Compliance in the Age of Discretion: Navigating CMS’s New Medicaid Oversight Landscape

From Statistical Certainty to Subjective Scrutiny

For years, Medicaid financing relied on formulas and thresholds—clear-cut lines that told states whether their provider tax proposals passed muster. But with CMS’s proposed rule in May 2025, we’re entering a new era. Compliance will no longer be just about checking the box. It will be about anticipating CMS’s judgment, navigating more subjective standards, and preparing for increased documentation and oversight.

This rule reflects a shift in how CMS wants to evaluate provider tax waivers—from mechanical compliance to a principled, intent-driven approach. That may sound ideal in theory. In practice, it creates more gray zones, more regulatory interpretation, and more work for Medicaid compliance teams.

The Shift: From Tests to Discretion

Under current rules, states that impose non-uniform provider taxes can still win CMS approval if they pass the B1/B2 statistical test, showing the tax is “generally redistributive.”

But CMS now believes this is too easily manipulated. The proposed rule:

• Eliminates reliance on the B1/B2 test alone for waiver approval.

  
  

• Gives CMS the authority to deny waivers even when statistical thresholds are met—if they determine Medicaid services are being taxed more heavily.

  
  

• Requires states to submit additional evidence showing their tax schemes meet the “intent” of being redistributive.

  
  

In short, the rule moves from compliance by calculation to compliance by interpretation.

Implications for State Medicaid Programs and Their Partners

This change reshapes how compliance teams must think and act:

1. Documentation Requirements Will Grow

   States (and their consultants) will need to:

   
   

   • Justify the rationale for different tax rates.

   • Provide deeper financial modeling.

   • Prepare preemptive responses to likely CMS objections.

     
     

2. CMS’s Decision-Making May Vary

   Subjective standards can lead to inconsistent approvals across regions or administrations. A waiver approved today might not be approved next year—even if the policy hasn’t changed.

   
   

   Compliance professionals must track CMS language, policy guidance, and informal communications closely to anticipate evolving enforcement trends.

   
   

3. Compliance Reviews Will Require Broader Teams

   Legal, finance, actuarial, and policy teams will all need to collaborate more deeply. No longer can tax compliance be siloed—it now touches multiple operational layers.

   
   

4. Slower Approval Timelines

   As CMS examines waivers more closely, approval timelines may lengthen. States and MCOs must account for this in their implementation schedules and contracts.

Compliance Culture Needs to Evolve

This rule challenges compliance teams to move beyond regulatory checklists. Success will now depend on:

• Strategic foresight: anticipating CMS’s interpretation of “fairness” in tax design.

  
  

• Narrative building: making the case for why a non-uniform tax is equitable and legally sound.

  
  

• Risk tolerance management: advising leadership on the compliance and financial risks of innovative financing mechanisms.

  
  

A New Mindset for Medicaid Oversight

We often talk about building a “culture of compliance.” This rule calls for a culture of regulatory intelligence—a proactive, adaptable, cross-functional approach to working within federal Medicaid frameworks.

Compliance is no longer just the gatekeeper. It’s the navigator through increasingly nuanced federal oversight.

Final Thoughts

CMS’s push for deeper scrutiny in provider tax waivers is about restoring trust in Medicaid financing. But for compliance professionals, it means more than just updated spreadsheets—it demands strategy, agility, and the ability to see around regulatory corners.

Do you have questions about this blog? Please contact jessicazeff@simplycomplianceconsulting.com.