Overview
The budget reconciliation process resulting in the One Big Beautiful Bill Act, which was enacted on July 4, 2025, contains many significant changes to the Medicaid program. Many of the changes, such as those related to work requirements, provider taxes, and state directed payments, will have nationwide implications. New York will be significantly impacted by these changes: the Kaiser Family Foundation estimates that New York will lose between $90 billion and $150 billion in its federal Medicaid funding over 10 years. The act’s increased scrutiny on managed care organization (MCO) taxes and limitations on premium tax credits for certain immigrants also will affect New York’s funding in a manner that other states are less likely to experience.
With New York’s legislature out of session for the remainder of the year and many provisions in the act not coming into effect until 2026 or later, it remains to be seen how New York will address the changes to its funding.
In Depth
Managed care organization taxes
New York’s fiscal year (FY) 2025 budget introduced an MCO provider tax, and its FY 2026 budget finalized many of the tax’s details. The tax is intended to be revenue neutral on MCOs. Each MCO pays a per-member monthly tax to the New York Department of Health, which deposits the payments into a “healthcare stability fund.” At the same time, New York increased its capitation payments to MCOs. These increased payments to MCOs prompted an increase in federal matching funds from the Centers for Medicare & Medicaid Services (CMS), the proceeds of which were also deposited into the healthcare stability fund. The increased capitation rates are paid out of the healthcare stability fund, and New York’s FY 2026 budget projected $3.7 billion in state savings remaining in the healthcare stability fund.
Existing federal law requires that MCO taxes, such as New York’s, be uniform and broad based, meaning that they must be applied uniformly to all MCOs in the state, not just Medicaid MCOs. States can, however, apply to CMS for a waiver of that requirement if the state can demonstrate that the net impact of the tax is generally redistributive and the tax amount is not directly correlated to Medicaid payments. New York is one of seven states that obtained a waiver from CMS to implement an MCO tax. In its approval letter to New York (and California), CMS indicated that it would introduce new regulatory requirements to test whether a tax would be “generally redistributive.”
The One Big Beautiful Bill Act implements such a test, stating that a tax will not be considered generally redistributive in three possible scenarios:
- If, within a permissible class, the tax rate imposed on the taxpayer or tax rate group explicitly defined by its relatively lower volume or percentage of Medicaid taxable units is lower than the tax rate imposed on any other taxpayer or tax rate group explicitly defined by its relatively higher volume or percentage of Medicaid taxable units
- If, within a permissible class, the tax rate imposed on any taxpayer or tax rate group based upon its Medicaid taxable units is higher than the tax rate imposed on any taxpayer or tax rate group based upon its non-Medicaid taxable unit
- If the tax excludes or imposes a lower tax rate on a taxpayer or tax rate group based on or defined by any description that results in the same effect as described above
CMS also recently proposed the rule Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations-Closing a Health Care-Related Tax Loophole. This proposed rule makes similar changes to Medicaid managed care taxes in relation to the generally redistributive test.
However, the One Big Beautiful Bill Act has a different transition period for states to adopt changes. The act allows CMS to provide a transition period not to exceed three fiscal years, whereas the proposed rule would only provide a transition period to states whose waivers were approved more than two years before the final rule’s effective date. States such as New York would not fall under the transition period in the proposed rule, which would put New York in severe financial distress. It remains to be seen how CMS finalizes the proposed rule and how the transition period will apply in light of the act.
Provider taxes
The act makes significant changes to provider taxes beyond the MCO tax. Effective immediately, the act prohibits any new provider taxes and does not allow increases to any existing provider taxes. Beginning in FY 2028, expansion states’ provider tax limits will be reduced from the current level (6%) by 0.5% each year until all expansion states reach a 3.5% limit in 2031. New York, like most states, uses provider taxes to finance state share of Medicaid payments.
