Managed Care in the Crosshairs: How CMS’s Medicaid Rule Could Reshape MCO Participation

Jessica Zeff
Jun 17
2 min read

Updated: Jul 20

When Financing Shifts, So Does the Ground Beneath Managed Care

Medicaid Managed Care Organizations (MCOs) are central to modern Medicaid. In most states, they deliver the bulk of services, administer benefits, and often act as key financial intermediaries. But CMS’s May 2025 proposed rule—designed to eliminate a specific provider tax loophole—could quietly but significantly reshape the environment in which MCOs operate.

This rule isn’t just about compliance. It’s about predictability, sustainability, and strategy—and MCOs will be paying close attention to how it unfolds.

MCO Taxes: A Popular (and Now Problematic) Tool

Many states fund part of their Medicaid programs by taxing MCOs, particularly Medicaid-focused plans. These taxes often vary widely depending on whether the plan serves Medicaid, commercial, or Medicare Advantage populations.

Under the current rules, if the tax isn’t uniform, a state can still get CMS approval via the B1/B2 “generally redistributive” statistical test. The issue? Some states use this test to justify disproportionately high taxes on Medicaid MCOs, creating a financial pipeline that draws in more federal matching funds.

The CMS rule proposes eliminating this flexibility. Even if the test is technically passed, CMS would deny approval if the tax is higher for Medicaid than for non-Medicaid lines of business.

Implications for MCOs

The rule doesn’t regulate MCOs directly, but they’re deeply embedded in the financing structure it seeks to reform. Here’s how they could be affected:

Financial Pressure
Medicaid-focused MCOs could face:
- Increased tax burdens if states broaden the tax base to all MCOs.
- Rate instability, as states adjust capitation payments to accommodate new fiscal realities.
- Revenue unpredictability, particularly in states forced to redesign their tax structure quickly.
Contracting Uncertainty
MCOs may see their contracts reopened, renegotiated, or subjected to greater scrutiny. States will need to ensure that any new arrangements:
- Remain actuarially sound.
- Comply with the new CMS standards.
- Do not trigger unfair selection or service disparities.
For national MCOs operating in multiple states, this creates a patchwork of compliance and financial forecasting challenges.
Participation Decisions
In some states, the new rule could change the calculus of whether it’s profitable—or even sustainable—for MCOs to continue participating in Medicaid. Smaller plans or nonprofit MCOs may be particularly vulnerable.

State Strategies in Response

States may respond to the rule in various ways, all of which will affect MCOs:

Flattening tax rates across commercial and Medicaid plans, which could shift costs to commercial insurers—or increase rates for consumers.
Reducing reliance on provider taxes altogether, leading to cuts elsewhere in the Medicaid budget.
Revisiting MCO structures, including regional vs. statewide contracts and population segmentation.

Compliance Priorities for MCOs

MCO compliance officers and finance teams should prepare for:

Greater involvement in state-level financing discussions, particularly during rate-setting negotiations.
Scenario planning: how would changing tax burdens or capitation models affect margins?
Data transparency: new CMS discretion may bring increased requests for utilization and payment data to justify tax fairness.

Conclusion: Adaptability Will Be Key

This rule may not name MCOs, but they are clearly among its most impacted stakeholders. If finalized, the regulation will disrupt longstanding financial arrangements between states and managed care plans. For MCOs, this is the moment to lean in—not only to protect their interests, but to ensure they remain stable partners in a changing Medicaid landscape.

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