On February 2, 2026, the final version of the rule entitled “Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations – Closing a Health Care-Related Loophole“ was published to the federal register. This is the finalized version of the proposed rule published on May 15, 2025, to which LeadingAge analyzed and submitted comments to the Centers for Medicare and Medicaid Services (CMS) seeking exemption of nursing home taxes from the proposed rule.

The proposed and final rules are substantively the same, with minor drafting updates to reflect regulatory consistency such as additions of “in this section” along with designated compliance deadlines. The rule will have a significant impact on the states (CA, OH, IL, MA, MN, NY, and WV)  in which taxes have been noted to be out of compliance because of the financial impacts generated by these taxes in their current states. Though CMS indicates only a small number of taxes targeted by this rule, LeadingAge continues to be wary of how these new requirements will be interpreted in the next wave of compliance reviews, as states make tax changes to comply with other areas of the Working Families Tax Cut Legislation (WFTCL), the budget reconciliation law enacted on July 4, 2025.

In the final rule, CMS takes steps to curtail states’ use of taxes that are not generally redistributive. The final rule mirrors the proposed rule, and codifies section 71117 of the WFTCL. The final rule adds definitions of “Medicaid taxable unit,” “Non-Medicaid taxable unit,” and “Tax rate group” in § 433.52 to facilitate CMS’ additions to §433.68: Permissible health care-related taxes. This section of the rule adds standards for “generally redistributive” and uses the new definitions to demonstrate tax structures that would not be deemed generally redistributive. This section includes examples of tax tiers that CMS would not find in compliance, all focusing on the definitions relating to direct and definitional tax burden on the Medicaid program.  

Though ‘generally redistributive’ remains undefined in this rule, the concept is intended to ensure that revenues collected from a healthcare tax are not borne disproportionately on Medicaid units or providers. Healthcare taxes were intended to use non-Medicaid funding to bolster the state-share and supplement Medicaid payment rates. Each of the regulatory requirements on the structure of provider taxes are designed to further this goal- all taxes are intended to be: 1) broad based or applying to all providers in a specific provider class and 2) uniform meaning applied at the same rate regardless of provider characteristics. Because of these requirements, states must seek waivers of the regulation to create tiered taxes where, for example, CCRCs or small nursing homes are taxed at a lower rate.   

In the proposed rule, the supporting regulatory analysis (text body and table 3) indicated that seven states had waivers for eight taxes that were presumed to be out of compliance. Of these eight taxes, seven were imposed on managed care organizations, while one was imposed on a hospital. In the final rule, table 4 indicates CMS has expanded that analysis to include one tax on nursing homes. Though, in the text before the final changes to the regulation, in review of the comments received on the proposed rule, CMS notes, “…that of the many nursing facility taxes, we are only aware of two that appear to utilize the loophole.” LeadingAge is working to get more information from CMS on these presumed non-compliant nursing home taxes.  

The final rule reiterates references from the proposed rule regarding the allowability of nursing home taxes that use tiered structures based on an entity’s status as a continuing care retirement community (CCRC). CMS indicates that these taxes would remain in compliance because the CCRC designation, though it may correlate with lower Medicaid utilization, is not a proxy for Medicaid utilization. The use of tiered taxes with definitional tiers based on characteristics independent from the Medicaid program or proxy terminology like a description of the Medicaid program without mention of it, are still likely to be compliant. CMS does note that each tax structure is unique and will be viewed under the totality of the circumstances and evidence, not merely a single definition or characteristic. 

Though LeadingAge and other commentators suggested that nursing home taxes not be subject to the new requirements, CMS did not agree. They felt that the abundance of taxes on nursing home revenues that fall within the regulatory framework following these updates is evidence that this provider class should not have an exemption. At this time, CMS indicates knowledge of only one nursing home tax that is out of compliance but the provider class is not exempt from the new framework.  

Compliance Timelines 

The newly finalized rule is effective April 3, 2026. States will work towards varying compliance deadlines for non-compliant taxes depending upon the taxed class and the date of the most recent waiver approval from CMS. Because CMS considers taxes on managed care organizations (MCO) to cause the most significant burden on federal Medicaid financing, the timeline for transitioning these taxes comes first. States with MCO taxes requiring transition will look to the date of their last approved waiver from CMS. If that date is after April 3, 2024, states will have until January 1, 2027, to remedy their tax. For taxes on MCOs with CMS waiver approvals prior to April 3, 2024, states will have until the last day of their state fiscal year that ends after April 3, 2027. For example, for states operating July 1-June 30 fiscal years, their tax would need to be compliant by June 30, 2027. For non MCO taxes needing transition (the one tax on hospitals and newly added tax on nursing homes, states will have until the last day of their state fiscal year ending in calendar year 2028, with an ultimate deadline of September 30, 2028.  

If states do not bring taxes into compliance by the deadline, CMS will withhold federal match attributable to tax revenues generated via taxes deemed out of compliance with the rule. 

LeadingAge will continue to monitor and engage with CMS and provide updates to members as they become available.