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CMS Issues Letter on Provider Taxes

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CMS Issues Letter on Provider Taxes

August 20, 2014

In a State Health Official (SHO) letter dated July 25, the Centers for Medicare and Medicaid Services (CMS) provides states with information regarding the treatment of health care-related taxes (provider taxes) and their effect on Federal matching funding under Medicaid and CHIP. CMS said the purpose of the letter is to address "confusion among states as to what would or would not be considered a health care-related tax."

Provider taxes are a legally permissible way for states to draw Federal Medicaid matching funds into their programs. The permissible class of services on which provider taxes could be levied was narrowed by the Balanced Budget Act of 1997 to Medicaid managed care organizations (MCOs), which, according to the letter "placed a particular burden on the Medicaid program." This in turn led to a change contained in the Deficit Reduction Act of 2005 (DRA) that broadened the scope to all MCOs, not just to Medicaid MCOs. 

CMS indicates that “some states may have continued to tax only Medicaid MCO services by incorporating only Medicaid MCOs into larger (often existing) state and local taxes,” such as “gross receipt taxes, tangible personal property taxes, general use taxes and insurance premium taxes which are otherwise non-health care-related.” However, according to the new SHO letter, “such taxes are not consistent with applicable statutory and regulatory requirements because they target Medicaid providers and treat such providers differently for purposes of the tax from other individuals or entities.” It goes on to say that "Taxing a subset of health care services or providers at the same rate as a statewide sales tax, for example, does not result in equal treatment if the tax is applied specifically to a subset of health care services or providers (such as only Medicaid MCOs), since the providers or users of those health care services are being treated differently than others who are not within the specified universe."

CMS points out that the controlling statute “limits the availability of Federal Medicaid funding when a state imposes health care-related taxes that do not meet certain requirements,” and advises states “that may have such a taxing structure to consider their current practices in light of this guidance and make any changes necessary to achieve compliance as soon as feasible, but no later than the end of their next regular legislative session.”