Skilled Nursing Is Exempt From the Medicaid Provider-Tax Cut, With One Narrow Exception

Nearly every state funds part of its Medicaid program with provider taxes. The state taxes a class of providers, counts the revenue toward its share of Medicaid spending, draws federal matching dollars against it, and uses the total to pay those providers higher rates. For a skilled nursing facility with a large Medicaid census, that rate drives much of the cash flow a lender sizes debt against.

The 2025 reconciliation law (Public Law 119-21) set out to shrink this financing, and in July CMS proposed the rule that carries it out. In expansion states, the safe-harbor ceiling on provider taxes would fall from 6% of net patient revenue by half a percentage point a year, starting in fiscal 2028, until it reaches 3.5%. CMS projects the rule will reduce federal Medicaid spending by $246 billion from 2026 through 2035. Comments are due September 21.

Taxes on nursing facilities are exempt from that step-down, as are taxes on intermediate care facilities for people with intellectual disabilities. The proposed rule leaves the thresholds for both unchanged.

The February rule on Medicaid-weighted taxes

Nursing home taxes fall under an earlier CMS final rule, published February 2 and effective April 3. It implements another section of the same law and prohibits taxes that charge providers with more Medicaid business a higher rate than providers with less. CMS's example is a nursing facility tax of $200 per bed day for facilities with more than 40 Medicaid-paid bed days and $20 per bed day for everyone else.

Nursing home groups asked CMS to exempt nursing facility taxes. CMS declined, saying every class of provider tax should be evaluated the same way. The rule identifies nine affected taxes in seven states, nearly all of them taxes on managed care organizations. On nursing homes, CMS wrote that "of the many nursing facility taxes, we are only aware of two that appear to utilize the loophole," and it did not name the states. Each state with an affected tax has until the end of its fiscal year ending in 2028, and no later than September 30, 2028, to comply. After that, CMS will withhold the federal match tied to the noncompliant revenue.

Checking the state tax in skilled nursing diligence

Many states tier their nursing home taxes, and LeadingAge reports that tiers based on continuing care retirement community status are expected to remain compliant. The February rule reaches tiers keyed to Medicaid volume.

Diligence on a skilled nursing acquisition or refinance should include the state's nursing facility tax, read closely enough to see whether the rate per bed day rises with Medicaid days. Where it does, the state may have to restructure or replace revenue that supports the facility's Medicaid rate before 2028, and debt sized on today's rate assumes that revenue continues.

Sources

• HFMA, July 22, 2026: Medicaid provider tax proposed rule
• LeadingAge, July 30, 2026: CMS Medicaid provider tax proposed rule implements HR 1's hold harmless phasedown
• Federal Register, February 2, 2026: Closing a Health Care-Related Tax Loophole (CMS-2448-F)
• LeadingAge: CMS final rule narrows Medicaid tax loophole, rejects exemption for nursing homes
• State Health and Value Strategies: compliance deadlines