President Donald Trump’s administration is taking steps to close a longstanding loophole in Medicaid funding that officials argue shifts significant costs from states to federal taxpayers.
Why is it Important
This week, the Centers for Medicare and Medicaid Services (CMS) finalized a rule intended to eliminate what it refers to as a “funding gimmick” in Medicaid, marking one of the most significant moves to harmonize the program in years.
According to CMS, some states have imposed higher taxes on Medicaid providers and managed care plans, using the revenue to leverage additional federal funds. This practice effectively shifts state costs onto federal taxpayers and disrupts the intended equitable funding for Medicaid.
What You Need to Know
CMS Administrator Dr. Mehmet Oz stated that this change aims to restore fairness to the partnership between federal and state governments supporting Medicaid.
Oz asserted that “states that relied on loopholes to hold federal taxpayers accountable have undermined the law,” emphasizing that the new rule ensures that funds go to vulnerable beneficiaries instead of “preferred providers.”
This decision is in response to “long-standing warnings” from various experts about the risks posed by such agreements to the integrity of the Medicaid program.
A report indicated that the existing loophole taxes contribute approximately $24 billion annually to state budgets, with estimates suggesting that closing these loopholes could save the federal government over $78 billion within the next decade.
For more than ten years, certain states have utilized special tax policies to effectively shift a segment of Medicaid financing onto the federal government, according to CMS.
From fiscal years 2012 to 2024, the federal portion of Medicaid spending increased from around 57 percent to 64.5 percent.
CMS noted that states alone managed to secure over $13 billion in extra funding by raising taxes on Medicaid managed care organizations and providers, redirecting those proceeds to enhance federal matching funds.
Furthermore, some states even channeled the additional funds into programs unrelated to Medicaid, a practice that the new rules will clearly prohibit.
Contents of the New Rules
CMS’s final rule strengthens existing legislative safeguards to prevent states from using convoluted tax structures that impose undue burdens on Medicaid operations. Key provisions include:
- Prohibition of higher tax rates on Medicaid businesses compared to non-Medicaid businesses, addressing the core mechanism behind the loophole.
- Blocking indirect or disguised tax structures that functioned as backdoor methods to generate excess federal matching funds.
- Implementation of statutory directives as required in the Working Household Tax Reduction Act.
- Completion of enforcement measures initially proposed in May 2025 to ensure compliance.
People’s Opinions
Dr. Mehmet Oz stated, “We will bring equity, accountability, and integrity to Medicaid by restoring the federal-state partnership.”
He added, “Medicaid only functions effectively when all partners fulfill their responsibilities. States that have exploited these loopholes have contravened the law and directed additional spending toward preferred healthcare providers instead of focusing on the families who depend on this program.”
“With this rule, CMS will eliminate these improper programs and ensure that all federal Medicaid funds are utilized as intended by Congress.”
What Happens Next
States will begin to phase out these taxes in staggered intervals to allow for adjustments in their funding frameworks.
States under the new Managed Care Organization tax exemption have until the end of 2026 to comply, while states with the previous exemption have until the close of the 2027 fiscal year.
Taxes for all other provider categories must be standardized by the end of the 2028 fiscal year.
CMS explained that these timelines are based on extensive discussions with states and are designed to balance financial responsibility with the practical needs of overhauling longstanding tax systems.
