Not All States Alike: How the Medicaid Tax Rule Hits Expansion and Non-Expansion States Differently

Medicaid Is a National Program, but Its Impact Is Local

CMS’s proposed rule to close provider tax loopholes aims to create consistency and fairness in Medicaid financing across the country. But the effects of this rule will not be felt evenly. For states that have expanded Medicaid under the Affordable Care Act, the changes may strike at the very heart of how they’ve financed that decision. In contrast, for non-expansion states, the implications are narrower—though still significant.

This is a story of two Medicaid realities: one where coverage was broadened and creatively funded, and one where limitations have defined the program for over a decade.

The Expansion States: More at Stake, More to Lose

Medicaid expansion came with a promise: the federal government would shoulder most of the cost, but states needed to find ways to fund their share. Many chose provider taxes, particularly on Medicaid managed care organizations (MCOs), to generate those funds without raising general revenues or cutting other services.

Here’s where the proposed CMS rule lands hard:

• Elimination of loophole-based waivers threatens these funding streams.

  
  

• States may be forced to redesign or reduce provider tax rates, potentially cutting the revenue used to support expansion.

  
  

• CMS estimates that up to $33 billion in federal matching funds could be curtailed over five years if current practices are disallowed.

  
  

States like California, New York, and Pennsylvania—leaders in both Medicaid expansion and creative tax design—may need to significantly rework how they sustain their coverage models.

Non-Expansion States: Less Complexity, But Less Flexibility

States that have not expanded Medicaid—such as Texas, Florida, and Georgia—typically rely less on MCO taxes for financing. For these states, the proposed rule may not threaten current funding levels in the same way. However:

• Future decisions to expand Medicaid may be affected, as the rule limits a popular method of funding expansion without raising new taxes.

  
  

• Existing supplemental payments or narrowly tailored taxes may still be impacted if they disproportionately target Medicaid.

  
  

• The rule may dissuade states from pursuing new waiver options that require significant state funding.

  
  

For non-expansion states, this rule could reinforce the status quo—limiting the financial pathways that would make expansion politically viable.

Compliance Complexity: Divergent Paths Ahead

Compliance professionals in expansion states will likely face more urgent work:

• Evaluating whether current MCO taxes can survive the new waiver criteria.

  
  

• Preparing documentation to defend waiver renewals under more subjective standards.

  
  

• Supporting state agencies in redesigning tax schemes that maintain revenue neutrality.

  
  

In non-expansion states, the workload may shift toward:

• Advising on the risks of future provider tax-based financing models.

  
  

• Modeling alternate expansion pathways in case of federal funding changes.

  
  

Equity Implications: Who Gets Hurt?

The rule isn’t just about state balance sheets—it’s about people. Expansion states tend to serve larger numbers of low-income adults through Medicaid. If provider taxes shrink, states might:

• Cut optional benefits (like dental or vision)

  
  

• Lower provider payments, straining safety-net systems.

  
  

• Delay or scale back proposed expansions (e.g., postpartum care, coverage for undocumented populations).

  
  

These outcomes disproportionately affect the very populations the rule claims to protect.

Final Thoughts

CMS’s push to restore integrity to Medicaid financing is rooted in good policy principles. But in a landscape shaped by 50 unique programs, the impact won’t be uniform. Expansion states face tough decisions ahead. Non-expansion states may find the rule further entrenches their hesitation.

For compliance professionals, the message is clear: policy isn’t made in a vacuum. It lands differently depending on your state, your funding structure, and your coverage commitments.

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