Section 71115 of H.R. 1 modifies the threshold for the hold harmless provision of health care-related (provider) taxes within U.S.C. 1396b(w)(4). This hold harmless threshold is currently established at 6% of net patient revenue. The changes to this threshold are effective beginning on or after October 1, 2026. Changes impact states that have elected to expand Medicaid differently than states that have not expanded Medicaid:

Non-Expansion States

• Provider tax programs that are enacted, imposed, and are equal to or lesser than the hold harmless threshold of 6% of net patient revenue as of the date of enactment (July 4, 2025), will have their hold harmless threshold established at the individual tax program’s percentage of net revenue as of July 4, 2025.
  • For example, a provider tax program that is enacted and imposed at 5.5% of net patient revenue as of July 4, 2025, will have their hold harmless threshold established at 5.5% of net patient revenue for periods beginning October 1, 2026, and after.
• Tax programs that were not enacted or not imposed as of July 4, 2025, will be set to 0% of net patient revenue.

Expansion State

• For provider tax programs enacted and imposed as of July 4, 2025, that comply with hold harmless rules, states must use a hold harmless threshold that is the lesser of:
  • The individual tax program’s percentage of net patient revenue on July 4, 2025, or
  • The following percentage of net patient revenue based on the applicable federal fiscal year (FY):
    • 2027 6.0%
    • 2028 5.5%
    • 2029 5.0%
    • 2030 4.5%
    • 2031 4.0%
    • 2032 and after 3.5%
  • For Example, for FY 2028 if an individual provider tax program on July 4, 2025, was calculated at 4.0% of net patient revenue, the hold harmless threshold would be established at 4.0% of net patient revenue. Conversely, for FY 2028, if an individual provider tax program at July 4, 2025, was calculated at 5.8% of net patient revenue, the hold harmless threshold would be established at 5.5% of net patient revenue in accordance with the “lesser of” language.
  • Tax programs that were not enacted or not imposed as of July 4, 2025, will be set to 0% of net patient revenue.

Expansion State Exception

• Nursing facility (NF) and Intermediate Care Facilities for Individuals with Intellectual Disabilities (ICF/IID) provider classes are excluded from the reduction to the hold harmless thresholds and can maintain the current program net revenue percentage as of July 4, 2025. This exclusion is applicable to only those programs that meet hold harmless requirements as of July 4, 2025.
  • For example, a NF or ICF/IID tax program calculated with a percentage of net revenue of 5% as of July 4, 2025, would have their hold harmless threshold established at 5% of net patient revenue for October 1, 2026, and after.

General Note

Modifications to the law governing the hold harmless threshold are effective beginning October 1, 2026, which leaves the hold harmless threshold at 6% of net patient revenue up until that date. As such, states may make time-limited modifications to increase tax program percentages of net patient revenue prior to October 1, 2026, as long as programs are modified to no more than their specific percentage of net patient revenue as of July 4, 2025, by October 1, 2026. The language also seems to indicate a time-limited new provider tax program could be created after July 4, 2025, but would essentially be eliminated as of October 1, 2026.

Section 71117 of H.R. 1 establishes requirements regarding the waiver of uniform tax requirements for Medicaid provider taxes within 42 U.S.C. 1396b(w). The statutory changes become effective upon the date of enactment, subject to a transition period as determined by the Secretary of Health and Human Services, not to exceed three fiscal years. New criteria are being added to further define when a tax is not considered to be generally redistributive. This means that even though the calculation of a state’s provider tax program may pass the currently required P1/P2 or B1/B2 statistical tests, the tax may not be permissible if it violates the new more restrictive criteria determining the generally redistributive nature of a tax. The new criteria are as follows:

• Within a permissible class the taxes imposed on a taxpayer or tax rate group explicitly defined by its relatively lower volume of Medicaid taxable units that are lower rates than the tax imposed on any other tax rate group defined by its higher volume of Medicaid units will not be permissible.
• Within a permissible class the tax rate imposed on a taxpayer or tax rate group based upon its Medicaid taxable units that are higher than any tax rate imposed on a group based upon its non-Medicaid units will not be permissible.
• Taxes that exclude or impose lower taxes on a tax rate group defined by or based on any characteristic that results in the same effects as the two items above but may not explicitly use the term Medicaid to define the unit, will not be permissible.

The changes within this section are the same as changes published in the proposed rule “Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations-Closing a Health Care-Related Tax Loophole Proposed Rule.” Please refer to our Rule Overview for examples and considerations for these changes.