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AHLA's Speaking of Health Law
OBBBA Updates: Recent CMS Guidance and State and Provider Responses
As 2025 closes, the implications of the One Big Beautiful Bill Act (now rebranded as the Working Families Tax Cut Act) on Medicaid continue to ripple through the health care industry. CMS has issued major guidance, and state Medicaid agencies and health care providers are scrambling to implement this guidance at an operational level. Harsh P. Parikh, Partner, Nixon Peabody LLP, Lloyd A. Bookman, Founding Partner, Hooper Lundy & Bookman PC, and Anne Winter, Senior Managing Director, FTI Consulting, provide updates on the community engagement/work requirements, beneficiary eligibility and coverage requirements, funding and payment reforms, and the Rural Health Transformation Program. They also discuss what challenges might be on the horizon in 2026 and the role of technology.
Watch this episode: https://www.youtube.com/watch?v=0vIviLRddzI
Watch Harsh, Lloyd, and Anne’s previous podcast from September 2025: https://www.youtube.com/watch?v=JDYg4KZwL0M
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SPEAKER_02:Well, hello, and welcome to the AHLA Speaking of Health Law, where today we are refreshing our deep dive into the one big beautiful act, a sweeping overhaul, reshaping Medicaid as we know it. The new law, by the way, has been rebranded by the federal agencies as the Working Families Tax Cut, Public Law 11921. This podcast is an update from our September 5th, 2025 episode. Since our last episode, CMS has published several major guidance documents, including one just late last night. State Medicaid agencies and stakeholders are scrambling to translate these new guidances into operational steps. Passed via the budget reconciliation with razor-thin margins, 51 to 50 in the Senate, 218 to 214 in the House. This legislation marks the largest Medicaid cut in US history, slashing$911 billion over the next 10 years, and potentially resulting in 10 million people losing health insurance by 2034. From these most recent announcements to dramatic funding changes in rural health innovations, our panel today will break down what matters for providers, stakeholders, and legal counsel. I'm Harsh Parik, joined once again by Ann Winter and Lloyd Bookman. And together we'll guide you through what's changing, who's impacted, and updates since our last episode and what the future may hold for Medicaid. Let's first start with introductions. Lloyd, if you want to go ahead and begin.
SPEAKER_01:Sure. I'm Lloyd Bookman. Hello, everybody. I'm a founding partner of Hooper Lundy and Bookman. I've been practicing as a healthcare lawyer now since 1979. A significant part of my practice deals with the Medicaid program, including uh specifically uh provider fees, healthcare-related taxes, as well as state-directed payments.
SPEAKER_03:Great. Ann? Good morning, everybody. Good to see you guys again. I'm just going to say that. Yeah, absolutely. Yeah. My name is Ann Winter. I'm a senior managing director at FTI Consulting. By background, I'm a CPA and got my start as a finance director at a Method UN clinic many years ago. And from there, I went to Access, which is Arizona's Medicaid agency, where I was responsible for much of the managed care contracting and all of the capitation rate setting. Since then, I have worked at a couple of health plans, including United Healthcare and Business Development. I was the head of Managed Medicaid Regulatory at CVS CareMark, where I oversaw compliance with 26 different state regulations at impacted PBMs. And I've been consulting for the last 10 years. So happy to be here.
SPEAKER_02:Awesome. And my name is Harsh Parig. I'm a partner here at Nixon Peabody. My practice really includes representing managed care organizations, healthcare providers on regulatory issues, as well as stakeholders that are interested in global macro changes in the US healthcare market. So with that, let me first uh give a quick disclaimer. This podcast is a non-political discussion. It's recorded on December 9th, 2025. All views expressed by myself and and Lloyd are really our own. They don't represent the views of our law firms or our organizations that we work for. This content is for informational purposes only and does not constitute legal or professional advice. Standard disclaimers apply. With that, let's dive in. Um just a quick recap. Um states uh one of the big provisions in the uh the one big beautiful act was what's referred to as the community engagement or work requirements. Specifically, uh starting in January 2027, expansion population, including adults ages 19 to 64, uh, will need to complete and verify at least 80 hours per month of community engagement, which includes work, education, volunteering, and a mix of things to qualify for coverage and maintain eligibility. States under the law are required to frequently crack and confirm these hours before enrolling individuals and doing regular eligibility checks. There are some limited exemptions, including for folks that are um disabled, medically frail, uh children under 14, and states also have the ability to seek exemption or delay implementation from these requirements down the line. Uh failure to comply with these requirements can lead to disenrollment, although individuals that are disenrolled do have a chance to appeal that decision and take advantage of the administrative review process. The law sets strict federal oversight, reduced funding for noncompliance for states that don't follow these mandates. And CMS and the law expects significant operational upgrades across the US to implement these requirements. To better understand these new requirements, why don't we start in with what we just saw come across our desk last night in the form of an informational bulletin from CMS? And if you want to jump in and tell us a little bit about that new guidance from CMS or historically what we've seen over the last couple of months with CMS.
