DEPARTMENT OF  HEALTH  & HUMAN SERVICES  
Centers for Medicare &  Medicaid  Services  
7500 Security Boulevard,  Mail Stop S2-26-12  
Baltimore, Maryland    21244-1850   CENTERS FOR MEDICARE & MEDICAID SERVICES 
  CENTER FOR MEDICAID & CHIP SERVICES 
CMCS Informational  Bulletin  
 
DATE:    February 17, 2023   
FROM:     Daniel Tsai, Deputy  Administrator and Director   
SUBJECT:     Health Care-Related Taxes and  Hold  Harmless  Arrangements  Involving the  
Redistribution of Medicaid Payments   
Background  
 
Recently, the Centers for Medicare & Medicaid Services  (CMS) has  been approached by several  
states with questions regarding the statutory and regulatory requirements applicable to health  
care-related taxes,  including  in connection with  proposals to implement  or renew Medicaid  
managed care state directed payments  (SDPs)  under 42 C.F.R.    438.6(c).  Many of these 
questions have focused on whether health care-related tax arrangements  involving the  
redistribution of Medicaid payments among providers  subject to the tax  would  comply  with the  
statutory and regulatory prohibition on  hold harmless  arrangementsthat is,  arrangements  in 
which  the State or  other unit of government imposing the tax provides (directly or  indirectly)  
for any payment,  offset,  or waiver that guarantees to hold taxpayers  harmless  for any portion of  
the costs  of the taxas specified  in section 1903(w)(1)(A)(iii)  and  (w)(4)  of the Social Security  
Act (the Act) and  implementing regulations. In response to  these questions,  this  informational  
bulletin reiterates  our longstanding position on the  existing federal requirements  that pertain to  
health-care related taxes and re-emphasizes  our goal of assisting states in ensuring appropriate 
sources of  non-federal share financing.      
CMS recognizes that health care-related taxes are a critical  source  of funding for  many  states  
Medicaid programs,  including for payments to  safety net providers. CMS supports states  
adoption of  health care-related  taxes when they are consistent with  federal requirements. CMS  
approves  many state payment proposals annually that are supported by health care-related taxes  
that appear  to meet federal requirements.  CMS  recognizes  the challenges faced by states  and  
health care providers  in  identifying sources of non-federal share financing  and implementing  
Medicaid  payment  methodologies that  assure payments are consistent with  federal requirements.    
Medicaid  statute and regulations afford states flexibility to  tailor health care-related taxes  within  
certain  parameters to  meet  their provider community  needs  and align with  broader  state tax  
policies and  priorities for  their  Medicaid  programs.  CMS remains committed to providing states  
with technical assistance aiming to  ensure that health care-related taxes used to finance the non-
federal  share of  Medicaid  expenditures  meet  the states policy goals and comply  with  federal  
requirements.  For example, CMS  is authorized to  waive the requirements that health care-related   CMCS Informational Bulletin    Page 2  
 
taxes  be  broad-based and/or uniform, when applicable conditions are met. 1  CMS regularly  
works with states to  approve such waivers  in  furtherance of  state goals while complying with  
federal requirements.    
Although the applicable  statutory and regulatory  provisions afford  states considerable flexibility  
in establishing health  care-related taxes,  such taxes  must be  imposed  in a  manner consistent with 
applicable federal  statutes and regulations, including  that  they may not  involve  hold harmless  
arrangements,  to avoid a reduction  in the states Medicaid expenditures eligible for federal  
financial participation.  Occasionally,  CMS  encounters  health care-related tax programs that  
appear to contain  hold harmless arrangements, which  contravene  section 1903(w)(1)(A)(iii)  and  
(w)(4)  of the Act and  42 C.F.R.  433.68(b)(3) and (f). Such arrangements are inconsistent with 
statutory and regulatory requirements  and  undermine the fiscal  integrity of the Medicaid  
program. Recently, CMS has become aware of  some health care-related tax  programs  that appear  
to contain a hold harmless arrangement  that involves the taxpaying providers redistributing 
Medicaid payments after receipt  to ensure that  all taxpaying providers receive  all or a portion of  
their tax costs back (typically ensuring that each taxpaying provider receives  at least  its  total tax  
amount  back).  
In this  informational  bulletin, CMS  is  reiterating  the federal requirements concerning  hold  
harmless arrangements  with  respect to  health care-related taxes. Further, states and providers  
should  be transparent  regarding any  explicit or implicit  agreements in place or under  
development to  ensure that all  health care-related taxes  meet federal requirements  to avoid a 
statutorily required reduction  in the states Medicaid expenditures  otherwise eligible  for federal 
financial participation.  CMS  recommends  that states that have questions or  concerns  about the 
permissibility of a health care-related  tax raise these concerns  to CMS  early  in the process of  
developing the states  tax program to avoid  issues  surrounding the permissibility of the non-
federal  share of Medicaid expenditures.  CMS  also intends  to  work with states  that may have  
existing  questionable  arrangements  to ensure compliance with  federal  statutory and regulatory  
requirements.   
Health Care-Related  Taxes and Hold Harmless  Arrangements  
 