The Kaiser Family Foundation reports that New York has three or more provider taxes, of which taxes on hospitals fall between 4.01% and 5%. Since New York is an expansion state, any provider tax (except for provider taxes on nursing facility services and intermediate care facility services, which are exempt from the expansion state phase-down) will have to decrease to 3.5% by 2031. Since New York’s hospital provider tax is reportedly between 4% and 5%, the state will not have to address the phase-down for several years.
Limiting premium tax credits for certain immigrants
New York is one of the few states that operates a basic health plan under the Affordable Care Act. The Essential Plan, as it is known in New York, is intended to be a bridge for individuals with incomes too high to meet Medicaid requirements, but who may otherwise have difficulty affording an exchange plan, even with subsidies. New York operates under a waiver, allowing it to provide coverage under the Essential Plan for individuals with incomes between 138% and 250% of the federal poverty level (FPL).
The federal government funds a significant portion of all enrollees in the Essential Plan. It pays New York 95% of the premium tax credit that individuals would have received if they purchased an exchange plan.
While the Essential Plan covers “lawfully present” individuals with income from 138% to 250% of the FPL, it also provides coverage – and federal payments – for lawfully present individuals with income less than 100% of the FPL who are ineligible for Medicaid due to their immigration status. About half a million individuals qualify for the Essential Plan in such a manner, and New York collects federal premium subsidies for those individuals. The Essential Plan and its federal subsidies have proven to be cost effective for New York, allowing it to pay relatively high rates in the Essential Plan and generating excess funding the state has redirected to other healthcare needs.
New York also provides Medicaid coverage to individuals who are not lawfully present. Funding for those individuals cannot include federal dollars, and they are on what is referred to as state-only Medicaid coverage. A New York Court of Appeals decision, Aliessa v. Novello, determined that the state’s constitution requires New York to provide health coverage to such individuals.
Effective for calendar year 2027, the act severely limits the definition of lawfully present aliens such that only aliens with permanent residence, certain aliens from Cuba, and individuals who reside in the United States under the Compact of Free Association will qualify. It also repeals premium tax credit eligibility for lawfully present aliens of any type with income below 100% of the FPL. The result for New York is that a significant portion of individuals currently enrolled in the Essential Plan will lose eligibility and federal funding, and due to the Aliessa decision, will be forced to move to state-only Medicaid coverage with no federal funding.
The result will not only affect New York’s healthcare funding, but providers’ revenue as well. The Essential Plan pays significantly higher rates than Medicaid, and providers’ reimbursement will be negatively impacted as a significant portion of Essential Plan enrollees move to Medicaid coverage with lower reimbursement.
New York’s 1115 redesign waiver
On January 9, 2024, the Centers for Medicare and Medicaid Services (CMS) approved the New York State 1115 Medicaid waiver, “Medicaid Redesign Team” (MRT). The MRT is a long-standing waiver in New York that has continuously evolved. The approved waiver represents the next step in Medicaid redesign in New York and builds on the previous delivery system reform incentive payment program. Initially New York requested $13.52 billion in federal funding for the waiver, but the final waiver was approved for $6 billion in federal funding.
The One Big Beautiful Bill Act codifies the existing CMS requirement that Section 1115 waivers be budget neutral. It specifies that CMS cannot approve an application, renewal, or amendment of a Section 1115 waiver unless budget neutrality is certified. CMS must develop methods to consider savings in subsequent approval periods if expenditures were less under the waiver than they would have been absent the waiver. In the case of a waiver renewal, the budget neutrality certification must be based on data from the duration of the preceding waiver. The act includes $5 million per year for FYs 2026 and 2027 for US Department of Health and Human Services implementation. This policy will be effective starting in January 2027. The MRT waiver will be effective through March 31, 2027, and as a result potential future versions of the waiver will likely be subject to more stringent methods of proving budget neutrality.
Conclusion
All states will be examining the act’s effects on their Medicaid funding and considering how to address decreased funding and increased oversight and management requirements. New York is particularly susceptible to changes implemented by the act because of state policy decisions that are directly addressed by the act. How New York addresses these unique issues remains to be seen but will likely be the topic of much political debate as the provisions take effect.
