Analysis of Healthcare Changes Under the 2025 Tax Legislation

Key Takeaways

• On July 4, President Donald Trump signed wide-ranging tax legislation, P.L. 119-21 (the Legislation). The Legislation will affect nearly every sector of the economy and every type of taxpayer.
• We previously published, on July 8, a comprehensive alert providing a summary and analysis of the Legislation.
• In this alert, which is part of an eight-part series taking a deeper dive into various portions of the Legislation (International Tax; Tax Credits and Opportunity Zones; Estate Planning and Individual Taxes; Renewable Energy Credits; Employer-Related and Executive Compensation; Startup Investors and Business Owners; Healthcare; and Exempt Organizations), we explain and analyze the implications of the Legislation provisions impacting many aspects of the healthcare industry and the delivery of and payment for healthcare services.

The Legislation combines spending and policy priorities from 11 congressional committees and will reshape federal policy across nearly every sector of the U.S. economy. With respect to healthcare, more than 35 provisions relating to healthcare were included in the Legislation and will drive significant changes in the healthcare delivery system. Notable provisions include Medicaid eligibility and cost-sharing changes, Medicare eligibility changes, shoring up rural hospital support and initiatives, and changing requirements for health insurance exchanges and marketplaces under the Affordable Care Act (ACA). For a summary of other provisions of the Legislation that will impact healthcare services and delivery, see our comprehensive alert published July 8 as well as our alert on Employer-Related and Executive Compensation Changes published Aug. 7.

There is a possibility of one or more additional reconciliation bills during late 2025 and 2026 and therefore additional opportunities for enactment of additional provisions, as well as changes and improvements to the Legislation. And the importance of engaging with the Department Health and Human Services (HHS), the Centers of Medicare & Medicaid Services (CMS), as well as the IRS, the Treasury Department as they develop guidance to implement some of the more complex provisions cannot be overstated.

Medicare Changes

• Eligibility changes. Medicare and Medicaid eligibility requirements are now aligned. Only those who are U.S. citizens or lawful permanent residents, certain Cuban and Haitian entrants, and those residing under the Compacts of Free Association are eligible to enroll in and be covered by Medicare or Medicaid. These provisions became effective July 4, 2025, and terminate Medicare coverage no later than Jan. 4, 2027, for those who are currently enrolled but no longer meet eligibility requirements. See further discussion below regarding obligations of states under the Medicaid program with respect to eligibility determinations.
• Moratorium on implementation of certain final rules until Oct. 1, 2034. Many provisions of the final rules below were effective prior to the Legislation and states have already complied with those provisions; the Legislation prohibits implementation until Oct. 1, 2034 of provisions in these rules that have not yet taken effect and apply to both the Medicare and Medicaid programs.
  • Long-term care staffing minimums. Under the Biden administration, CMS published a final rule setting minimum staffing standards for long-term care facilities participating in Medicare or Medicaid. The final rule set up a bifurcated implementation process with an effective date of 2026 for non-rural facilities and 2027 for rural facilities.
  • Enrollment in Medicare Savings Programs – dual eligibles. A CMS final rule published in September 2023 made certain changes to the Medicare Savings Programs (MSPs) to ease enrollment barriers and streamline eligibility and verification processes. MSPs, which are part of a state’s Medicaid program, provide assistance to eligible Medicare beneficiaries to cover the costs of Medicare Parts A and B premiums and those costs are covered as part of the Medicaid program for Medicaid recipients who are also Medicare beneficiaries. To fund implementation, CMS was allocated $1 billion for fiscal year (FY) 2026.
• Temporary Increase in physician reimbursement payments. In 2025, as a result of the expiration of a temporary increase in physician payments for 2024, physician payments under the Medicare program decreased by 3 percent. The Legislation provides for a temporary 2.5 percent increase in the Medicare Physician Fee Schedule conversion factor for all physician services provided in calendar year 2026.
• Drug Price Negotiation Program – orphan drugs. The Inflation Reduction Act of 2022 (IRA) implemented a requirement that HHS negotiate drug prices with pharmaceutical manufacturers for certain drugs that are covered by the Medicare program and have been on the market for either seven years (small-molecule drugs) or 11 years (biologics) past the date of Food and Drug Administration approval or licensure of the drug. However, “orphan drugs” – designated and approved for treatment of one rare disease or condition – were excluded from the IRA price negotiation requirements. The Legislation (i) expands the orphan drug exclusion to now include drugs designated and approved for one or more rare diseases and (ii) excludes the time period the orphan drug has been on the market from the calculation of the applicable time periods above. This provision will apply for the drug selection process beginning in February 2026 with negotiated prices going into effect Jan. 1, 2028.

Medicaid Eligibility, Cost-Sharing and Other Changes

Significant changes to Medicaid programs, especially in terms of financing, governance and eligibility requirements, will be implemented as a result of the Legislation.