During standard oversight activities and the review  of state payment proposals, particularly  
managed care SDPs and  fee-for-service payment  state plan amendments (SPAs),  CMS  is  
increasingly encountering health care-related tax  programs  that  appear to  contain hold harmless  
arrangements  involving the redistribution of Medicaid payments.  In these  arrangements, a state 
or  other unit of government imposes a health-care related  tax,  then uses the tax revenue to  
support  the non-federal share of Medicaid payments back to  the class of  providers subject to the  
                                                             
1  For non-broad based and/or  non-uniform health  care related taxes,  these conditions are: that the tax be imposed on  
a  permissible class or class,  that the  tax be generally redistributive, that the tax be  not directly correlated with  
Medicaid payments, and  that  the tax lack a hold  harmless  arrangement. See section 1903 (w)(3)(E)(ii) for the  
requirement that the tax  demonstrate that it is generally redistributive and not directly correlated with Medicaid  
payments. For the statistical test  demonstrating that the  tax is generally redistributive see 42 CFR  433.68 (e)(1) 
for waivers of the broad based  requirement only and 42 C.F.R.   433.68 (e)(2) for waivers of the uniformity  
requirement whether or  not the tax  is broad-based. See section 1903 (w)(4) and implementing  regulations  at 42  
C.F.R.   433.68 (f) for  the  hold  harmless  requirements. See section 1903 (w)(7) and 42 C.F.R.   433.56 for a list of 
permissible classes upon which states may impose health care-related taxes.  
  CMCS Informational Bulletin    Page 3  
 
tax. The taxpayers appear to  have  entered  into oral or written  agreements (meaning explicit or  
implicit  meeting of the  minds, regardless of the  formality or informality of any such agreement)  
to redirect or  redistribute the Medicaid payments to ensure that  all  taxpayers  receive all or a 
portion of their tax back, when  considering each providers retained portion of any  original 
Medicaid payment (either directly  from the state  or  from the state  through  a managed care plan2) 
and any redistribution payment  received by the provider  from  another taxpayer  or taxpayers.  
These redistribution payments  may  be made directly  from one taxpaying provider to another,  or  
the funds  may be contributed first to an intermediary redistribution pool.  
 
In these hold  harmless arrangements,  there appear  to be agreements among providers  (explicit or  
implicit  in nature)  such that  providers  that furnish a  relatively high  percentage  of Medicaid-
covered services  redistribute a portion of their Medicaid payments to providers with relatively  
low (or no) Medicaid  service percentage. The redistributions occur so  that  taxpaying providers  
are held harmless  for all or a portion of the health  care-related  tax. This  may  include the 
redistribution of Medicaid payments to providers that serve no Medicaid beneficiaries.  
 
These tax  programs  appear to  contain  impermissible  hold  harmless arrangements as defined  in  
section 1903(w)(4)(C)(i)  of the Act  and 42 C.F.R.   433.68(f)(3)  that  require  a reduction  in  
medical assistance expenditures  prior  to  the calculation of  federal  financial participation  as 
required  under  section  1903(w)(1)(A)  and (w)(1)(A)(iii)  of the Act. Here is  a detailed  example of  
a  hold harmless arrangement involving Medicaid payment redistribution:   
   
   A state imposes a  hospital tax based on the volume  of  inpatient hospital  services  
provided. The tax is broad-based,  uniform, and is  imposed on 10 hospitals.  
   Six of the hospitals  serve a high percentage of  Medicaid  beneficiaries,  three serve a low  
percentage  of Medicaid  beneficiaries, and one  hospital does not participate in Medicaid.  
   The state uses the tax revenue as the source of  non-federal share of Medicaid payments,  
which are made back to  nine of the  hospitals through SDPs.  The tenth hospital, which  
does not participate in Medicaid,  does not  receive any SDPs directly  from state-
contracted  managed care plans.  
   Nine  hospitals  enter  into  oral or written agreements (meaning an explicit or implicit  
meeting of the minds, regardless of the formality or informality of any  such agreement)  
to redirect or  redistribute the  Medicaid payments  that  the  eight of the  nine Medicaid-
participating hospitals receive. Under this arrangement,  five of the six hospitals  that 
furnish a  high  percentage of Medicaid-covered services  receive Medicaid payments  from  
the managed care plans, then redistribute  a portion of their Medicaid  payments  to the  
remaining  four  hospitals  with lower  Medicaid  service percentages  (including  to the one  
hospital that does not participate in Medicaid). The redistribution  amounts are  calculated  
to guarantee  that the  nine  participating  hospitals,  including those redistributing  their own  
payments and those  receiving the redistribution  amounts,  receive most, all, or more than  
all of  their total tax cost back.  
   The agreement among the taxpaying  hospitals results  in  a reasonable  expectation that the  
taxpaying  hospitals, whether directly through their Medicaid payments or due  to  the  
                                                             