SPEAKER_03:That informational bulletin um provided some guidance, but want to emphasize that there's still going to be more formal interim rulemaking next year. But they listed four key principles. Um one of them is they want to make sure that the members are being connected to the community, whether it's through work or volunteering. So that is a primary, that's principle number one. The second one is state flexibility. And of course, every state wants complete flexibility in the model that we have for Medicaid. However, they want to balance that flexibility with more standardized processes, primarily from a cost reduction. You don't need, I think they're going to try to look to see where they can combine maybe some of the eligibility for some of the smaller states. They want to promote alignment, and you're going to hear this probably quite a bit, but they are going to want to align programs through what is known as APIs and interoperability to collect data. And so that's with SNAP and TANF, the IRS. It could be with ADP, you know, for payroll information. So this is going to be one of the things that Harsh just alluded to is like there's going to be a lot of investments. And then finally, they want to protect the taxpayer. And what that means is all the verification needs to be auditable. They also laid a timeline. The timeline is, as Harsh mentioned, 1127. States must do the verification checks of work requirements and community engagement in that December time frame. But states can elect up to three months look back. So the timeline is if if the state elects just that month of December, the information, the verification of community engagement must be provided from the beneficiary in December. However, the state will have to notify the beneficiary in September that they're going to have to provide this information. So there is that notification requirement. Then if you elect two, so you're looking at November and December, that notice goes out in August. So they back it up one month. And finally, if you go back three months, then you are going to be providing, or the beneficiary will be providing information from October, November, December, and then notification period is in July. So when you think about that, I mean, states are working now very hard. I mean, just even getting these notices written, drafted, getting them out the door, you know, this is this really is upon us. It's really not a year away.
SPEAKER_02:So yeah, I mean, uh, sort of going back uh in November, CMS confirmed that all 50 states um submitted some sort of a preliminary implementation plan for how they will implement this requirement. Uh there were 17 states that requested a good faith delay. We'll see what that means in terms of um how CMS um executes those requests. Um as Ann, you indicated, what we're really anticipating is an interim final rule or some sort of rulemaking from CMS that we anticipate um on or before June of 2026. Um some other pieces from yesterday's guidance that I just want to pull out and would love your comments. The first is CMS commented on the role of Medicaid managed care plans. So um in a lot of uh states, especially where Lloyd and Lloyd and I are in California, um, most um Medicaid deliver is delivered, Medicaid benefits are delivered through managed care organizations at the county level. And what CMS state uh said yesterday was states cannot delegate these compliance informations to MCOs. While MCOs can assist states in non-determination activities like outreaches, education, or navigation, um, uh states directly, the state Medicaid agencies, have to be the ones that make a determination as to whether an individual is qualified and meets these requirements. I thought that was an interesting uh statement and clarity uh from CMS. Uh Lloyd, any thoughts on the role of managed care plans or generally these work requirements and how CMS is going about this?
SPEAKER_01:Oh well, well, the I mean the general uh notion about work requirements is the devil is going to be in the details. How is CMS going to require states to gather information to ensure the work requirements are met? As we all know, the difficulty with work requirements isn't so much that beneficiaries aren't actually engaged in community engagement, it's that they can't document it. And what so what I'm waiting to see is what the actual final rules require states to gather in terms of documentation. And that'll determine whether and how many beneficiaries end up losing coverage. As to the role of managed care plans, as you were talking about, harsh versus the states, again, it increases the burden on stressed states. Uh, you know, our state has tried to push down um a lot of the burden of the Medicaid administration to the um managed care plans um and get it off their desk. And this um guidance is telling us that that can't happen here. The states are going to be in the first year.
SPEAKER_02:Yeah, and and one of the things that also was in the CMS uh bulletin yesterday was, and Ann, you hit up you hit on this earlier, is that states have to use reliable information first, meaning before asking individuals for paperworks, paperwork, states must use data they already have, such as payroll, employment records, Medicaid claims or encounter data, higher education, job training, community service data, et cetera. And only if those data sets aren't sufficient, then could they look, could states look to individuals. Um, and uh anything more on that piece of data sharing? And I know there was a RFI that CMS put out in September, um, trying to get data about matching standards for verifying work hours.
SPEAKER_03:Yeah, and I think this is something, you know, um, if you look at the legislation, they're appropriating$200 million to states. And I think that$200 million to states is going into modernizing their systems. Um, I think one of the reasons this ex parte, this is ex parte determination, um, was included in um HR1 is because it was a lesson learned from the big redetermination process that every state went through in 2023 and 2024, where some states didn't have the capability to do ex parte, some states elected not to do ex parte, but I think the lesson learned out of the redeterminations was there is a wealth of data out there and you need to go get it. And this is where I what I did allude to that there was going to be interoperability where states are gonna be required to collect information from all of these data sources. And I think that's where, given the different levels of sophistication for state Medicaid, managed Medicaid information systems, um, is is is where states are scrambling right now. And I I I actually was talking to somebody this morning. A good example of this is Colorado delegates all of its eligibility to its counties. Colorado has 64 counties, every one of them are doing eligibility in their own way. And, you know, there's some counties with a thousand people in them. And so one of the things that Governor Polis is looking at, he has a proposal out there is how do you kind of pull all of that responsibility and parts of it back into a more centralized function? Um, because not all of those 64 counties are going to be able to potentially modify their systems and their processes and workflows to be able to do everything needed. So this is going to be a state-by-state decision. And I think one person on the call said they needed an eligibility czar. So we'll see if eligibility czars emerge in the next six months while they implement.
