Provider Tax-Dependent Healthcare Entities Face Further Uncertainty
States looking to private administrators to run provider tax programs should pay close attention to potential circuit split on federal oversight.
On December 5, 2025, a three-judge panel of the 11th circuit issued a ruling (Case 24-10875) that “…presents a question about how states may—and may not—foot their share of the Medicaid bill” using the state’s Directed Payment Program. The ruling remands the case back to the lower court finding that a 2023 Centers for Medicare & Medicaid Services (CMS) Bulletin in which CMS took the position that the hold-harmless prohibition on Medicaid provider taxes covers purely private re-distribution arrangements is final agency action and can be appealed by the state in Federal court under the Administrative Procedure Act (APA). In doing so the Court clarified the statutory prohibition explaining that Federal law (42 U.S.C. § 1396b(w)(4)(C)(i)) has long prohibited states from imposing provider taxes while guaranteeing to hold taxpayers harmless for any portion of the tax costs, opining that the without the hold-harmless rule, states could secure “practically unlimited extra Federal matching funds using revenue that is little more than a short-term loan from the hospitals.”
Earlier this fall, on September 24, 2025, the United States District Court for the Eastern District of Texas ruled in favor of the State of Texas in a similar challenge to the definition of “hold-harmless provisions” in healthcare-related taxes. In that case, Texas argued that CMS was precluded from expanding the definition to include private agreements between providers, even when states have no involvement. The court agreed, finding that CMS exceeded its statutory authority by expanding the “hold-harmless provision” to include guarantees by private parties in private agreements and in attempting to strip Federal courts of jurisdiction by sending these issues to a CMS administrative review process. They also found the relevant provisions of the 2024 Medicaid Program; Medicaid and Children’s Health Insurance Program (CHIP) Managed Care Access, Finance, and Quality, 89 Fed. Reg. 41,002 (May 10, 2024) (“the 2024 Medicaid Access Final Rule”) arbitrary and capricious because CMS failed to acknowledge or explain its change in position regarding the definition of “hold-harmless arrangement” and did not address states’ good-faith reliance on the agency’s prior position. The ruling vacated the challenged portions of the 2024 Medicaid Access Final Rule (42 C.F.R §§ 438.6(c)(2)(ii)(G), 438.6(c)(2)(ii)(H), and 430.3(e)) and the 2023 and 2024 Bulletins, permanently and nationally enjoined CMS from enforcing its interpretation of 42 U.S.C. § 1396b(w)(4)(C)(i). On November 21, 2025 CMS filed a notice of appeal of the district court’s ruling.
What does this (potentially) mean for healthcare payments?
States looking at the Texas case might have seen privately administered provider taxes as a port in a storm. It might be too early to draw such a conclusion.
First, while the Texas court opined that the 2024 Medicaid Access Final Rule exceeded CMS’s statutory authority by expanding the hold-harmless provision to include guarantees by private parties in private agreements, what the court actually found was that CMS acted arbitrarily and capriciously in how they did so. Second, in the Florida case, in finding against the state, the panel’s opinion explicitly rejected Florida’s arguments that because the tax is administered by private organizations it is not within CMS’s power to oversee compliance with the law’s hold-harmless provisions. This split between the 5th and 11th circuit courts creates an opportunity for the issue of CMS’s oversight of private agreements, whether provider tax related or not, to ultimately be decided by the Supreme Court.
States, hospitals, and other providers dependent on privately administered provider taxes should pay close attention to what the Florida court decides on remand, whether CMS’s appeal of the Texas case continues, and whether a split in the circuits leads to further appeals of this issue.
Additionally, given the slow pace of judicial action and the short timelines contained in HR 1 (“One Big Beautiful Bill Act”), the question for states and providers who are parties to or impacted by agreements privately administer provider tax programs may be as much about new guidance that CMS might attempt to promulgate to clarify the issue or, as relevant in Florida, special terms and conditions of Medicaid waivers providing for disclosure to the agency, as it is about how the courts ultimately come down on CMS’s authority to enforce oversight over the private administration of these arrangements.
Given the varying timelines associated with recent changes to enforcement associated with the relevant sections of HR 1, and ongoing litigation, this issue presents both near and longer-term risk for states operating these programs and the provider organizations operating in those states. As provider system leaders continue to steward their organizations through these policy changes, it is important that they pay close attention to:
- Financial risk of potential disallowance of existing tax revenue.
- Financial risk to a given provider organization should their state’s Medicaid program losing a significant source of match revenue.
- Operational risk of potential increased disclosure requirements associated with provider tax participation – whether publicly or privately administered.
- Reputational risk of increased scrutiny by CMS of all documentation related to provider-related taxes including those between providers, between providers and local government, and between providers and the state.
- Financial risk of increased compliance costs related to identifying all this information, disclosing it, and complying with whatever auditing is associated.
Background and Next Steps
TX v. CMS (U.S. District Court for the Eastern District of Texas, September 24, 2025)
The Issue: The court previously enjoined CMS from enforcing a 2023 Bulletin that expanded the definition of “hold-harmless provision” in Medicaid funding, finding it exceeded CMS’s statutory authority under the Social Security Act. Despite this ruling, CMS issued a 2024 Medicaid Access Final Rule and new 2024 Bulletin largely adopting the same interpretation rejected by the court. The dispute centers on the definition of “hold-harmless provisions” in healthcare-related taxes that fund state Medicaid programs.
