Association Files Amicus Brief in Medicaid Provider Tax Hold Harmless Lawsuit

America's Essential Hospitals joined three state hospital associations and two hospital-created nonprofit organizations in filing a June 24 amicus brief in the Fifth Circuit Court of Appeals in support of a lawsuit brought by the state of Texas. At issue are two Centers for Medicare & Medicaid Services (CMS) informational bulletins and provisions in CMS' 2024 Medicaid managed care rule that sought to expand federal hold harmless provisions to prohibit voluntary redistribution agreements among private parties participating in a Medicaid provider tax program.

Texas challenged CMS' actions in the U.S. District Court for the Eastern District of Texas. In September 2025, the district court vacated CMS' unlawful interpretations of the provider tax hold harmless statute and stopped the agency from applying the rule nationwide. The district court also enjoined CMS from enforcing the CMS policy that expanded the regulatory definition of a provider tax "hold harmless" to prohibit these arrangements. CMS immediately filed an appeal in the Fifth Circuit.

Our brief asserts that CMS has misinterpreted the relevant statutory provisions in direct conflict with the statutory language and structure enacted by Congress. Specifically, Congress has precluded CMS' two-factor test for identifying a hold harmless-(1) a provider tax and (2) Medicaid payments that reimburse all or a portion of the tax. Statutory language prohibits CMS from "prevent[ing] use of [a provider] tax to reimburse health care providers . . . for expenditures under" Medicaid. CMS and the Eleventh Circuit have ignored this critical statutory language. In addition, the brief explains to the court how CMS' interpretation lacks a limiting principle and could be read to prohibit all provider taxes as illegal "hold harmless" arrangements, a result clearly not permitted by Congress.

Additionally, our brief counters CMS' contention that the district court's decision should apply only to Texas rather than nationwide. The brief reiterates that a nationwide vacatur is the default remedy under federal statute and the only remedy that addresses the harm CMS' unlawful interpretation has caused and will continue to cause. Helpfully, the state amici described to the court how CMS aggressively pursued audits and pressured states other than Texas to abandon lawful provider tax structures when the Texas district court's preliminary injunction was in effect without explicit nationwide reach.

Contact Director of Policy Rob Nelb, MPH, at [email protected] or 202.585.0127 with questions.