SPEAKER_02:Yeah. And we talked about, you know, the last point is, you know, starting date uh January 2027 for these requirements. Um, in the guidance document yesterday, CMS sort of laid out, you know, what states need to do with respect to its Medicaid population and confirming that these folks starting in January 2027 are eligible. And CMS sort of set out, you know, gave states option. You can do sort of a one check, right? You can sort of review whether that person has, you know, information or documentation to support the work requirement um uh contours in December, or you could check twice or provide uh three different um uh you know times where the individual would need to confirm prior to uh the January go live day. Um any other sort of thoughts on how you see this playing out? I mean, you know, I feel like states are scrambling to get, you know, essentially building this all together while waiting more guidance from CMS. And obviously, Lloyd, you talked about, you know, what does this really mean? Uh is it just a paperwork requirement, or are we sort of actually encouraging folks that wouldn't otherwise be engaging in community activities to do so now?
SPEAKER_01:Yeah, and unless this program is rolled out differently than the couple of programs that have been rolled out previously, um I'm afraid it's going to be a pre-paperwork exercise, and we're not going to see um significant uptick in Medicaid beneficiaries coming into the workforce or going back to school. Again, the studies so far indicate that they don't generally do that now. And so you're not gonna so you're gonna uh the fear is you're just going to lose people off the Medicaid roles. Um what it's gonna be interesting to see whether states implement these requirements in more stringent ways in states that are less uh uh favorable towards Medicaid and in less stringent ways in other states. Um I'm looking forward to seeing how states themselves react to either try to keep folks uh enrolled in Medicaid or the opposite.
SPEAKER_03:I think that's a good point. And even as they scramble towards the finish line of 1127, well, some say we're just gonna, you know, look at that one time because we got to get it done, but then in future years make it, you know, potentially more stringent, you know, during the redetermination process. Um, I've also talked with um a few developers. There are companies out there right now that are developing mobile apps for cell phones for Medicaid members, you know, to hopefully eliminate some of that paperwork you're talking about, Lloyd, you know, where maybe that they can download. And so there's a frenzy out there right now in the community to be the one that gets that best product first and be able to sell it into MCOs that could provide it on their already mobile apps.
SPEAKER_02:So yeah, it's yeah, and I I think that that's right on, right? So I mean, in a perfect world, we have the seamless data flowing and everybody's sharing with one another, and this doesn't become sort of a paperwork exercise. But as we were prepping for this call, we talked about how there is a lot of distrust between states and and the federal government right now. Uh we talked about um, you know, immigration trying to get it's get access to Medicaid data and concerns that states have there and lawsuits. Um does that environment uh make in what you're describing, you know, technological solutions to seamless data um integration, does that make it more difficult?
SPEAKER_03:I think that could be a state-by-state basis, but I think that's going to be the individual user may not want to have that information shared for you know a variety of reasons that we've seen kind of playing out through um immigration enforcement. So yeah, I I think so.
SPEAKER_01:Yeah, one one point about technology. Really poor people don't often have access to technology. You know, they don't have access to broadband internet, they don't have you know, they don't have that at home. So if there's if the solutions are going to be uh internet, even if they're cell phone-based, you know, cell phone applications, I don't know how that's if that's gonna help the the really poor folks who don't have access. Um, it may help others, but it's not a bad idea to add another device. And to, but but I don't know that that's going to be a panacea.
SPEAKER_03:Well, interestingly, um, one of the organizations I talked to is gonna leverage a federal program that provides free cell phones, and that if somebody doesn't have one, I don't know how big that program is or how wide it can go, but I agree. And hopefully, you know, with all of the rural health technology, you know, grants and initiatives that are going to be coming out, that broadband can expand further.
unknown:Right.
SPEAKER_02:Yeah, it's like doing whack-a-mole, right? You you sort of come up with a solution, and then maybe there's some more problems to it. Yeah, sorry.
SPEAKER_01:Just really quickly regarding the information sharing that Harshi mentioned. Um, you know, the department DHS, Department of Homeland Security, has wanted to gain access to Medicaid, um, patient-specific information. Uh, a federal court in California said no, uh, issued a TRO against it. Uh DHS, the Department of Homeland Security, has said, well, we fixed the problem that that court noted uh because it was really a procedural problem, and we're gonna now seek the information again. We'll see how this plays out. Obviously, you know, a lot of folks are very uh concerned about that information sharing. DHS wants the wants the data.
SPEAKER_02:Yeah, so a lot of friction in in terms of how uh this can work without causing all the harms that that uh you know folks are are raising. Um let's uh let's shift gears and talk about um a different aspect of uh the WT WFTC legislation. I'm gonna keep calling that rather than HR1 or the one big beautiful bill, uh, which is uh the new requirements on eligibility and coverage. Um so the new law introduces three key changes for Medicaid expansion adults. Uh first, starting in January 2027, eligibility reviews will shift from once a year to every six months, meaning with beneficiaries. Have to renew coverage every six months rather than annually. Second, retroactive coverage. So once um an individual is enrolled in in Medicaid, um retroactive coverage is reduced. It used to be three months to only a one month um before enrollment. And finally, and this gets to uh what we were just talking about, Lloyd, um, October 1, 2026, immigrant eligibility will be limited um for Medicaid beneficiaries to only U.S. citizens, a small group of lawful permanent residents, and certain specific groups, but it does exclude uh refugees, humanitarian paroleese, and others. And so you're gonna see a significant reduction in um immigrants being eligible for Medicaid. Um Ann, maybe we jump to you. Any up, you know, has has there been any updates on um implementation of these requirements and others sort of a little bit farther in the future, but um uh anything you've heard from CMS or state Medicaid agencies with respect to these new mandates?
