Federal officials will generally prohibit new or increased health care-related taxes in Medicaid, often called provider taxes, starting Oct. 1, 2026. The Centers for Medicare & Medicaid Services sent states preliminary guidance on Nov. 14, 2025, explaining how it will enforce limits in the 2025 reconciliation law, Public Law 119-21.
CMS described the guidance in a news release the same day, which links to the Dear Colleague letter on sections 71115 and 71117 of the law. CMS projects the provisions will save more than $200 billion over 10 years.
Why provider taxes matter
States must pay part of Medicaid's cost. Many raise part of that share by taxing hospitals, nursing facilities, managed care plans and other providers, then drawing federal matching funds on the money. Limits on those taxes shrink a key source of state Medicaid money.
The new thresholds
Under section 71115, from Oct. 1, 2026, the "hold harmless" threshold is tied to taxes that were enacted and imposed as of July 4, 2025, the day the law was signed. CMS says that will generally prevent increases to existing taxes and new taxes. The letter explains what "enacted" and "imposed" mean. CMS said it would issue more guidance and rules on this section.
Closing the loophole
Section 71117 closes what CMS calls a loophole: taxes that hit Medicaid business much harder than commercial business while still passing a federal statistical test. CMS named California and New York as examples. States with tax waivers approved before July 4, 2025, got transition periods: until the end of the state fiscal year ending in 2026 for taxes on managed care organizations, and until the end of the state fiscal year ending in 2028 for other taxes.
The January 2026 final rule
CMS followed with a final rule, put on public display Jan. 29, 2026, that codifies the loophole closure and expands on the transition periods in the letter. According to CMS, the rule gives states at least until the end of calendar year 2026, and in some cases the full three years Congress allowed, depending on when their waiver was approved and the type of tax. CMS said seven states use the loophole, that such taxes generate $24 billion a year for states, and that closing it will save the federal government more than $78 billion over 10 years.
Why this matters for providers and DSPs
Provider taxes help states pay for optional Medicaid services, including home and community-based services for people with I/DD. As states lose room to raise or restructure them, budget writers may look for savings in those programs. Agencies should watch how their state plans to fill the gap, especially in states with large managed care organization taxes, whose transition deadlines come first.