonstrates to the Secretary's satisfaction that
the value of P1/P2 is at least 1, and satisfies the requirements of
paragraphs (e)(3) and (f), the tax waiver is approvable.
(iii) If a tax is enacted and in effect prior to August 13, 1993,
and the State demonstrates to the Secretary's satisfaction that the
value of P1/P2 is at least 0.90, CMS will review the waiver request.
Such a waiver will be approved only if, in addition to satisfying the
requirement at paragraphs (e)(3) and (f), the following two criteria
are met:
* * * * *
(iv) If a tax is enacted and in effect after August 13, 1993, and
the State demonstrates to the Secretary's satisfaction that the value
of P1/P2 is at least 0.95, CMS will review the waiver request. Such a
waiver request will be approved only if, in addition to satisfying the
requirement at paragraphs (e)(3) and (f), the following two criteria
are met:
(2) * * *
(ii) If the State demonstrates to the Secretary's satisfaction that
the value of B1/B2 is at least 1, and satisfies the requirements of
paragraphs (e)(3) and (f), the tax waiver is approvable.
(iii) If the State demonstrates to the Secretary's satisfaction
that the value of B1/B2 is at least 0.95, CMS will review the waiver
request. Such a waiver will be approved only if, in addition to
satisfying the requirement at paragraphs (e)(3) and (f), the following
two criteria are met:
* * * * *
(3) Additional requirement to demonstrate a tax is generally
redistributive. This paragraph (e)(3) applies on a per class basis.
Regardless of whether a tax meets the standards in paragraphs (e)(1)
and (2), the tax is not generally redistributive if:
(i) Within a permissible class, the tax rate imposed on any
taxpayer or tax rate group based upon its Medicaid taxable units is
higher than the tax rate imposed on any taxpayer or tax rate group
based upon its non-Medicaid taxable units (except as a result of
excluding from taxation Medicare revenue or payments as described in
paragraph (d) of this section). For example, a tax on MCOs where
Medicaid member months are taxed $200 per member month whereas the non-
Medicaid member months are taxed $20 per member month would violate the
requirements of paragraph (e)(3)(i).
(ii) Within a permissible class, the tax rate imposed on any
taxpayer or tax rate group explicitly defined by its relatively lower
volume or percentage of Medicaid taxable units is lower than the tax
rate imposed on any other taxpayer or tax rate group defined by its
relatively higher volume or percentage of Medicaid taxable units. For
example, a tax on nursing facilities with more than 40 Medicaid-paid
bed days of $200 per bed day and on nursing facilities with 40 or fewer
Medicaid-paid bed days of $20 per bed day would violate the
requirements of paragraph (e)(3)(ii). As an additional example, a tax
on hospitals with less than 5 percent Medicaid utilization at 2 percent
of net patient service revenue for inpatient hospital services, and on
all other hospitals at 4 percent of net patient service revenue for
inpatient hospital services would also violate the requirements of
paragraph (e)(3)(ii).
(iii) The tax excludes or imposes a lower tax rate on a taxpayer or
tax rate group defined by or based on any characteristic that results
in the same effect as described in paragraph (e)(3)(i) or (ii).
Characteristics that may indicate this type of violation exists
include:
(A) Use of terminology to establish a tax rate group based on
Medicaid without explicitly mentioning Medicaid to accomplish the same
effect as described in paragraphs (3)(i) or (ii) for a tax rate group.
For example, a tax on inpatient hospital service discharges that
imposes a $10 rate per discharge associated with beneficiaries covered
by a joint Federal and State health care program and a $5 rate per
discharge associated with individuals not covered by a joint Federal
and State health care program would violate this requirement, because
joint Federal and State health care program describes Medicaid and a
higher tax rate is imposed on Medicaid discharges than on discharges
for individuals not covered by a joint Federal and State health care
program.
(B) Use of terminology that creates a tax rate group that closely
approximates Medicaid, to the same effect as described in paragraphs
(3)(i) or (ii). For example, a tax on hospitals located in counties
with an average income less
[[Page 20600]]
than 230 percent of the Federal poverty level of $10 per inpatient
hospital discharge, while hospitals in all other counties are taxed at
$5 per inpatient hospital discharge, would violate this requirement,
because the distinction being drawn between tax rate groups is
associated with a Medicaid eligibility criterion with a higher tax rate
imposed on the tax rate group that is likely to involve more Medicaid
taxable units.
(4) Transition Period. (i) States with health care-related tax
waivers that do not meet the requirements of paragraph (e)(3), where
the date of the most recent approval of the waiver that violates
paragraph (e)(3) occurred 2 years or less before [EFFECTIVE DATE OF A
FINAL RULE], are not eligible for a transition period. Any collections
made under that waiver following [EFFECTIVE DATE OF A FINAL RULE] may
be subject to deduction from medical assistance expenditures as
described in Sec. 433.70(b).
(ii) States with health care-related tax waivers that do not meet
the requirements of paragraph (e)(3), where the date of the most recent
approval of the waiver that violates paragraph (e)(3) occurred more
than two years before prior to [EFFECTIVE DATE OF A FINAL RULE], must
either:
(A) Submit a health care-related tax waiver proposal that complies
with paragraph (e)(3) with an effective date no later than the start of
the first State fiscal year beginning at least one year from [EFFECTIVE
DATE OF A FINAL RULE]; or
(B) Otherwise modify the health care-related tax to comply with
this rule and all other applicable Federal requirements with an
effective date not later than the start of the first State fiscal year
beginning at least one year from [EFFECTIVE DATE OF A FINAL RULE].
(iii) Once the transition period for a tax waiver that qualifies
under paragraph (e)(4)(ii) has expired, CMS may deduct from a State's
medical assistance expenditures revenues from health care-related taxes
that do not meet the requirements of paragraph (e)(3) as specified by
section 1903(w)(1)(A)(iii) of the Act and Sec. 433.70(b).
Robert F. Kennedy, Jr.,
Secretary, Department of Health and Human Services.
[FR Doc. 2025-08566 Filed 5-12-25; 4:15 pm]
BILLING CODE 4120-01-P