SPEAKER_03:Uh you know, there are states that already have this in place, you know, again, so I think some states that have already done the every six-month eligibility for this population are probably feeling this is one thing that they don't have to, you know, have a czar for. But um I I think you know, one of the things that I saw uh here in Arizona, our legislative joint budget committee um issued their preliminary view of how WFTC. I have to get used to it part here. Yeah, W FTC. Um the Family Zach will have on um the Arizona budget. And it was really interesting because um they went through all of the provisions. Um it's gonna have a big impact on our budget, and it will on every state budget. And that's just gonna be an underlying theme on everything here, but um access, the Medicaid agency requested 290 new eligibility workers to be able to implement the new provisions around community engagement every six months. They do it annually now, all of the other things that you talked about, and you know, and 10 positioned and additional 10 for IT. But, you know, I think this is you know, some of this the administrative burden that states are going to have. It's gonna be staffing and you know, just the costs of it and the IT. Um, I happened to attend last month the National Association of Medicaid Director meeting, and um, Dan Brillman, the new Medicaid administrator, was there on a panel with some other states, and the three takeaways were it was gonna be technology infrastructure, it was gonna be staffing, and the third, and what Dan said was we need partnership with the states because CMS is implementing this at the same their own part of this at the same time. And so, you know, there's multiple implementations going on. They're working with 51 jurisdictions, and so um I think the ability to partner with various organizations is gonna be paramount into the success of this.
SPEAKER_02:Yeah, and and maybe Lloyd, we can jump to immigration really quickly. You know, California uh made news a few years ago with Governor Newsom announcing uh the state was going to accept uh undocumented immigrants into the Medicaid program. Uh we've seen a bit of a rollback there, but talk about um, you know, immigrants and and the impact of these provisions on uh that population.
SPEAKER_01:Well, obviously immigrants are going to be, you know, including lawful immigrants, are going to be losing Medicaid coverage. Um but what I've been hearing back from providers, particularly hospitals, is is the fear factor that um folks who are uh immigrants, uh including some citizens, are just reluctant to get out in public and are reluctant to go to hospitals. And once they're in a hospital, they're reluctant to provide enrollment information. Um and and so uh while the patients, once they get to a critical stage, will show up in a hospital ED, then the hospital can't enroll them in Medicaid because the patient won't provide the information. So it's it's a it's just a large fear factor that um is going to discourage uh people who need care from getting care.
SPEAKER_02:Yeah, and it's not that if you lose insurance, you just don't need health care. You just are likely going to need more acute care uh in a uh in a that'll be more costly perhaps uh than if you know preempt preventative or some other care was provided earlier on. Um okay, let's let's jump, and let's, uh Ann, if you have anything else to add, let's jump to the the funding and payment uh uh reforms. Um and Lloyd, this is sort of your your expertise has been for many, many years. Um, you know, as as CMS was uh rolling out its uh informational bulletins, um, and and lawmakers are really referring to these Medicaid funding mechanisms as abusive financial practices. So let me just ask you an open-ended question. Are these various uh Medicaid funding mechanisms, provider taxes, uh state director payments, uh, et cetera, are these abusive financial practices? Um your your thoughts on on sort of the way uh the current administration seems to be viewing these mechanisms that states use?
SPEAKER_01:I think it depends upon whether you're sitting in Congress trying to balance the federal budget, or you're sitting in a state and you're a state and a state governor trying to deal with the state budget and trying to fund the Medicaid program. Um there's been this tension between the feds and the states for years. I mean, this is the states discovered, hey, we can do these provider-related taxes, we can tax providers, generate the state, the non-federal share of Medicaid payments, and leverage federal funding without having a general fund hit. So this is good. This is and and federal law allowed this. So it wasn't an unlawful device. It was a mechanism built into the federal law. Congress and various administrations have said we don't like this because the states really aren't putting skin in the game. They're getting around putting skin in the game. Um, but because so many states, red states and blue states, rely so heavily on provider taxes, um the political will has ebbed and flowed on uh on Congress taking action to reduce the availability of provider taxes. Uh, my view is we need fun, we need Medicaid funded appropriately. And frankly, it's not funded appropriately now. You know, Medicaid payments nationally or lag behind other payments are generally insufficient to cover provider costs. So, how my view is however you get the funding uh is a good thing. But there, you know, depends who's whose budget you're trying to work.
SPEAKER_02:Yeah, that that makes sense. And and so maybe maybe we can dive in and you can talk a little bit about you know the background of what uh the new legislation does with respect to provider taxes, state grip payments, and then we can talk about updates.
