AHA Comments on CMS Medicaid Provider Tax Proposed Rule

September 21, 2026

The Honorable Mehmet Oz, M.D. 
Administrator 
Department of Health and Human Services 
7500 Security Boulevard 
Baltimore, MD 21244

Re: Medicaid Program; Amending the Indirect Hold Harmless Threshold of Health Care-Related Taxes

Dear Administrator Oz:

On behalf of our nearly 5,000 member hospitals, health systems and other healthcare organizations, our clinician partners — including more than 270,000 affiliated physicians, 2 million nurses and other caregivers — and the 43,000 healthcare leaders who belong to our professional membership groups, the American Hospital Association (AHA) appreciates the opportunity to comment on the Centers for Medicare & Medicaid Services (CMS) proposed rule regarding the indirect hold harmless threshold of healthcare-related taxes.

Provider taxes are a longstanding, legitimate and vital source of financing states' non-federal share of Medicaid expenditures. Congress expressly authorized healthcare-related taxes as a permissible source of Medicaid financing in 1991. Thus, states have relied on this authority for more than three decades to sustain their Medicaid programs. Provider taxes enable states to support their Medicaid programs, including to finance investments in program integrity, fraud control, eligibility and enrollment systems, and to finance supplemental payment programs that help offset Medicaid's chronically low base payment rates. These activities are critical to maintaining a program that serves over 70 million people and ensuring that the people who depend on Medicaid have access to care. Without this financing mechanism, many states would face significant budget shortfalls that could force reductions in Medicaid eligibility, covered benefits or provider payment rates, with serious consequences for patient access, particularly in rural communities.

Section 71115 of Public Law 119-21 (P.L. 119-21) imposed new limits on Medicaid provider taxes. Beginning in federal FY 2027, the law prohibits all states from increasing the provider tax indirect hold harmless threshold above the rate that was in place on the date of enactment. The law also reduces the hold harmless threshold for expansion states beginning in FY 2028 by 0.5 percentage points annually. The hold harmless threshold will be the lower of the existing percentage in a state or: 5.5% in federal FY 2028, 5.0% in federal FY 2029, 4.5% in federal FY 2030, 4.0% in federal FY 2031, and 3.5% for federal FY 2032 and subsequent years.

The proposed rule would implement these changes, including establishing new state and provider class-specific indirect hold harmless threshold percentages for existing provider taxes. The rule proposes substantial changes to how the indirect hold harmless threshold is calculated and how states and CMS monitor it. This includes a shift from the longstanding prospective estimate-based approach to a retrospective reconciliation methodology. CMS also proposes significant new one-time and ongoing reporting requirements that will impose substantial administrative burden on states, providers and CMS itself.

As such, the AHA is concerned that some proposals in this rule could create serious financial and operational disruption for states, hospitals and the patients they serve. We are particularly concerned that CMS' proposal to require retrospective reconciliation of actual tax collections and net patient revenue will create significant unpredictability for state Medicaid programs, as well as unnecessary and costly administrative burden for states, providers and the agency. Moreover, we are concerned that other proposals in this rule would unnecessarily compound the financial and operational impact of the statutory changes already required under P.L. 119-21. Specifically, we:

• Urge CMS to preserve the prospective, estimate-based approach for ongoing compliance monitoring and limit the retrospective actual-data requirement to the one-time threshold calculation mandated by statute.
• Ask CMS to delay the Dec. 31, 2026, interim reporting deadline to allow the agency sufficient time to deliberate on comments, finalize the rule and issue the detailed guidance necessary for accurate and complete data submission.
• Strongly oppose CMS' proposal to sunset the 75/75 test, which exceeds CMS' statutory authority, as Congress codified the test in 2006 and did not repeal it in P.L. 119-21.
• Encourage CMS to allow states flexibility to align the administrative calendar year used as the basis for the threshold calculation with other state administrative calendars, such as state or federal fiscal year, subject to CMS review and approval. 
• Request additional clarification on the proposed health insurer permissible class, including its distinction from the existing Managed Care Organization (MCO) permissible class, and its application to taxes not used to finance the non-federal share of Medicaid expenditures. 

We appreciate your consideration of these issues. Our detailed comments are attached. Please contact me if you have any questions, or have a member of your team contact Ben Finder, AHA vice president of coverage policy, bfinder@aha.org, or Krista Geier, AHA senior associate director of Medicaid policy, at kgeier@aha.org.

Sincerely,

/s/

Ashley B. Thompson
Senior Vice President
Public Policy Analysis and Development

View the detailed letter below.

Contents

Enacted and Imposed

Defining Net Patient Revenue

Retrospective Reconciliation of Net Patient Revenue and Tax Collections

One-time and Ongoing Reporting Requirements

Consequences for Exceeding the Threshold or Failing to Comply with Reporting Requirements

75/75 Test

Federal and State Fiscal Year Considerationsar Considerations

New Health Insurer Permissible Class