DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland21244-1850 
 
Center for Medicaid and CHIP Services 
             
                SHO# 14-001 
 
July 25, 2014 
             
        RE:  Health Care-Related Taxes 
 
Dear State Medicaid Director: 
Dear State Health Official: 
 
This letter provides states with information regarding the treatment of health care-related taxes 
(provider taxes) and their effect on Federal matching funding under Medicaid and the Childrens 
Health Insurance Program (CHIP).  The Centers for Medicare & Medicaid Services (CMS) has 
learned that there may be confusion among states as to what would or would not be considered a 
health care-related tax.   
 
Section 1903(w)(7)(A) of the Social Security Act (the Act) and implementing regulations 
identify a number of classes of health care items and services upon which states can impose taxes 
consistent with other applicable requirements without affecting Federal matching funding.  
Included among those classes in the original enactment of that section were services of health 
maintenance organizations (and other organizations with contracts under section 1903(m)).  
When the Balanced Budget Act of 1997 changed the statutory terminology for Medicaid 
managed care, the phrase Medicaid managed care organizations was substituted for health 
maintenance organizations as a conforming amendment.  This resulted in narrowing the 
permissible class of services to services provided only to Medicaid beneficiaries, and allowed 
states to impose taxes that placed a particular burden on the Medicaid program.  This language 
was changed in the Deficit Reduction Act of 2005 (DRA) to return the permissible class to a 
broader scope that includes a wide range of managed care organizations (MCOs).  The DRA 
eliminated states ability to tax only Medicaid MCOs.  In order for a health care-related tax on 
MCOs to be permissible, after the DRA, the tax would have to apply more generally to all 
MCOs. 
 
CMS understands 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.  (See, for 
example, the May 2014 report from the HHS Office of the Inspector General, available at 
http://oig.hhs.gov/oas/reports/region3/31300201.pdf.) Such taxes could include, but are not 
limited to, gross receipt taxes, tangible personal property taxes, general use taxes and insurance 
premium taxes which are otherwise non-health care-related.  For the reasons we explain below, 
CMS is concerned that 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.  We are also concerned because this 
targeting is directly related to the underlying health care items or services. 
  Page 2  State Health Official Letter 
 
Section 1903(w) of the Act and implementing regulations at 42 CFR Part 433, Subpart B set 
forth the parameters for health care-related taxes and limits the availability of Federal Medicaid 
funding when a state imposes health care-related taxes that do not meet certain requirements.  
These provisions are made applicable to CHIP by section 2107(e)(1)(K) of the Act, and 
implemented at 42 CFR 457.628.   
 
Section 1903(w)(3)(A)(i) of the Act defines a health care-related tax using multiple tests that 
must be applied to these types of tax proposals.  Health care-related taxes include taxes related 
to:  (1) health care items or services; (2) the provision of, or the authority to provide, the health 
care items or services; or (3) payment for such items or services.  Section 1903(w)(3)(A)(ii) 
further stipulates that a health care-related tax includes taxes that are not limited to health care 
items or services but provide for different or unequal treatment for individuals or entities that are 
paying for or providing health care items or services.  Any tax must be fully evaluated against all 
components of the statutory definition.  
 
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.   
 
In determining whether a tax is related to health care items or services, section 1903(w)(3)(A) 
also specifies that if 85 percent of the tax burden falls on health care providers, it is considered to 
be related to health care items or services.  However, this provision does not establish a safe 
harbor for any tax on health care providers that falls below the threshold.  The relationship of 
such taxes to health care items and services must still be analyzed to determine if there is equal 
treatment of providers or payers in the design and application of the tax.  
 
CMS 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.    
 
Please contact my staff to facilitate any discussions you would like to have regarding the taxation 
of health care-related services or items so that we can help you ensure your tax program meets 
the statutory and regulatory requirements.  If you have any questions, please direct them to 
Kristin Fan, Deputy Director, Financial Management Group at 410-786-4581 or at 
Kristin.Fan@cms.hhs.gov. 
 
            Sincerely, 
 
            /s/ 
 
            Cindy Mann 
            Director  
 
 
  Page 3  State Health Official Letter 
 
cc:  
 
CMS Regional Administrators  
 
CMS Associate Regional Administrators  
Division of Medicaid and Childrens Health Operations 
 
Matt Salo  
Executive Director 
National Association of Medicaid Directors  
 
Joy Wilson  
Health Policy Director  
National Conference of State Legislatures  
 
Dan Crippen 
Executive Director 
National Governors Association 
 
Debra Miller  
Director of Health Policy  
Council of State Governments  
 
Christopher Gould 
Director, Federal Government Relations  
Association of State and Territorial Health Officials  
 
Neva Kaye  
Interim Executive Director  
National Academy for State Health Policy  
 
Ron Smith  
Director of Legislative Affairs  
American Public Human Services Association