SPEAKER_01:Sure. Um let me start with provider taxes. Um HR1 wanted to cut back on provider taxes, and they did it in a couple of different ways. Uh one, it prohibits new provider taxes, basically, uh, on any new um type of items or new type of providers. Uh can't do that. Uh, any new tax after uh date of enactment, July 4th, 2025, is is not um going to be matched by the federal government. Um and then it imposed new limits for non-expansion states. Uh that there are 11 non-expansion states, if I'm remembering correctly. The limit on taxes is the percentage. There's a there's a net revenue percentage limitation on taxes before HR1 that said you can't have your provider taxes being uh exceeding 6% of net patient revenue. That's that was the absolute limit. HR1 um says, okay, for non-expansion states, we're gonna say you can't um your limit on the percentage of net patient revenue that a provider tax can be is gonna be the percentage of a tax that was enacted and imposed on the date of enactment. So you can't basically increase the percentage of a provider tax on a particular um class of items or services. For expansion states have gone further, and this is endemic throughout HR1, where they treat expansion states uh more harshly than they treat non-expansion states. For expansion states, um you have the same sort of bottom line threshold, you can't increase the percentage of net patient revenue over a provider tax that has been enacted and imposed as of the enactment. But then beginning, um, there's another limit or another set of reductions beginning federal fiscal year 2028, um, the 6% limit goes down to 5.5% limit, uh, and then by an additional 0.5% uh each year until you hit 3.5% in 2032. So those two limits that is, you can't increase the net patient revenue over existing provider taxes. And secondly, we're gonna, even if you do, we're gonna reduce the 6% limit down to 3.5% over time. It's gonna cost a lot of money. Um, estimates are well in you know, well over$100 billion over the 10-year period. So that's a significant reduction. And those provider taxes these days typically um support supplemental payments to providers, and that's where that's where the hit's gonna be. And uh, given the the economic circumstances of many states, I don't see the states backfilling. So something's gonna give. Um, there's another uh requirement um called the uniformity requirement uh that came out of HR1, which said that basically you can't tax Medicaid utilization at higher rates than non-Medaid utilization. And a lot of some this is a big what the CMS has called a big loophole, because a lot of states have said, okay, we'll have our provider tax programs, but we'll tax Medicaid utilization, say Medicaid days at a higher rate than non-Medaid days, which results in easing the pain on providers who don't do a lot of Medicaid. So you're so one of the things in Medicaid programs that the designers try to do is to reduce the number of net losers, that is the number of providers who actually pay more in taxes than they get back in payments. Um states have used this device of taxing Medicaid utilization at higher levels than non-Medicaid utilization to try to mitigate the number of and reduce the number of losers. Uh HR1 says you can't do that. Uh it says uh effect basically effective as of data of enactment, you have to have uniformity in your taxing structure. Um, although recognizing that a lot of states rely on non-uniform taxes, AHR1 said, well, the Secretary of HHS can um enact a transition period of up to three years. Um and so we get November 20, November 14, 2025, we get some CMS informal guidance in a dear colleague letter that deals with both the net percentage percentage of net patient revenue issue and with uniformity, um, identified as preliminary, with final guidance depending on a final rule. Apparently, their CMS is intending to go through rulemaking. But even though they call it preliminary, this is what they're implementing right now. And if you're in a state that's trying to get a provider tax approved, this is what you're dealing with, even though it so what if it gets changed later, I'm not quite sure how that impacts you retroactively. Um, on the net patient revenue um limit threshold, that is, you can't increase the percentage of net patient revenue that a tax encompasses, it's a tax. The key is that the statute says the threshold is based on a tax enacted and imposed as of the date of enactment. And what CMS did in the November guidance is defined and focused on those terms that said basically enacted means that the state has authorized through its legislative or regulatory mechanisms the specific tax structure. And secondly, that CMS has approved that specific tax structure. So if you had a tax pending as of July 4, 2025, that CMS had not yet approved, that would have increased the size of your tax program. I'm sorry, that's that that increased tax threshold will not be your new threshold. Now, these threshold limits, this threshold limit and the reductions in the net patient revenue that I talked about earlier from 6% down to 3.5%, all uh the the the net patient revenue kick in um October 1 uh the net the threshold kicks in October 1, 2026. So theoretically, a state can increase the size of its provider tax program now until October 1, 2026. But as of that date, it can't be any higher than the program that was CMS approved as of July 4, 2025, according to this guidance. And that's very controversial, but that's the guidance we have. Uniformity. Um CMS defined did establish a phase-in period in this informal guidance. Um it said for um a lot, a lot of the um uniformity issues have come along with MCO taxes, where um a uh uh Medicaid enrollment taxes are based in some of these tax structures on Medicaid enrollment and an MCO. And if Medicaid and so some of the states have taxed Medicaid enrollment much higher than non-Medaid enrollment. Um CMS has said that this is where they view this as a more abusive practice in the MCO uh arena. So what they've said is that for MCO taxes, um beginning at the end, will allow your current tax structure through the end of a state fiscal year ending there in calendar year 2026. So if you're a 630 fiscal year end state through June 30, 2026, will let you keep your a non-uniform structure, if it has been CMS approved, in place until then, but then then you fall off the cliff. Uh for other taxes, um, the the date is not is later because they see less abuse um and no later than October 1, 2028. Are you gonna have to have a uniform structure? But that's only if the particular tax structure that you're implementing has been approved, and a lot of the um controversy is going to be as to whether a particular tax structure was actually approved by July uh July 4, 2025. Um, I I know that's gonna be an issue in our state in California. Um, one of the questions that I've got is what's the state gonna do if it disagrees with CMS's