McDermott+ is pleased to bring you Regs & Eggs, a weekly Regulatory Affairs blog by Jeffrey Davis. Click here to subscribe to future blog posts.
July 30, 2026 – Another week, another rule. With comments on the Medicaid work requirement interim final rule due on July 31, 2026, the Centers for Medicare & Medicaid Services (CMS) just gave us another Medicaid rule to chew on. Last week, CMS released its long-awaited proposed rule implementing the provider tax provisions in the One Big Beautiful Bill Act (OBBBA). While the statute established new limits on provider taxes, the proposed rule explains how CMS intends to determine what each state’s provider tax structure looked like on July 4, 2025 – and that historical snapshot will drive provider tax policy for years to come.
CMS packed dozens of technical proposals into the regulation, but several themes stand out. I’m bringing in my colleagues Katie Waldo and Maddie News to help provide key takeaways from the rule.
If there is one takeaway from this proposed rule, it’s that CMS views July 4, 2025, as the permanent reference point for provider taxes. Rather than continuing to rely on a uniform 6% indirect hold-harmless threshold, CMS proposes to calculate a unique threshold for every provider tax class in every state based on the taxes that were both enacted and imposed on that date. Once calculated, those thresholds generally would become the baseline going forward, subject to the statutory phase-down for Medicaid expansion states.
One of the biggest questions following enactment of OBBBA was what Congress meant by “enacted” and “imposed.” The proposed rule largely sticks with the framework CMS previewed last November through guidance but refines both definitions. A tax must have been legally authorized (enacted) and providers must have had a legally enforceable obligation to pay it (imposed) by July 4, 2025. CMS also proposes modifications to how waiver approvals factor into that analysis. These may seem like technical distinctions, but they will determine whether certain provider taxes count toward a state’s future threshold or whether they effectively disappear altogether.
Another consistent emphasis throughout the proposal is data integrity. States would ultimately need to submit actual provider tax collections and actual net patient revenue to establish their permanent thresholds. While CMS recognizes that those data won’t be available immediately and proposes interim thresholds, the long-term framework would depend on detailed reporting and ongoing quarterly monitoring.
In other words, compliance would be an ongoing operational responsibility.
As outlined in OBBBA, CMS proposes to implement the statutory phase-down of the indirect hold-harmless threshold for Medicaid expansion states, while non-expansion states would retain the one-time threshold calculated based on provider taxes enacted and imposed as of July 4, 2025. The phase-down would apply to all permissible provider tax classes except nursing facilities and intermediate care facilities for individuals with intellectual disabilities, which are exempt under the statute. CMS also proposes to apply the same phase-down requirements to the proposed new health insurer provider tax class, also as outlined in OBBBA.
Beginning in federal fiscal year (FY) 2028, the indirect hold-harmless threshold for expansion states would be the lower of the state’s calculated July 4, 2025, threshold or the statutory phase-down amount:
Beyond calculating thresholds, CMS proposes a much more structured compliance framework.
The agency would eliminate the current 75/75 alternative hold-harmless test, require extensive quarterly reporting, and reiterate that states exceeding the allowable threshold risk losing federal matching funds associated with provider taxes in the affected provider class. (CMS notes that while no current tax likely meets this 75/75 alternative, the agency would eliminate it for future use.) CMS also proposes to withhold approval of certain payment initiatives if required provider tax information is not submitted.
Taken together, these proposals demonstrate that CMS is focused not only on establishing new thresholds, but also on ensuring states remain below them.
While much of the proposed rule would implement the provisions of OBBBA and CMS’s November 2025 guidance on provider taxes, CMS also proposes to create a new permissible provider tax class for commercial health insurers. Although many states currently impose taxes on commercial health insurers and use that revenue to finance the state share of Medicaid, health insurers have never been explicitly recognized as a permissible provider tax class under federal regulations. The proposed class would generally include commercial health insurance issuers in the individual and group markets, including Medicare Advantage, Medicare Part D, short-term limited-duration, dental, and vision insurers, but would expressly exclude Medicaid managed care organizations (MCOs), health maintenance organizations, and preferred provider organizations, which are already included in the existing MCO provider tax class.
For the new permissible health insurance class, CMS would apply the same hold-harmless framework established under OBBBA.
The provider tax provisions in OBBBA fundamentally changed Medicaid financing. This proposed rule answers the operational questions many stakeholders have been asking since the law was enacted.
For states, providers, and other Medicaid stakeholders, the next two months will be an important opportunity to weigh in. Comments are due September 21, 2026, and many of the technical choices CMS makes in the final rule could shape Medicaid financing for years to come.
Until next week, this is Jeffrey (and Katie and Maddie) saying, enjoy reading regs with your eggs.
For more information, please contact Jeffrey Davis. To subscribe to Regs & Eggs, please CLICK HERE.
