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Medicaid Program; Amending the Indirect Hold Harmless Threshold of Health Care-Related Taxes
Plain English Summary
A new proposed rule will change how health care-related taxes are assessed for Medicaid. It affects states that collect these taxes by setting a new limit on how much tax revenue they can collect based on patient revenue. Starting October 1, 2026, the limit will be based on taxes in place as of July 4, 2025. By October 1, 2027, there will be a gradual reduction of this limit in states that expanded Medicaid. Insurance agents should be aware of these changes and prepare to adjust their practices accordingly.
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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.