interpretation? I mean, CMS sort of holds all the cards here. You know, you either get your program approved and you run forward with it and you get federal financial participation, or you don't and you end up in court and um you know you're in a limbo uh land for the next three or four or five years. Um so that's the provider fee side. Um, the state directed payment side, a little um uh uh again, a number of reductions uh and the background of state directed payments is that federal Medicaid regulations came out in 2016 that said states can indeed direct uh the managed care plans, the MCAs, how to pay providers within certain limits and under certain guidelines. And pretty much um 39 states, I believe, have state directed payment programs, and there are hundreds, hundreds of these different programs with different provider groups involving uh enormous amounts of Medicaid funding. And a lot of these state-directed payment programs they involve an effect supplemental payments to providers that are in addition to their regular contract rates, and they're funded largely to in most states by provider taxes. So there's this uh close relationship between provider taxes and state directed payments. Okay, the limit on state directed payments as of as of pre-HR1 as of July before July 5, 2025, was the average commercial rate in contracts, which given uh the relationship between the average commercial rate and most Medicaid contract rates was pretty generous, frankly. And states had a lot of room to play with to increase, have their um uh to direct the health plans to to pay more to providers to get up closer to the average contract rate. So there's a a lot of a lot of room there. Um, HR1 uh reduces the ceiling on state directed payments as follows. For non-grandfathered plans, and I'll explain grandfathering in a moment because that's that's kind of key here. For non-grandfathered plans, effective for rating periods, beginning on or after enactment, on or after July 4, 2025. Um for an expansion state, you get 100% your cap is 100% of payment at Medicare rates. Now, if you're grandfathered, you get some flexibility. I'll talk about that in a second. For non-expansion states, it's 110%. You get a of Medicare, you get an extra 10%. So what's a grandfathered plan? Grandfathered plan is one um uh that was um uh that was uh approved for which it completed does either approved or a completed what's called preprint, which is what you submit to get state directed payments approved by CMS. A completed preprint was submitted on or before July 4, 2025. So if you didn't get your state directed payment either approved or submitted a completed preprint by July 4, 2025, it's not grandfathered and you're immediately subject to the 100% or 110% uh limitation. Um by the way, our state squeezed in under the gun for the hospital directed payment program. We got it in on July 1st. Somehow or another, somebody knew that July 4 was coming up and they managed to get a completed preprint in on July 1st. By the way, that's a you know multi-billion dollar thing that happened by by the by by three days. Um the if you if you are in a grandfathered plan, these um beginning you're okay into July 1, 2028. Then beginning July 1, 2028, the state directed payments um have to be reduced by 10% annually until you hit Medicare rates. A little uncertain how the Medicare rate ceiling is gonna be computed. Um I suspect it's gonna be much like the Medicare upper payment limit for those of you familiar with that, under fee-for-service Medicaid. Um, it's gonna be on an act, not on a hospital-by-hospital basis, but on an aggregate basis for all of the um class of providers that are subject to the particular directed payment um methodology. Um other things that the guidance said that guidance came out from CMS on September 9, 2025, which was pretty much in line with what I've just said, except it also added a sentence that said basically you can't increase the size of a state directed payment program beyond the size of the program eligible for grants. So if you have a grandfathered program, what this guidance says is you can't increase the size of the program regardless of its relationship to the Medicare rates. I don't understand that, but that's what they say. I don't understand how that's tethered to the statute. But that, but that's that's what they say, and that can constrain the growth of many state-directed payment programs. Last, I'll mention, even though this is not actually an HR1 thing, but it's hot off the presses, on Friday, the 11th Circuit Court of Appeal, sitting in Tallahassee, issued a decision dealing with the hold harmless prohibition. Very quickly, a provider tax structure can't hold taxpayers harmless for the provider tax. That's impermissible. If you do that, the feds won't pay matching funds. A lot of states have had over the years the providers voluntarily agreeing to share funding to ameliorate the negative impact on some providers of the provider tax program. So they basically redistribute uh funds, whether those are Medicaid funds or other funds, they'd redistribute redistribute funds from basically the winners under the program to the losers. CMS hates this. And CMS has taken the position that those informal voluntary programs among providers are an impermissible hold harmless. Providers take the opposite position and say, wait a minute, if the state's not involved, once we get the money, we can do whatever we want with the money. We thought that had national impact because they said the court said we're setting aside CMS's policy, which implicates nationwide impact. That case is under appeal to the Fifth Circuit. But in the meantime, just Friday, the 11th Circuit said we agree with CMS that these voluntary uh redistribution programs create an impermissible hold harmless. And if you want to have a get federal matching funds, you can't have one of these programs. The 11th Circuit, this is a the 11th Circuit case is in a case brought by the state of Florida. Um the 11th Circuit did not address at all the Texas case, which is curious. So this issue is going to roll forward and we will see how that plays out over the years.
SPEAKER_02:Yeah, thank you, Lloyd. And and really, um, these financial reforms, I mean, Lloyd, you hit on this, uh, make up the bulk of the savings uh that uh the bill um is is going to provide. Uh just to give sort of specific numbers, uh the provider tax uh reforms and the phase down, uh, that's supposed to lead to 191 billion saved over 10 years. The state directed payment uh caps and changes there are supposed to lead to$149 billion in savings for a total of$340 billion from these um Medicaid funding mechanisms. So really where uh a lot of the funding uh cuts are are coming from are these um mechanisms that are used to finance uh Medicaid. And I don't know if you have anything else to add here on uh on the Arizona front um and and what you're seeing in in that state.
