in effect
This is a final rule issued by the Centers for Medicare & Medicaid Services (CMS), effective April 3, 2026, that tightens the federal standards states must meet when applying for waivers to use non-standard health care taxes to help fund their share of Medicaid costs. It closes a gap in an existing statistical test that some states have exploited to impose higher tax burdens on Medicaid-related activity than on commercial activity while still technically passing the test.
The existing rule relies on a linear regression comparison called the B1/B2 test to check whether a proposed state tax treats Medicaid activity no worse than a standard uniform tax would. The loophole arises because linear regression is sensitive to outliers — states could exclude a few large Medicaid-heavy providers from the tax while still including them in the regression calculation, or use sharply tiered rate structures (in some cases taxing Medicaid member months at 100 times the rate of commercial member months), causing the statistical slope to pass the test even though Medicaid bore a disproportionate share of the actual tax burden. The new rule adds safeguards — additional tests and criteria — that a waiver proposal must also satisfy, so that a tax arrangement that passes the B1/B2 regression but is not genuinely redistributive in practice cannot be approved. It also implements recently enacted statutory requirements Congress added for what qualifies as “generally redistributive.” The rule does not change the underlying permissible tax classes or the hold harmless prohibition.
State Medicaid agencies that currently operate, or are seeking to create, health care-related tax waivers — particularly those involving managed care organization taxes with variable or tiered rate structures — will face stricter federal review and may find existing or proposed arrangements no longer approvable. Managed care organizations and other health care providers subject to these state taxes are affected because the tax structures available to states will be more constrained. The federal government’s exposure to artificially inflated Medicaid matching payments is what the rule aims to reduce.