Broad-Based Requirement for Medicaid Provider Taxes

The broad-based requirement for Medicaid provider taxes means a state’s tax on healthcare providers must apply to every non-federal, non-public provider in the class of services being taxed, not just to those who serve Medicaid patients. It comes from 42 C.F.R. § 433.68, and it is one of three structural conditions a provider tax has to satisfy before the revenue can count toward the state’s share of Medicaid spending. If the tax leaves any private provider in the class untaxed without a valid waiver, CMS deducts the full amount of that tax revenue from the state’s medical assistance expenditures before calculating the federal match.¹

What the Rule Actually Requires

Under 42 C.F.R. § 433.68(c), a health care-related tax is broad-based when it applies to all healthcare items or services in a class, or to all non-federal, non-public providers furnishing those services in the state.² Two pieces of that definition do the heavy lifting.

The first is the class. Federal rules at 42 C.F.R. § 433.56 define 19 separate classes of healthcare items and services a state may tax, including inpatient hospital services, outpatient hospital services, nursing facility services, intermediate care facility services for individuals with intellectual disabilities, physician services, home health care, outpatient prescription drugs, and managed care organization services.³ A state picks the class or classes it wants to tax, and the broad-based test then runs class by class. A state cannot cherry-pick individual providers within a class.

The second is who counts. The rule reaches every non-federal, non-public provider furnishing the taxed service in the state. Federal facilities and publicly operated facilities sit outside the calculation. Every other provider in the class has to be covered, whether or not that provider treats a single Medicaid patient.

Which Taxes Have to Meet It

Not every state tax that touches a hospital or clinic is a health care-related tax for these purposes. A tax becomes subject to § 433.68 when at least 85 percent of its revenue falls on healthcare providers.⁴ Once a tax crosses that line, the broad-based rule applies along with the other two conditions in the regulation. Common structures include licensing fees, gross receipts taxes, and per-bed assessments on hospitals or nursing facilities.

The 85 percent test exists because a state could otherwise label an assessment as a general business tax while aiming it almost entirely at hospitals or nursing homes. Drawing the line at 85 percent captures any tax that is healthcare-specific in substance, regardless of what it is called.

Why the Rule Exists

Medicaid is jointly financed. The federal government matches state Medicaid spending under the Federal Medical Assistance Percentage, which ranges from 50 to 83 percent depending on a state’s per capita income.⁵ Provider taxes are one of the ways states raise the state share.

If a state could tax only Medicaid providers, the arrangement would fold in on itself. The state would raise Medicaid payment rates enough to cover the tax, the federal government would match those higher payments, and the provider would end up whole while the federal treasury covered the state’s supposed contribution. Requiring the tax to reach non-Medicaid providers forces some of the revenue to come from entities the state cannot reimburse through Medicaid. That is what makes the state contribution real.

How States Trip Over the Rule

Most compliance problems begin with exemptions that seem reasonable in isolation. A state might carve out rural hospitals, newly opened facilities, or providers below a revenue threshold. Each carve-out has a policy rationale, and each one narrows the tax below the class-wide standard.

The consequence is not proportional. If CMS finds that any non-federal, non-public providers in the class have been left out without a valid waiver, the tax fails the broad-based test and the state loses the federal match on the full amount of the impermissible revenue.¹ For a state with a 70 percent FMAP, $100 million in disqualified tax revenue also erases the $70 million in matching funds that revenue would have drawn down.

Waiving the Broad-Based Requirement

A state that cannot or does not want to tax every provider in a class can ask CMS to waive the broad-based rule. The waiver is available only if the tax is “generally redistributive,” meaning it does not funnel Medicaid dollars disproportionately back to the providers who paid the most. CMS applies a statistical comparison called the P1/P2 test.

The P1/P2 Test

P1 is the proportion of tax revenue that would be attributable to Medicaid if the tax applied to every provider in the class. P2 is the same proportion under the tax the state actually wants to impose, with its exclusions in place. A P1/P2 ratio of at least 1 gets automatic approval.² A ratio at or above 1 means the state’s exclusions did not shift a heavier share of the burden onto Medicaid-facing providers.

Lower ratios can still qualify in limited circumstances. For taxes enacted after August 13, 1993, a ratio of at least 0.95 may be enough if the excluded providers fall into specific categories: rural hospitals, sole community hospitals, physicians in medically underserved areas, financially distressed hospitals, or psychiatric hospitals. Taxes enacted before that date can qualify with a ratio as low as 0.90, and those older taxes may also exclude HMO-owned hospitals.⁶

The P1/P2 test has an important limit. It works when the state is excluding providers but still taxing all revenue within the class. If the state also strips Medicaid revenue out of the tax base, a different analysis applies.

Automatic Waivers for Small Licensing Fees

One narrow shortcut avoids the statistical analysis entirely. A licensing or certification fee of no more than $1,000 per provider annually, dedicated to running the licensing program, receives an automatic waiver of both the broad-based and uniformity requirements.² Fees at that scale pose no realistic risk of manipulating federal matching funds.

Where the Broad-Based Rule Ends

Meeting the broad-based requirement, on its own, does not make a provider tax permissible. The regulation imposes two other conditions that operate independently.

Uniformity, under § 433.68(d), requires that the tax rate be the same for every provider in the class. A tax that covers all providers but charges Medicaid-heavy providers much more than others satisfies the broad-based rule while failing uniformity. Rate variations can be waived through a parallel B1/B2 statistical test.⁶

The hold harmless prohibition, under § 433.68(f), forbids any arrangement that guarantees providers will be made whole for the cost of the tax. Unlike the other two, this prohibition cannot be waived at all.⁷ A safe harbor treats a tax as compliant if its revenue is 6 percent or less of net patient revenue for the class, which is why many state provider taxes sit at or just under that line.²

A tax has to clear all three tests, or hold valid waivers where waivers are allowed. A pass on broad-based is necessary, not sufficient.

What Failure Costs

When a provider tax fails the broad-based rule and no waiver applies, CMS reduces the state’s reported medical assistance expenditures by the full amount of the impermissible tax revenue before calculating the federal share.¹ The reduction runs dollar for dollar through the quarterly expenditure reporting on Form CMS-64, where states document actual Medicaid spending against earlier budget estimates on Form CMS-37.⁸

The math is what makes the rule enforceable. A state that designs a provider tax around a class-wide base, or that secures a waiver with a defensible P1/P2 ratio before enacting it, keeps the matching funds the tax was meant to generate. A state that assumes reasonable-sounding carve-outs will survive review does not.

1
eCFR. 42 CFR 433.70 – Limitations on Provider-Related Donations and Health Care-Related Taxes
2
eCFR. 42 CFR 433.68 – Permissible Health Care-Related Taxes
3
eCFR. 42 CFR 433.56 – Classes of Health Care Services and Providers
4
Federal Register. Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations-Closing a Health Care-Related Tax Loophole
5
Medicaid and CHIP Payment and Access Commission. MACStats: Medicaid and CHIP Data Book
6
eCFR. 42 CFR 433.68 – Permissible Health Care-Related Taxes
7
Social Security Administration. Social Security Act Section 1903
8
Medicaid.gov. State Budget and Expenditure Reporting for Medicaid and CHIP