End Medicaid state financing loopholes

What has happened

1. Feb 2, 2026 Partially done

   CMS finalized the health care-related tax rule, closing the indirect hold-harmless loophole for taxes that distinguish Medicaid from non-Medicaid units. A follow-on proposed rule of 2026-07-23 would amend the indirect hold-harmless threshold to implement Public Law 119-21's step-down (effective 2026-10-01), and the State directed payment limits are still only proposed (2026-05-22), so the sweep is not finished.

   • CMS final rule: Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations—Closing a Health Care-Related Tax Loophole

     Primary Executive branch Feb 2, 2026

   • CMS proposed rule: Medicaid Program; Amending the Indirect Hold Harmless Threshold of Health Care-Related Taxes

     Primary Executive branch Jul 23, 2026

2. Jul 4, 2025 Partially done

   Public Law 119-21 wrote three of the financing loopholes into law: § 71115 freezes existing provider taxes and steps the safe-harbour threshold down from 6 percent to 3.5 percent for expansion States, § 71116 caps State directed payments at Medicare rates, and § 71117 tightens the waiver of the uniform-tax requirement. Substantial delivery, but the ask is open-ended ("end state financing loopholes") and the directed-payment and hold-harmless mechanics were left to rulemaking.

   • Public Law 119-21, §§ 71115–71117 (provider taxes, State directed payments, waiver of the uniform tax requirement)

     Primary Congress Jul 4, 2025

3. May 15, 2025 Attempted

   CMS proposed to close the health care-related tax loophole by which States (California's managed care organization tax being the model) tax Medicaid business at far higher effective rates than non-Medicaid business and draw down the federal match on the proceeds. Proposal only.

   • CMS proposed rule: Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations—Closing a Health Care-Related Tax Loophole

     Primary Executive branch May 15, 2025