SPEAKER_03:Yeah, um here in Arizona again, uh referencing back to the JLBC report, um we have a 6% provider tax on hospitals, which funds our Medicaid expansion 10% match. So I think that one just one comment, Lloyd. One reason why I think maybe CMS, you know, was giving preference to non-expansion states is they know states are using sometimes these provider taxes to fund their Medicaid expansion and how that might impact them is they lose some of that. But if you look at um our six percent where if we had six percent in 2032, which is when that full phase in down to the 3.5 happens, if you compare that, that's$2.1 billion a year we're gonna be losing, you know, and it's just it's big. This is this this is everything that you know states are gonna grapple with as they you know look not only to next year, the fiscal 27 budget, but you know, as they go on. And also if one of the things that I found interesting in the JLBC report is if a state has um uniformity with federal tax rules, you know, that's another decrease because of the way we, you know, tax in our state, you know, with uniformity. And I think that in Arizona in the first year is 453 billion next year because of the reduction in in tax.
SPEAKER_01:So these dollars are just so big, you know. You wonder where states are gonna what's gonna happen. There's no states. How do you backbill that? Yeah, yeah, general fund revenue. Our state doesn't have a big pot of money just sitting out there in general funds.
SPEAKER_02:Yeah. Yeah. I I saw something in, I think it was the it was in Washington state where there was a you know some lawmaker there proposing to impose, essentially put this burden on the tech companies uh in Seattle that you know to sort of fill the hole or the gap that's gonna be left here. Okay, let's move on. I know we're gonna run out of time soon. Um, let's skip the fraud and abuse provisions. We talked about this on our last podcast, right? These are enhanced provider enrollee verifications that are in the working families tax cut, duplicate enrollment prevention systems, provide enrollment screening changes. Um, nothing really much to say about that, except CMS has has sort of made clear that it's moving forward on those. There's a really great November 18th slide deck from CMS that I think does a good job of outlining and going through these. And obviously, we talked about Lloyd last time, the$35 per service um cost share requirement on some some Medicaid uh folks uh uh beneficiaries starting in October 2028. Um okay, so let's really get to uh where I think we've seen probably the most action over the last three months, uh, which is the rural health transformation program. So if you recall, the the one big beautiful bill launched this program setting aside$50 billion over five years. The idea was to help rural health care providers, not just the rural hospitals, but rural healthcare providers generally innovate. The idea would be CMS would distribute$10 billion a year, um, half equal to all participating states with a plan, and the other half based on uh states with rural population and hospital needs. States were required to apply by end of this year with a detailed explanation of how they'll use these funds. And CMS was supposed to get back um to states on its award decisions. Uh so and uh update us on on where this uh program is, uh changes and what you sort of anticipate uh coming down the pike in the next couple of weeks.
SPEAKER_03:Yeah, um CMS put this on the fast track. Um they issued the notice of funding opportunity, the no-foo, on September 15th. So states, you know, were scrambling, you know, trying to get all their stakeholder feedback on you know how they wanted to design their initiatives. Um on November 5th, um, states were required to submit their response to the NOFO. And then awards are going to be announced by the end of this month on the 30th by the 31st, with funding going out right away in um right away in January. So um this has been really fast tracked. The um in looking at websites and seeing some summaries of um state applications, you know, there's some really big key themes in there and um technology is huge. You know, back to Lloyd, your point, you know, on broadband is like how do you get technology out into the rural areas, you know, so you can do telehealth. Um, they're looking at hub and spoke models where you might have, you know, the hub at a large medical center and then the spokes going out, and that's all going to require a lot of um connectivity. Um, so health information technology was number one or number two. The second is workforce, um workforce development, training, education, um, on uh making sure that there are providers out there. And then another big theme was behavioral health and substance use disorder. That was another one that that a lot of states are going to be focusing on. Um, so I I I think I think the initiatives look really good, really positive. It's just now gonna be, you know, executing on on how they're executing on them. So and one thing that it was also interesting is if a state, it's kind of like how chip funds are done now, like if a state doesn't spend all its chip funds, they're redistributed to other other states. And so the rural grant funding, if if states don't spend it, it is going to be reallocated to other to other other states.
SPEAKER_02:So Lloyd, the the you know, this program, doesn't this sort of patch up some of the the gaps we'll see as a result of the funding changes and other cuts? Um is this being since here, but it's it's better than nothing.
SPEAKER_01:Um it's uh it I mean from what I hear from rural providers and the numbers I've seen, it's it it doesn't come close to filling in the gap. Both the existing gap that we're you know, rural providers are struggling right now. So it doesn't it doesn't help with the existing gap, it doesn't help with the uh extra pressures uh resulting from HR1. Um it's it again it'll help a bit, but we're gonna continue to lose rural health providers, and that's in a community a tragedy as the rural if you're a hospital, for example, you're the biggest employer in town. You're the only place, you know, you're you're the town. Without you, the town could disappear. So the the these could be tragedies, and states recognize these as super important problems that they have to grapple with. So we'll we'll see. It's again better than not having the 50 billion, but it's not gonna be sufficient.
