Medicaid Program; Amending the Indirect Hold Harmless Threshold of Health Care-Related Taxes
Key claim: CMS proposes to amend Medicaid indirect hold harmless standards for health care-related taxes to match WFTC statutory thresholds effective October 2026–2027, sunset a secondary determination prong, and add a new permissible tax class for enhanced oversight.
Abstract
(Proposed Rule · Health and Human Services Department, Centers for Medicare & Medicaid Services) This proposed rule would revise standards for determining whether an indirect hold harmless arrangement exists for a health care- related tax. This proposed rule is necessary to implement a provision in the “One Big Beautiful Bill Act,” herein referred to as the “Working Families Tax Cut (WFTC) legislation,” which established new indirect hold harmless thresholds for health care-related taxes. Currently, the threshold for a State’s collection of tax revenues is no more than 6 percent of net patient revenue attributable to the assessed permissible class of health care items or services. Effective October 1, 2026, the WFTC legislation generally sets the threshold equal to the applicable percent of net patient revenue attributable to taxes imposed as of July 4, 2025. Effective October 1, 2027, the WFTC legislation also requires a phase down of the hold harmless threshold in expansion States. Apart from establishing the new threshold in regulation and proposing related changes and enhancements to existing processes, we propose to sunset a secondary prong to the indirect hold harmless determination to ensure the thresholds determined as of July 4, 2025, serve as the maximum permissible level. Finally, this rule proposes to add a new permissible class to enhance CMS oversight of health care- related taxes.
Why this matters
Provider taxes are a major mechanism states use to finance their share of Medicaid spending, and tightening the indirect hold harmless thresholds narrows how much states can raise through these taxes without triggering federal disallowance. If finalized, the phased WFTC-aligned thresholds and the new permissible tax class could reshape state Medicaid budgets and, downstream, provider payment rates and coverage decisions during the 2026–2027 transition.