Page 15

Page 15 – CMCS Informational Bulletin revenue, resulting in a presumption that the tax costs will be repaid to the taxpayer through increased Medicaid payments, after the state draws down federal financial participation. Generally, the 6 percent indirect hold harmless threshold limits the amount each state can collect in provider taxes on a per-class basis.35 Section 71115 amends section 1903(w)(4) of the Act by modifying the indirect hold harmless threshold, beginning on October 1, 2026. Effectively, this provision prohibits states from increasing the revenue a health care-related tax can generate in almost all instances and generally prohibits states from establishing new provider taxes. This effect is achieved by setting the indirect hold harmless threshold equal to the percent of net patient revenue attributable to such permissible class as of July 4, 2025. Beginning October 1, 2027, the indirect hold harmless threshold for Medicaid expansion states36 is reduced to the lower of July 4, 2025, levels or 5.5 percent, which decreases annually by 0.5 percentage points until reaching 3.5 percent in FY 2032. This phase-down is not applicable to non-expansion states or to health care-related taxes imposed on the nursing facility or Intermediate Care Facility for Individuals with Intellectual Disabilities (ICF/IID) permissible classes. On November 14, 2025, CMS sent a letter37 to states outlining preliminary guidance on section 71115 (and section 71117). Under section 71115(b), the amendments made to section 1903(w)(4) of the Act are applicable to all states and the District of Columbia; they do not apply to the territories. Section 71116. State Directed Payments Generally, states may not direct MCO, PIHP, or PAHP expenditures, except in limited circumstances. One such circumstance is when states obtain approval for a state directed payment (SDP), which permits states to direct specific payments made by MCOs, PIHPs, or PAHPs to providers under certain circumstances. The regulation finalized in 2024 at 42 CFR § 438.6(c)(2)(iii) requires that the total payment rate for SDPs for inpatient and outpatient hospital services, nursing facility services, and qualified practitioner services at an academic medical center not exceed the average commercial rate (ACR). Section 71116 directs the Secretary to revise 42 CFR § 438.6(c)(2)(iii) to reduce the total payment rate limit for SDPs for these services to 100 percent of the total published Medicare payment rates for expansion states38 and 110 percent of the total published Medicare payment 35 A tax that generates revenue more than 6 percent of net patient revenue for the class may be permissible where 75 percent or more of providers do not receive at least 75 percent of their tax cost back, but in practice, this secondary test is virtually never satisfied. 36 Section 71115(a)(2) of the WFTC legislation defines an expansion state as “a State that, beginning on January 1, 2014, or on any date thereafter, elects to provide medical assistance to all individuals described in section 1902(a)(10)(A)(i)(VIII) under the State plan under this title or under a waiver of such plan.” 37 https://www.medicaid.gov/medicaid/downloads/providertax_dcl_11142025.pdf 38 Section 71116(a)(1) defines an expansion states as “a State that provides coverage to all individuals described in section 1902(a)(10)(A)(i)(VIII) of the Social Security Act (42 U.S.C. 1396(a)(10)(A)(i)(VIII)) that is equivalent to minimum essential coverage (as described in section 5000A(f)(1)(A) of the Internal Revenue Code of 1986 and