SPEAKER_02:Yeah, I I I think uh please Ann.
SPEAKER_03:Oh, I was just gonna say I there's been a bit of a bleak picture here for me listening to you talk, Lloyd, because we're looking at all the reduction, the over 300 million and payments to providers. And then, you know, um one of the questions I had for you is what work, you know, you what happens to the workforce? And it's not even a rural issue, it is a statewide issue for everyone, you know. And at the same time, you're losing money there, which could impact workforce. Then you're having all these people that are losing eligibility and go to the hospital for their care. So it it's it this looks very tricky.
SPEAKER_01:It looks tricky. Um here's a perverse thought. We have a nursing shortage nationally, and I suppose if we lose hospitals, then they'll have their nurses that'll be able to relocate elsewhere. I mean, that's sort of a perverse uh upside to having a workforce problem. But you're absolutely right. It's a snowballing effect. You'll you lose employer, people lose their jobs, people lose their health coverage, they become uninsured. Um it's you know, it is not a pretty picture.
SPEAKER_02:Yeah, so we're we're definitely gonna see lots of distrust healthcare uh over the next uh few years. Uh just to put an end on this piece of conversation, awards, Ann, you said are going to be announced no later than end of this year, is it? December 31st. Yes, December 31st. And then we'll start to see funding flow over the next four or five years. But to the point uh that you made, the cuts we talked about are permanent while this is a temporary perhaps band-aid over what might be a bigger issue. Um, so so you know, let's sort of um conclude our podcast shortly. Um, you know, uh what's next? Um, I mean, legal challenges, we haven't really seen many because frankly, uh none of this thing, none of these provisions are really ripe to be challenged yet. But I suspect we'll probably see something right, Lloyd. And you know, there are a lot of different we haven't seen obviously the the interim final rule or whatever the rulemaking is gonna be from CMS, but I I suspect there'll be some legal challenges to different provisions here, or or are you thinking that well Florida and Texas have done it um in dealing with the old harmless?
SPEAKER_01:I suspect it's possible. The difficulty is the states need to get things approved today and need to have the funds flowing today. And if they're gonna take a litigation route, that they you know that's gonna delay everything. Um, so I'm uh even if CMS goes beyond, obviously, challenging what's in HR1 is gonna be extraordinarily difficult. You have to show a constitutional challenge because that's the law. The CMS implementation, maybe, maybe we'll see challenges. Um, I'm thinking on the on the you know, the payment and the state, the state director payment and uh provider fee side. You may see more challenges to the extent they uh where they roll out the um uh workforce requirements and the like in a too harsh a harsh a too a way that's beyond uh that's arbitrary and capricious, that's beyond what the statute requires. But I'm not sure I'm gonna see the lawsuits on the on the payment side because CMS, I think, holds the cards here.
SPEAKER_02:Yeah, that that makes sense. And and there were discussions about rollbacks. I I think I heard murmurs about this, that the onset of the federal government shutdown, but but not really. Um so there could be future legislation, shifts in political leadership, um, maybe the 2026 election results that might um bring forth opportunities to revisit some of these reforms. Thoughts on on sort of the you know change potential legislative changes to to what this law is starting to shape up to be.
SPEAKER_01:We're gonna see pain and it's gonna start hitting around the midterms. Um I don't know whether that's gonna lead to legislative changes before the 2028 election, um, but it might because as some of the you know the the the redder leaning states as opposed to the bluer leaning states are feeling the pain, they'll be putting pressure on their legislative uh representatives to do something in Congress. So I say that we might see some you know some additional funding shaking out to help in certain areas.
SPEAKER_03:If they create HSAs, I think that's gonna be it's not Medicaid related, it's marketplace, but I think the first feeling of pain of what it means that the delivery system is not where it's been for how many years, and people are losing coverage or opting out of coverage, and then the provider community starts feeling that I think those are gonna be their initial signals of pain that we'll see that may impact future federal legislation.
SPEAKER_02:Great. And Ann, maybe you can take us home, you know, with all of these financial challenges, is there a real promise ahead? I think you've uh you know talked about technology. I mean, is that really the potential bright spot, AI as a I think it is.
SPEAKER_03:I think it is. I mean, underlying almost everything that we've been talking about and is you know going to be the ability to execute, you know, data and data well. And so I think that's where, you know, I think last time I said this is the one big beautiful technology bill, it really is, you know, and I and if you look at concurrent efforts that CMS is doing, you know, they are they have a whole initiative on make health technology great again. You know, um Dan Brillman, the new uh Medicaid administrator, came from a technology firm. He created Unitus, which is a platform that can aggregate social determinants of health providers and, you know, provide referrals and closed loop, you know, so the Medicaid plan or the state that contracts with United St can find out whether or not the member actually got groceries, for example, you know, and so I think there's gonna be a big emphasis on that. I think they're they're gonna be a big winner in all of this. But I think this year everybody's gonna be sprinting to 1127, you know, and how how we get that the work requirements, community engagement, and uh eligibility implemented.
SPEAKER_02:Well, great. With with that, let's uh end the podcast. Thanks everybody for joining, and we'll be sure to uh do an update in a few months again. Thank you.
SPEAKER_03:Thanks, Harsh.
SPEAKER_01:Thanks.
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