A proposed regulatory change from the Centers for Medicare & Medicaid Services (CMS) aims to shut down a decades-old “tax loophole” in Medicaid financing, a move the agency says could save federal taxpayers over $30 billion across five years.
CMS said in a press release issued on Monday that it plans to prohibit states from levying targeted taxes on managed care organizations’ (MCOs) “Medicaid business” designed to draw higher federal reimbursements.
Why It Matters
According to CMS, this type of tax, which can be structured in such a way that it specifically targets MCOs’ Medicaid operations, basically inflates a state’s Medicaid spending and allows it to collect more matching funds from the federal government.
The maneuver has been described by officials as a legal workaround used by states to secure inflated Medicaid funds while freeing up their own budgets for unrelated spending, such “new benefits for illegal immigrants.”
What To Know
CMS said that these “loophole taxes are solely designed to game the higher federal match” by taxing a type of entity, drawing down a high federal match.
It then added that federal dollars are being redistributed back to the entities that were taxed, deeming the tax practice “what most Americans call money laundering.”
CMS cited the example that in California, Medicaid business in “certain cases” is taxed at $274 per member/per month, while non-Medicaid business is taxed at $2 per member / per month.
The proposed rule would bar higher tax rates on Medicaid business, tighten language standards on Medicaid-specific taxes to prevent regulatory evasion, and implement a transition plan for states with older waivers.
CMS projects the proposed rule would save federal taxpayers billions of dollars, and that if the expansion of these financing tactics were left unchecked, and just two more states adopted the schemes each year, it could drive excess Medicaid costs above $74 billion in the next five years.
The organization also pointed to waivers approved in the final year of the Joe Biden administration for California, Michigan, Massachusetts and New York, saying that those four states alone account for more than 95 percent of the projected losses stemming from the loophole.
What People Are Saying
CMS Administrator Dr. Mehmet Oz said in the CMS press release issued on Monday: “States are gaming the system—creating complex tax schemes that shift their responsibility to invest in Medicaid and rob federal taxpayers. This proposed rule stops the shell game and ensures federal Medicaid dollars go where they’re needed most—to pay for health care for vulnerable Americans who rely on this program, not to plug state budget holes or bankroll benefits for noncitizens.”
Drew Snyder, CMS deputy administrator and Medicaid director, said: “This isn’t just wasteful—it’s wrong. Medicaid was designed to protect low-income seniors, pregnant women, children, and people with disabilities—not subsidize coverage schemes that displace our most vulnerable. We are restoring Medicaid to its original purpose and ensuring the intent of the law is followed.”
What Happens Next
The proposed rule is open for public comment through July 14, 2025, and can be accessed through the Federal Register.
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