2  The  term managed care plan is used  here and  throughout this guidance to include managed care organizations  
(MCOs), prepaid inpatient  health plans (PIHPs),  and prepaid ambulatory health plans (PAHPs) as defined in 42  
C.F.R.   438.2.   CMCS Informational Bulletin   Page 4 
 
availability of the  redistributed  payments received from  five of the six high Medicaid  
service volume hospitals  (regardless of whether the funds were  first pooled and then 
redistributed), are held harmless  for at least part  of  their  health care-related tax  costs.  
   The high-percentage Medicaid hospitals are willing  to participate because they still  
financially  benefit  from the tax program  (even net of  the  redistribution payments they  
make to  the lower Medicaid service volume hospitals),  and the redistribution enables  
broad support for  the  tax program  from all  hospitals, ensuring constituent support for  the  
state law authorizing  the  tax program.  
 
Section 1903(w)(4)  of the Act describes what constitutes a hold  harmless arrangement.  
Specifically,  section 1903(w)(4)(C)(i)  provides that a hold harmless provision exists where  [t]he  
State  or  other unit  of government imposing the tax  provides (directly or indirectly) for any  
payment,  offset,  or waiver that guarantees  to hold taxpayers harmless  for any portion of the costs  
of the tax. Implementing regulations at 42 C.F.R.   433.68(f)(3)  specify  that a  hold harmless  
arrangement exists where [t]he  State  (or other  unit of  government)  imposing  the  tax provides  
for any direct or  indirect  payment,  offset,  or waiver such that  the provision of the payment,  
offset,  or waiver directly or  indirectly  guarantees to hold taxpayers  harmless  for all or any  
portion of the  tax amount  (emphasis added).  In the preamble to  the 2008 final rule amending the  
above-referenced regulation, CMS wrote  that [a]  direct guarantee will  be found when a State 
payment  is  made available to a  taxpayer or a party  related  to  the taxpayer  with  the reasonable 
expectation that  the payment would result  in the  taxpayer  being held  harmless  for any part  of the  
tax  (through direct or indirect payments).3   
 
The word indirect in the regulation, highlighted  in the excerpt above, makes clear that  the state  
or  other unit of government imposing the tax  itself need not  be involved in the  actual  
redistribution of Medicaid payments  for  the purpose of  making taxpayers whole  for the  
arrangement  to qualify as a hold harmless.  It is possible  for a state  to  indirectly provide a 
payment within the  meaning of section 1903(w)(4)(C)(i) of the Act that guarantees  to hold 
taxpayers harmless  for any portion of the costs  of the tax,  if some  or all  of the taxpayers receive 
those  payments  at issue  through an intermediary  (for example, a hospital association or similar  
provider affiliated organization)  rather  than directly  from the state or its contracted managed care 
plan. As  CMS  further explained  in preamble  to  the 2008 final rule,  we used the term  reasonable 
expectation because state laws were rarely overt  in requiring that state payments be used to  
hold taxpayers harmless.4  In the  preamble,  we also  gave  an example of state laws  providing 
grants to nursing  home residents who  experienced  increased  charges  as a result of nursing  
facility  bed taxes; even though no state law typically required residents to use the grant funds to  
pay the increased nursing  home fees, these  direct state payments  to nursing  home residents  
indirectly  held the  nursing facilities harmless  for  their health care-related  tax costs because of the 
reasonable expectation that  their residents would use the state payments to repay the nursing  
facilities  for all or a portion of their tax costs.5  It remains  true that hold harmless arrangements  
typically are not  overtly  established through state law but can be based  instead on reasonable 
expectations  that  certain actions  will take place  among  participating  entities  that will result in  
taxpayers being  held harmless  for all or a portion of their health care-related tax  costs.  
                                                             
3  73 Federal Register 9685, 9694-95 (Feb. 22, 2008).  
4  73 Federal Register 9694  
5  Id.   CMCS Informational Bulletin    Page 5  
 
 
Accordingly, an arrangement  in which providers  receive Medicaid payments  from the state  (or 
from a state-contracted  managed care plan), then redistribute  those payments  such that  taxed  
providers  are held  harmless  for all or  any portion of their cost  of the tax,  would constitute a  
prohibited hold harmless  provision  under section 1903(w)(4)(C)(i)  of the Act and 42 C.F.R.   
433.68(f)(3). Section 1903(w)(1)(A)(iii) of the  Act and 42 C.F.R.   433.70(b) require that CMS  
reduce a states medical  assistance expenditures  by  the amount of health care-related tax  
collections that include hold  harmless arrangements, prior  to calculating  federal financial 
participation.  
 
