A second piece of the same Medicaid financing overhaul targets a technical rule that has quietly let some states tax hospitals more heavily than the usual federal limit allows. The Centers for Medicare & Medicaid Services wants to eliminate what regulators call the 75/75 test, an alternative path that can let a provider tax exceeding the standard threshold still count as legitimate financing. Like the rest of the package, this specific change has not taken effect. It is one provision inside a broader rule CMS published for public comment in July 2026, and it has its own mechanics worth understanding separately from the headline dollar figure attached to the overall proposal.
What the 75/75 Test Currently Allows
Medicaid law limits how heavily states can tax hospitals, nursing facilities and other provider classes to help fund the program, generally capping the indirect hold harmless threshold at 6 percent of a provider class’s net patient revenue. Current CMS regulations, though, include a second, alternative path around that ceiling. Under what the agency calls the 75/75 test, a tax that exceeds the 6 percent threshold can still count as a legitimate, non-hold-harmless tax if fewer than 75 percent of the taxpayers in that provider class receive 75 percent or more of their tax costs back through Medicaid payments or other state funds. In practice, that has meant a state could tax a provider class above the usual limit and still have it approved, so long as the money wasn’t clearly flowing back to a large majority of the businesses paying it. States have used that flexibility, particularly for hospital assessments, to raise more Medicaid financing than the flat percentage limit alone would allow.
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Why CMS Wants to Scrap the Second Test
In its proposed rule, published in the Federal Register on July 23, 2026, CMS says it wants to discontinue the 75/75 test entirely and rely only on the primary hold harmless threshold going forward. The agency’s fact sheet on the proposal frames this as part of a broader effort to tighten what qualifies as a permissible provider tax under section 71115 of the tax law Congress passed in 2025, which CMS refers to as the Working Families Tax Cut legislation. Without the 75/75 alternative, a hospital tax that pushes past the applicable threshold would no longer have a second path to qualify, regardless of how the money is distributed among the providers paying it. CMS frames the change as closing a loophole in how hold harmless arrangements get identified; state Medicaid agencies and hospital associations that rely on the alternative test are likely to see it differently once the comment period plays out.
The Primary Threshold Is Changing Too
Removing the 75/75 test would matter less if the main threshold stayed exactly where it is, but the same rule also proposes to replace the uniform 6 percent line with thresholds specific to each state and provider class, based on whether a tax was already “enacted and imposed” as of July 4, 2025. A state with no qualifying tax on a given provider class as of that date would face a threshold of zero, with no 75/75 escape valve to fall back on if it later imposes one. A state with a tax already in place on that date would get a threshold set by what that tax actually collected then, again with no alternative test available if a future increase pushes past it. That combination, a tighter and more state-specific primary threshold plus the loss of the backup test, is why state budget officials are treating the two changes together as more consequential than either would be alone.
Which Taxes Are Most Exposed
The provider classes most likely to feel this are the ones where states have historically pushed taxes toward or past the edge of the 6 percent line, hospitals foremost among them, since hospital assessments are among the largest and most common Medicaid financing taxes nationally. CMS’s fact sheet notes that 49 states and the District of Columbia currently have at least one health care-related tax in place, and the agency is separately proposing to bring taxes on health insurers under the same oversight for the first time by formally establishing “services of health insurers” as its own taxable class. States that leaned on the 75/75 test to justify a higher hospital tax, rather than staying under the flat percentage limit from the start, face the most direct exposure if this piece of the rule is finalized as written.
The Comment Window Closes September 21
Nothing here is settled. CMS has proposed eliminating the 75/75 test, not finalized that decision, and the provision remains open to public comment through the formal Federal Register docket, which closes September 21, 2026. State agencies, hospital groups and other commenters can push back on the elimination of the 75/75 test specifically, separate from any objection to the broader threshold changes, since CMS structured the proposal as a set of distinct provisions rather than a single up-or-down policy. Whether the final rule keeps, modifies or drops this particular change depends on what CMS decides after reviewing that record, and the agency has not committed to a date for a final rule.
This article was produced with AI assistance and reviewed by a human editor. Figures are linked to their primary sources; where a claim could not be verified from the public record, we say so.
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