The Centers for Medicare & Medicaid Services (CMS) issued a proposed rule on July 21, 2026, to implement Section 71115 of the 2025 budget reconciliation act, P.L. 119-21, the Working Families Tax Cut (WFTCA). The proposal calls for introducing significant changes to how states finance Medicaid through healthcare-related taxes.
Though much of the attention has focused on the proposed rule’s implications for Medicaid provider taxes, it also raises important questions for State-Based Marketplaces (SBMs), Section 1332 reinsurance programs, health insurers, and state budget officials. The comment period closes September 12, 2026, giving states and stakeholders a limited window to assess the proposal and provide feedback to CMS.
To better understand the potential implications, Andrea Maresca spoke with Mary Goddeeris, Principal at Health Management Associates (HMA) and Medicaid financing expert; Lina Rashid, Principal at HMA and federal healthcare and Marketplace policy expert; and Zach Sherman, Managing Director for Coverage Policy and Program Design at HMA, and a national expert on ACA Marketplaces and state coverage programs.
Q: What is CMS proposing in this rule, and why is it generating attention among state policymakers and healthcare leaders?
Mary Goddeeris: At its core, the proposal implements Section 71115 of WFTCA, which significantly changes the federal rules governing Medicaid provider taxes. Historically, states could satisfy the federal indirect hold harmless test by using a generally applicable 6 percent threshold. The new law replaces that standard with more restrictive state- and provider-specific thresholds. For many provider taxes in Medicaid expansion states, allowable thresholds will phase down beginning in fiscal year 2028 and fall to 3.5 percent by 2032. The proposed rule implements those statutory changes.
The statutory change has attracted a lot of attention because provider taxes are one of the primary tools states use to finance Medicaid programs. Any changes to those financing mechanisms can have a ripple effect on state budgets, provider payments, managed care financing, supplemental payment programs, and long-term Medicaid strategy. State officials and healthcare leaders are all evaluating the potential fiscal and operational implications.
Q: The proposal is framed as a Medicaid financing rule. Why are stakeholders outside Medicaid also paying attention?
Lina Rashid: One reason is that CMS proposes creating a new permissible provider tax class called “services of health insurers.” CMS indicates this class could include issuers offering individual market coverage, group market coverage, catastrophic plans, short-term limited duration insurance, and certain excepted benefit products (dental and vision only policies), among others. Managed care organizations would generally remain under an existing provider class.
The proposal raises questions because many states already use insurer assessments to fund activities outside Medicaid. These assessments may support State-Based Marketplaces (SBMs), Section 1332 reinsurance programs, or other state affordability initiatives. The proposed rule seems to make these assessments subject to the same provider tax framework and hold harmless restrictions that would be applied to Medicaid financing rules.
The proposal does not clearly answer how broadly CMS intends to interpret these provisions, especially in the cases of taxes that have no direct connection to Medicaid financing. Under a strict framework, it is possible that many states may not meet CMS’s standard, and that they may face financial consequences with respect to the Medicaid program, SBMs, or other initiatives.
Q: How could the proposed rule affect ACA Marketplaces and Section 1332 reinsurance programs?
Zach Sherman: The immediate challenge is the uncertainty with this proposed rule. Many SBMs and reinsurance programs rely on assessments imposed on commercial health insurers. Currently, those assessments generally support Marketplace operations, affordability programs, or reinsurance initiatives rather than Medicaid.
CMS writes that healthcare-related taxes imposed on the new insurer class would be subject to the same hold harmless framework established in Section 71115. The proposal does not, however, clearly state whether insurer assessments used for non-Medicaid purposes would be included. Clarity on this issue is critical because many states depend on these assessments to sustain Marketplace infrastructure and affordability initiatives.
States that already operate SBMs, states considering transition to an SBM, and states supporting reinsurance programs through insurer assessments will want to evaluate how the proposal could affect existing funding models and future flexibility, alongside impacts to Medicaid funding.
Q: For the newly established health insurer permissible class, is the applicable threshold determined by aggregating all taxes imposed on entities within the class, for example including assessments on individual market issuers and catastrophic plans, or is the threshold applied separately to distinct entities within the class?
Rashid: If individual market issuers and catastrophic plans are both included in the same new permissible class (“services of health insurers”), then they would be aggregated across the class to measure if it meets CMS’s threshold, not separately. It would be the combined impact of individual market issuers and catastrophic plans revenue generated from the taxes imposed divided by the applicable revenue base for the health insurer class.
Q: What are the most significant questions states should be considering right now?
Goddeeris: States first need to understand their exposure under the Medicaid provisions themselves. Many states rely heavily on provider taxes to support Medicaid financing. They should be analyzing existing tax structures, estimating future fiscal impacts, and understanding how the phased-down thresholds could affect funding sources over time.
State officials should also consider how this proposal intersects with other major Medicaid policy and budget pressures. States are conducting eligibility redeterminations, implementing new federal requirements, evaluating managed care financing approaches, and managing broader budget constraints. This proposed rule could become another important factor in long-term Medicaid financing decisions and potential driver for significant policy and programmatic changes.
Q: Where should healthcare stakeholders focus their attention while the regulation is pending?
Sherman: Stakeholders should start by assessing whether they could be directly or indirectly affected. States, Marketplaces, health plans, providers, and trade associations may all have different perspectives on implementation questions that remain unresolved.
Rashid: Organizations also should focus on identifying areas where they need additional clarification. In our review, some of the most significant questions involve the scope of the insurer class, how CMS will measure the allowable threshold within each class, the applicability of the rule and hold harmless requirements to non-Medicaid assessments, and how CMS intends to interpret statutory language. Those are all issues stakeholders may want to address in their comments.
How HMA Can Help
Although CMS’s proposal focuses on implementing Medicaid financing reforms enacted by Congress, the effect may extend beyond Medicaid to include insurer assessments, Marketplace funding, reinsurance programs, and state affordability initiatives. Until CMS provides clarification, states and insurers will likely continue evaluating potential operational, fiscal, and policy implications.
HMA Medicaid financing, federal policy, actuarial, and Marketplace experts are helping states, health plans, provider organizations, and other stakeholders evaluate the proposed rule, assess potential impacts, and develop comment strategies.
HMA and its companies, including Wakely and Leavitt Partners, can support strategic planning, design and implementation of SBMs, Medicaid and Marketplace policy development and regulatory compliance, actuarial analysis, data development and reporting. Connect with us to learn how we can help your organization navigate the federal and state policy changes. Access additional insights from the ACA Marketplace team here.