Some states have cited challenges with  identifying and providing details on redistribution  
arrangements  because they  may  not be parties to  the redistribution agreements.  A  lack of  
transparency involving health care-related taxes and Medicaid payments  may  prevent  both CMS  
and states from  having  information necessary to ensure sources of  non-federal share meet  
statutory requirements.  States have an obligation to  ensure that  the  sources of  non-federal share 
of Medicaid expenditures  comport with  federal  statute and regulations. As a result, states should  
make clear to  their providers that  these arrangements are not permissible under  federal  
requirements, learn the details of how health care-related taxes are collected, and take steps  to  
curtail these practices  if they  exist.  
 
As part  of the agencys normal oversight activities  and review of state payment proposals, CMS  
intends to  inquire about  potential redistribution arrangements and  may  conduct  detailed financial  
management reviews  of health care-related tax  programs that appear  to include redistribution  
arrangements  or  that CMS has  information may include redistribution arrangements. As  part of 
their obligation to ensure state sources  of non-federal share meet federal requirements, we expect  
states  to have detailed information  available  regarding their  health care-related taxes.  Consistent  
with  federal requirements,  CMS  expects  states to  make available  all requested documentation  
regarding arrangements  involving possible hold  harmless arrangements and the redistribution of  
Medicaid payments.  States should work with their providers to ensure necessary  information  is  
available.  Where appropriate, states  should  examine their provider participation agreements and  
managed care plan  contracts  to ensure that providers, as a condition of participation  in Medicaid  
and/or  of network participation  for a Medicaid  managed care plan, agree to provide necessary  
information to the state.  States may consult section 1902(a)(6)  of the Act,  45  C.F.R.   75.364,  42 
C.F.R.   433.74, and 42 C.F.R. part 438  for  any requirements  related to  CMS  authority  to  
request records and documentation related  to  the Medicaid program. In particular, 42 C.F.R.   
433.74(a) requires that states, must also provide any  additional  information requested by the  
Secretary related to any  . . . taxes  imposed on  . . . health care providers, and the States' reports  
must present a complete, accurate, and full disclosure of all of their donation and tax programs  
and expenditures. 42 C.F.R.   433.74(d) specifies  that a failure to  comply with  reporting  
requirements  may result  in a deferral or disallowance of  federal  financial participation.  If CMS  
or an outside oversight agency, such as the state auditing agency or  the HHS Office of Inspector  
General discovers the existence of  impermissible financing practices related  to health care-
related taxes  CMS  will  take enforcement action  as necessary. CMS is available  to provide  
technical assistance and  work with states  to ensure the permissibility of all of the sources  of the 
non-federal share of Medicaid expenditures,  including  any health care-related taxes  the state may  
impose.   CMCS Informational Bulletin   Page 6 
 
 
Conclusion  
 
CMS recognizes  that  health care-related taxes  can be  a permissible  source of  funding  for the  
non-federal share of Medicaid expenditures. CMS  is available to provide technical assistance  to 
states,  including by reviewing proposals or existing arrangements  and providing  feedback  to 
develop  or modify  health care-related taxes  to  align with state policy goals and  federal  
requirements. One  key  federal requirement  is that a health care-related tax cannot have a hold 
harmless  provision  that guarantees  to  return all or  a portion of the tax back to  the taxpayer.  
Health care-related tax programs  in which taxpayers enter into  agreements  (explicit or implicit  in  
nature) to  redistribute  Medicaid payments  so  that  taxpayers have a reasonable expectation  that 
they will  receive all or a portion of their tax cost back  generally involve  a hold  harmless  
arrangement  that does not comply with  federal  statute and regulations.    
 
CMS  will  continue to approve  permissible  health care-related tax  programs  that do not contain 
hold  harmless arrangements  and  meet all other  applicable federal requirements. These taxes  
often  finance critical  health care programs that  pay for  care furnished to Medicaid  beneficiaries  
and shore up  the  health care  safety  net in our country.  As always,  CMS  intends to  work  
collaboratively with states  by  providing technical assistance as necessary  to ensure  the  
programmatic and  fiscal  integrity of the Medicaid program. For  questions or  to request  technical  
assistance, please contact Rory Howe at  rory.howe@cms.hhs.gov.