In January 2026, the Centers for Medicare & Medicaid Services (CMS) issued a Final Rule affecting how states may structure healthcare related taxes, particularly Managed Care Organization (MCO) taxes, to finance Medicaid. Because New York first implemented its MCO tax beginning in SFY 2025–26, the rule has direct relevance for nursing homes whose recent Medicaid investments are supported by this mechanism.
What Is the MCO Tax?
An MCO tax is a state‑imposed assessment on Medicaid managed care plans. The revenue generated serves as part of the state share of Medicaid spending, enabling New York to draw down federal matching funds.
New York adopted the MCO tax as a financing tool to support targeted Medicaid investments, including nursing home funding in SFY 2025-26.
What CMS Changed
CMS finalized a rule titled “Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations – Closing a Health Care‑Related Tax Loophole,” effective April 3, 2026.
The rule closes a statistical loophole that previously allowed some state Medicaid taxes, particularly MCO taxes, to disproportionately burden Medicaid business while technically satisfying federal statistical tests.
Under the Final Rule:
- CMS will no longer approve new or renewed MCO tax arrangements that disproportionately target Medicaid business
- Additional safeguards were added to prevent indirect or opaque tax structures that isolate Medicaid utilization
What the Rule Does Not Do
For New York nursing homes, it is important to clarify what the rule does not do:
- It does not retroactively invalidate New York’s existing MCO tax
- It does not require immediate Medicaid rate reductions
- It does not create an immediate funding cliff
Instead, CMS established a defined transition period.
New York’s Compliance Timeline
Because New York’s MCO tax was approved within two years of the rule’s effective date, it falls into the earliest MCO compliance category.
As a result:
- The MCO tax may remain in place through December 31, 2026
- After that date, New York must bring its financing structure into compliance
Impact for Nursing Homes
In the near term, Medicaid investments tied to the MCO tax remain largely intact. This includes:
- $445 million in nursing home funding in SFY 2025–26
- $288.8 million ($385 million * 75%) applicable to SFY 2026–27**
However, because the CMS transition period extends only through December 31, 2026, the first nine months of SFY 2026–27, roughly 75%, aligns with current federal guidance. Funding assumptions for the final quarter will depend on how the state restructures its financing model.
Key Takeaways
The CMS Final Rule does not eliminate funding, but it places a defined endpoint on the current structure.
For providers, the key takeaway is not an immediate disruption, but longer-term uncertainty. Strategic planning should account for the possibility that Medicaid financing tools used in 2025 and 2026 will not look the same in 2027 and beyond.
If you have any questions or are interested in learning more, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
