On July 23, CMS issued a proposed rule implementing the Working Families Tax Cut legislation’s (WFTCL’s) indirect hold harmless provisions. Such provisions include the freeze on provider tax increases in all states for all services other than nursing facility and intermediate care facility services, as well as a phase down of the provider tax indirect hold harmless threshold from the current 6% to 3.5% in expansion states.
The proposed rule, which builds on preliminary guidance the agency issued last November, establishes a process for determining the new hold harmless thresholds in each state, which are based on the taxes enacted and imposed in the state as of July 4, 2025, and establishes more detailed quarterly tax reporting requirements. In good news for states and providers, the proposed rule takes a more flexible approach to determining whether a tax had been enacted and imposed as of July 4, 2025, compared to the approach suggested in CMS’s preliminary guidance. The proposed rule also specifies that the required hold harmless phase down in expansion states will be applied on a federal fiscal year, rather than state fiscal year, basis.
More concerning for states and providers is that CMS proposes to require retrospective compliance determinations based on actual tax and patient service revenues. The determinations will be conducted by CMS two years after the tax year in question, leaving states and providers vulnerable to federal recoupments. The proposed rule also removes the secondary test, known as the “75/75” test, that allows states to demonstrate that taxes that exceed the indirect hold harmless thresholds are compliant with federal law. It would also establish a new tax class for health insurer services and would subject these taxes to the restrictions in the WFTCL.
If you have any questions about how this preliminary guidance and the provisions of the WFTCL may impact you, please reach out to any Eyman Partners attorney to discuss.