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By Jasmine Laws
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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.
However, Dr. Susan Dorr Goold of the University of Michigan told Newsweek she has concerns about a "drastic policy change, which does not allow states, and providers, time to adjust."
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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."
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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 CMS press release characterizes provider taxes as 'money laundering.' These taxes are, however, legal, so that term is inaccurate Dr. Susan Dorr Goold, a professor of Internal Medicine and Health Management and Policy at the University of Michigan, told Newsweek.
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
Dr. Susan Dorr Goold of the University of Michigan, told Newsweek: "I do think that CMS can and should take a hard look at all the sources of funds states use to pay for their share of Medicaid, including but not limited to provider taxes.
"Eliminating states' ability to use any and all provider taxes, however, would decrease states' budgets for Medicaid, except for Alaska, which doesn't use provider taxes. States then must either raise taxes from other sources, or decrease enrollment, or decrease payments to providers. Decreasing enrollment would increase uninsurance, which would hurt providers, particularly those that care for substantial numbers of Medicaid enrollees. Even more important, it would hurt those who lose insurance.
"I am especially concerned about a rapid implementation of this drastic policy change, which does not allow states, and providers, time to adjust."
Laura Wherry, a professor of Economics and Public Service at the New York University Wagner Graduate School of Public Service, told Newsweek: "This proposed rule is seeking to strengthen government oversight of how states finance their portion of the Medicaid program. If finalized, the states affected by this rule will need to figure out how to make up those resources in other ways, perhaps by diverting spending from other areas or increasing taxes, or by scaling back current Medicaid benefits or how much they pay health care providers."
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.
Update 05/13/25, 10:58 a.m. ET: This article has been updated with comment from Dr. Susan Dorr Goold.
Update 05/13/25, 11:29 a.m. ET: This article has been updated with comment from Professor Laura Wherry.
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