Court’s Findings: The 2024 Medicaid Access Final Rule and 2023 and 2024 Bulletins exceed CMS’s statutory authority by expanding “hold-harmless provision” to include guarantees by private parties in private agreements and attempting to strip Federal courts of jurisdiction over certain disputes. The 2024 Medicaid Access Final Rule is arbitrary and capricious because CMS failed to acknowledge or explain its change in position regarding the definition of “hold-harmless arrangement” and did not address states’ good-faith reliance on the agency’s prior position.
Court’s Ruling: Vacated the challenged portions of the 2024 Medicaid Access Final Rule (42 C.F.R §§ 438.6(c)(2)(ii)(G), 438.6(c)(2)(ii)(H), and 430.3(e)) and the 2023 and 2024 Bulletins and Permanently enjoined CMS from enforcing its interpretation of 42 U.S.C. § 1396b(w)(4)(C)(i)
- Next Step: CMS filed a notice of appeal to the 5th circuit.
Florida Agency for Health Care Administration v. CMS (11th Circuit, December 5, 2025)
The issue: In February 2023, CMS issued an “Informational Bulletin” stating that private redistribution arrangements among healthcare providers to offset provider taxes violated the hold-harmless rule. The 2023 Bulletin threatened investigation and potential clawback of Medicaid funding from states with such arrangements. Florida sued under the APA, arguing that the 2023 Bulletin misinterpreted the hold-harmless rule, was arbitrary and capricious, and was issued without proper notice and comment.
Court’s Findings: The court agreed with CMS that the law covers agreements between private parties for the redistribution of funds to offset provider taxes. The court rejected Florida’s arguments that the 2023 Bulletin represented a change in policy, finding it consistent with CMS’s interpretation dating back to 2008. The court determined that the 2023 Bulletin was an interpretive rule rather than a legislative rule, meaning it didn’t require notice and comment procedures.
Court Ruling: The 11th Circuit reversed the district court’s previous ruling, finding the 2023 Bulletin was final agency action and Florida’s challenge was ripe for review. The court affirmed the denial of Florida’s preliminary injunction request, finding Florida unlikely to succeed on the merits.
- Next Step: The court remanded the case back to the district court in Miami.
CMS Action at Issue
The 2024 CMS Informational Bulletin (April 22, 2024) provides temporary relief, by granting enforcement discretion until January 1, 2028, acknowledging that many states currently have arrangements that violate the hold-harmless prohibition, and provides a grace period because immediate elimination could cause state budget shortfalls and provider solvency issues, particularly affecting safety net providers and underserved communities. The 2024 Medicaid Program; Medicaid and Children’s Health Insurance Program (CHIP) Managed Care Access, Finance, and Quality, 89 Fed. Reg. 41,002 (May 10, 2024) (permanently enjoined by the Texas court) required provider attestations that they don’t participate in hold-harmless arrangements, effective for rating periods beginning on or after January 1, 2028.
On November 14, 2025, CMS promulgated guidance regarding the transition discretion included in § 71117. In that guidance, CMS advised that it intends to implement these provisions through notice and comment rulemaking and granted the following transition periods:
- For health care-related taxes on services of managed care organizations (MCO) that were approved before July 4, 2025 – Until the end of the applicable state’s fiscal year ending in calendar year 2026.
- For all other taxes on permissible classes that were approved before July 4, 2025: Until the end of the applicable state’s fiscal year ending in calendar year 2028, but no later than October 1, 2028.
The guidance does not speak to the issue of private administration.
- Next Step: CMS’s notice and comment rulemaking.
HR1 (One Big Beautiful Bill Act): Provider tax relevant sections (§§ 1115 and 1117)
- Reduce hold-harmless thresholds: Changes the statutory threshold from 6% to declining percentages for expansion states (5.5% in FY2028 down to 3.5% by FY2032) and potentially 0% for states without existing approved taxes.
- Restricts tax structure flexibility: Establishes that taxes are not considered “generally redistributive” if they impose lower rates on providers with lower Medicaid volume or higher rates based on Medicaid units.
- Creates new definitions: Introduces precise statutory definitions for “Medicaid taxable unit,” “non-Medicaid taxable unit,” and “tax rate group”.
- Provides for limited grandfathering: Allows certain existing taxes on specific classes to maintain their approved percentages.
- Sets earlier effective dates: Hold-harmless threshold changes begin October 1, 2026.
- Timeline for provider tax restrictions:
- July 4, 2025 – New waiver restrictions take effect with up to 3-year transition (HR1 § 71117)
- October 1, 2026 – New hold-harmless thresholds begin (HR1 § 71115)
- Oct 1, 2027 – Expansion state threshold drops to 5.5% (HR1 § 71115)
- FY 2029-2032 – Expansion state thresholds continue declining to 3.5%.
- Next Step: Notice and comment rulemaking as discussed above.
We welcome the opportunity for further discussion.
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