With the sweeping policy changes to Medicaid coming following the July 4, 2025, enactment of HR 1–also referred to as the One Big Beautiful Bill and the Working Families Tax Cuts Act–states are poised to undertake drastic redesign of multiple aspects of their Medicaid programs and need substantial guidance from the Centers for Medicare and Medicaid Services (CMS).

Directives are emerging.

Dan Brillman, Director of the Center for Medicaid and Chip Services within CMS provides background on the agency’s thinking via a November 14, 2025 ‘Dear Colleague’ letter–a less formal avenue than a State Medicaid Director Letter (SMDLs) which provide both background and directives on how states should consider activities to comply.

CMS should also provide more details on their policy interpretation in notice and comment rulemaking. A final rule pending at the Office of Management and Budget (OMB) will likely formally codifies the policies in this letter and hopefully provides more clarity. LeadingAge provided comments on the proposed rule, released earlier this year.

Director Brillman’s letter focuses on CMS’ perspective on implementation and compliance for states on Sections 71115 and 71117 of HR 1. These provisions included changes to statutes governing the use and structure of Medicaid Provider Taxes.

Section 71115 imposed a moratorium on new taxes. It caps existing taxes at their enacted levels in non-expansion states and for nursing homes and intermediate care facilities taxes in all states. In expansion states, taxes on other providers will see future, staggered reductions in the hold harmless threshold from a maximum of 6% to a new maximum of 3.5%.

Section 71117 further limits the structure of states’ waivers of uniformity to prohibit taxes that CMS believes aren’t ‘generally redistributive’.

Enacted and Imposed

The freeze on existing and new taxes in section 71115 hinges on CMS’ interpretation of ‘enacted’ and ‘imposed’. Under their definition of ‘enacted,’ CMS requires two conditions to be met- a state’s administrative body (Medicaid Agency) has been granted authority to impose the tax by their state legislature AND CMS has approved any necessary waivers of uniformity or broad base requirements. The definition includes a note:

The enacted tax structure as of July 4, 2025, does not include administrative (e.g. through a state budget office) or legislative adjustments to a tax structure (including revenue increases) after July 4, 2025, even if retroactively applicable.

The letter defines ‘imposed’ taxes as those for which the state was collecting funds. CMS stipulates a tax is compliant if:

A state or local government (directly or by way of a delegated administrative agency) was actively collecting revenue, as of July 4, 2025, associated with the specific enacted tax structure in effect on that date.

• In the case where a state collects taxes on a delayed schedule consistent with routine collection or billing practice, the collection is applicable as of July 4, 2025, and based on the specific enacted tax structure in effect on that date.

The language in the letter seems clear that CMS is drawing a line in the sand–and is also a stark divergence from prior policy. CMS has historically granted retroactive approvals if the submission date of the waiver was in the same quarter as the anticipated date of retroactive approval. CMS states:

Based on the above description of “enacted” and “imposed,” revenues associated with tax waiver proposals that were pending on or submitted after July 4, 2025, will not be included in the new indirect hold harmless threshold. CMS will calculate thresholds associated with the tax structure in effect with the most recent waiver approval for the tax, and for which the state is actively collecting revenue.

This will be significant for many states operating on July-June fiscal years (FYs) that could historically submit waiver approvals (for broad base or uniformity) to CMS for a July 1 (start of state fiscal year) retroactive effective date up through the end of the same FY quarter, or through the end of September. CMS, in the past, has approved these waivers back to the state’s proposed effective date. This guidance seems to indicate a departure from that long-held practice. For many states, this may freeze their provider taxes as the rates and structures approved for state fiscal year ’24-25, which ended June 30.

Furthermore, LeadingAge has heard that some states have attempted to retroactively increase either the base of the tax by expanding the taxed class or increasing the rate of an already imposed tax – these waiver changes do not align with the definitions of “imposed” or the timelines in the letter and may not be approved by CMS. Additionally, routine updates to states’ waivers of uniformity to update tiers or provider class tax rates as states have undergone annually will now be more complicated. Under prior policy, states used these small definitional changes to keep tax percentages near an allowable threshold as provider closure and differences in revenues adjusted to the denominator in the hold harmless calculation. The law as interpreted in this letter will allow states to update their taxes as the provider landscape changes, though only to reduce the percentage of net patient revenues, as each year a new cap will be established, and a reduction in a prior year creates a new ceiling for future years.

Waivers of Uniformity and Non-Compliant Taxes

HR 1 changed policy around waivers of uniformity causing a number of states to have noncompliant taxes–the letter provides a timeline for coming into compliance. LeadingAge believes that fewer than ten taxes across fewer than eight states are out of compliance at this time – though note that while this is small in terms of number of taxes, the loss of dollars raised by these taxes are often significant to members. Additionally, LeadingAge has concerns that the scope of CMS’ attention to these waivers could grow. For currently identified noncompliant taxes on Managed Care Organizations, states will have until the end of the state fiscal year in 2026 to come into compliance. Taxes on other provider types that run afoul of the new standards in 71117 will have until 2028 to amend taxes into compliant structures. CMS says these are the minimum transition periods allowed by the law and states will receive support and technical assistance from CMS to come into compliance. There are likely states that will ask CMS for more time.

The newly released letter is useful information for states when considering timelines, though much more clarity is needed to understand how CMS will define other terms in the law which we hope to see in the anticipated final rule on this topic. Terms like ‘relatively higher’ or ‘relatively lower’ (both included in HR 1 and the proposed rule) still remain undefined and will continue to cause confusion for states and providers that rely on taxes with uniformity waivers.  Without clear definitions, LeadingAge is concerned that CMS could find a slippery slope of taxes with ‘relatively’ differential tax rates that could be found non-compliant based on the new law.

Intersection of 71117 and 71115

Director Brillman notes that the intersection of provisions in 71115 and 71117 can be reconciled in a way that taxes deemed noncompliant with 71117 can be brought into compliance under the newly imposed limits in 71115. While this is good news for states hoping to bring taxes into compliance, revenues generated from taxes under transition are likely to be significantly reduced. The caps imposed in section 71115 are likely to mean that a state will be held to the tax base approved in the most recent waiver approval and bring tax rates into compliance with generally redistributive principles, a process that gives CMS a lot of discretion.

Conclusion

The letter provides information for states on CMS’ thinking about the intersection of provider tax provisions in the law, and outlines timelines for compliance. States will welcome the delivery of information, if not the content that demonstrates changes in standard practices for provider tax waiver applications and still leaves key questions unanswered. States will specifically need to understand how CMS is viewing these key terms, among others as they begin to restructure provider taxes to comply with the law.

The press release on the letter includes a link to directly download the letter.