Amending the Indirect Hold Harmless Threshold of Health Care-Related Taxes Proposed Rule (CMS-2452-P)
On November 14, 2025, the Centers for Medicare & Medicaid Services (CMS) published a Notice of Proposed Rulemaking (NPRM) to implement section 71115 of Public Law 119-21, which CMS refers to as the “Working Families Tax Cut (WFTC) legislation.” Effective October 1, 2026, section 71115 establishes new indirect hold harmless thresholds for health care-related taxes (sometimes referred to as provider taxes) generally based on taxes that were enacted and imposed as of July 4, 2025. New indirect hold harmless thresholds for most permissible classes in States that expanded Medicaid to the adult group begin taking effect on October 1, 2027. This proposed rule would implement the new indirect hold harmless requirements and codify the statutory limits on new and increased health care-related taxes established by section 71115. Currently, 49 States and the District of Columbia have at least one health care-related tax.
Section 1903(w) of the Social Security Act establishes requirements for health care-related taxes. These taxes must be imposed on a permissible class of health care items or services, be broad-based (generally applying to all non-Federal, non-public providers within the permissible class), and be uniform (generally applying at the same tax rate for all taxed providers). The statute also prohibits direct and indirect hold harmless arrangements that return tax costs to taxpayers.
CMS regulations define two types of hold harmless arrangements:
- Direct hold harmless: The taxpayer is guaranteed to receive some or all tax costs back. Specifically, a state provides a payment (Medicaid or non-Medicaid), offset, or waiver to the providers (whether through direct or indirect payments, including payments redistributed through an intermediary) that guarantees to repay the providers for part or all of the cost of the tax.
- Indirect hold harmless: A tax structure is considered to hold providers harmless for their tax costs based on the level of taxation. Historically, CMS used a mathematical indirect hold harmless test to identify such arrangements, with a threshold generally set at no more than 6 percent of net patient revenue attributable to the permissible class.
The CMS Office of the Actuary estimates that this rule will reduce Federal government expenditures by $246 billion over the 10-year period from 2026 to 2035. The proposed rule supports the Administration’s priorities to promote financial integrity in the Medicaid program.
The proposed rule includes proposed regulatory revisions in the following areas. Comments are due on DATE.
| Topic | Proposal in NPRM |
|---|---|
| New Definitions & Technical Changes | Proposes definitions for key terms (e.g., “Expansion State,” “Non-Expansion State,” and "Net Patient Revenue") and technical revisions to the regulations to support implementation of the new indirect hold harmless thresholds. |
| Interpretation of "Enacted" and "Imposed" | Proposes revised interpretations from those described in CMS's preliminary guidance issued November 14, 2025, Dear Colleague Letter. “Enacted” would mean that the State or locality completed the legislative process necessary to authorize the specific tax structure in effect as of July 4, 2025. “Imposed” would mean the tax was in effect on July 4, 2025, and any required waiver has been approved effective to July 4, 2025 or earlier. |
| Discontinuation of the 75/75 Test | Proposes to discontinue the second prong of the indirect hold harmless test, under which taxes exceeding the indirect hold harmless threshold could remain permissible unless 75% or more of taxpayers in a class did not receive 75% or more of their tax costs back through Medicaid or other state payments. |
| "Services of Health Insurers" as a Permissible Class | Proposes to establish services of health insurers as a permissible class for health care-related taxes, bringing existing state taxes on health insurers under CMS oversight and section 71115 requirements. |
| Reporting Requirements | Proposes new requirements for states to submit detailed health care-related tax data to CMS to support calculation of the new thresholds and ongoing oversight and enforcement of health care-related taxes. |
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