• Eligibility/enrollment.
  • The “Medicaid Program; Streamlining the Medicaid, Children’s Health Insurance Program, and Basic Health Program Application, Eligibility Determination, Enrollment, and Renewal Processes” was published by CMS as a final rule April 2, 2024 (89 Fed. Reg. 22,780). The rule set forth, among other things, processes to streamline enrollment and application for and transitions among Medicaid, the Children’s Health Insurance Plan (CHIP) and subsidized marketplace coverages and to eliminate barriers in CHIP. The Legislation delays until Oct. 1, 2034, implementation of provisions that have not yet taken effect, including those that reduced barriers to accessing and maintaining coverage such as streamlined verification processes, renewal timelines and other minimum timelines.
  • The Legislation significantly narrows eligibility requirements for the Medicaid and CHIP programs.
    • Eligibility is limited to US citizens or lawful permanent residents, certain Cuban and Haitian entrants, those residing under the Compacts of Free Association, and lawfully present children and pregnant individuals who are receiving coverage under the Immigrant Children’s Health Improvement Act. CMS has been allocated implementation funds of $15 million for FY 2026.
    • “Community engagement” (i.e., work) requirements are now a condition to Medicaid eligibility and those applying for Medicaid will have to show proof of community engagement during the prior month. States must implement these requirements for individuals ages 19 to 64 (without a dependent) by no later than Dec. 31, 2026. Qualifying activities include employment, community service, participation in a work program, enrollment in an educational program at least half-time, or any combination of these activities – for at least 80 hours per month; alternatively, this can be established by a monthly income of the then current national minimum wage multiplied by 80 hours. There are certain exceptions for short-term hardships. To avoid any potential conflicts of interest, managed care entities are prohibited from both determining whether an individual has met the community engagement standard and being the entity that provides, or arranges for, coverage of such individual. HHS has been allocated implementation funds of $200 million for FY 2026; states have been provided with $200 million for FY 2026 for development costs involved in setting up appropriate systems to implement the new requirements.
    • Eligibility redeterminations – Beginning Jan. 1, 2027, a state will be required to conduct eligibility redeterminations for its ACA Medicaid expansion group every six months; for all other enrollees, states must conduct an annual eligibility review. The CMS administrator will issue implementation guidance on the process, with $75 million allocated to CMS for FY 2026 for implementation funding.
    • Retroactive Medicaid coverage. Under current Social Security Administration (SSA) rules, a Medicaid applicant is eligible for up to three months of retroactive coverage from the date of application if the applicant met the eligibility requirements during that time. Under the Legislation, the retroactive coverage period is reduced depending on eligibility category – one month prior to the month of application of retroactive coverage for those eligible as part of an ACA Medicaid expansion group and no more than two months prior to the month of application of retroactive coverage for all other Medicaid applicants. The changes in the retroactive coverage period will take effect Jan. 1, 2027. The Legislation allocates $10 million to CMS in FY 2026 for implementation efforts.
  • The Legislation establishes processes for ensuring accurate Medicaid enrollment as follows:
    • Reduction of duplicate enrollment in multiple state Medicaid programs. By Jan. 1, 2027, (i) states must implement a process to regularly obtain beneficiary address information from reliable data sources, including US mail returned with a forwarding address, the US Postal Service National Change of Address database, and a verified address from a managed care entity contracting with the state and (ii) managed care entities contracting with the state must transmit enrollee address information to the states. Additionally, by Oct. 1, 2029, HHS must establish a system to be used by HHS and states to prevent dual enrollment in multiple state Medicaid programs. States must transmit enrollee information to the system on a monthly basis, and during any eligibility determination. The Legislation allocates a total of $30 million for system operations and maintenance.
    • Disenrollment of deceased individuals. Effective Jan. 1, 2027, states must review the Death Master File maintained by the SSA (or a successor system) on at least a quarterly basis to determine if individuals enrolled in the state Medicaid program are deceased. If they are, the state must disenroll all such individuals but must also immediately re-enroll anyone who was erroneously disenrolled.
    • Disenrollment of deceased providers/suppliers. Codifying current CMS regulations, effective Jan. 1, 2028, as part of the enrollment, reenrollment or revalidation of a provider or supplier, states must check the Death Master File to determine whether the provider or supplier is deceased. States must perform such checks at least quarterly.
    • Long-term care services. In determining eligibility for long-term care services under Medicaid, states will look at allowable assets, including the value of the applicant’s home. Beginning Jan. 1, 2028, the home equity limit will be set at $1 million with no adjustments for inflation; however, states have the discretion to implement different requirements for homes on lots zoned for agricultural use.
• Funding/cost-sharing and other financing changes.
  • Federal Medical Assistance Percentage (FMAP) changes.
    • Sunsetting of increased FMAP incentive. The ACA expanded Medicaid eligibility to non-elderly adults with incomes not exceeding 133 percent of the federal poverty level and provided for 90 percent federal financing for states to cover the expanded population. Per Supreme Court precedent, expansion by states is optional and in an effort to encourage states to expand Medicaid, the American Rescue Plan Act of 2021 provided for additional funding of 5 percent for two years for a non-expansion state if the state expanded its Medicaid program to this patient population. The Legislation essentially eliminates the additional 5 percent incentive by imposing a Dec. 31, 2025 deadline for non-expansion states to cover the full expansion patient population to be eligible for the additional incentive.
    • Reduction in FMAP for emergency care under Medicaid. Under the ACA, expansion states would receive the enhanced FMAP of 90 percent for the costs of emergency care provided to unlawfully present aliens who would otherwise qualify for Medicaid if not for their immigration status. Under the Legislation, effective Oct. 1, 2026, the enhanced FMAP will no longer be available – the FMAP in this situation is reduced to the FMAP available to the traditional Medicaid population.
  • Recapture of excess payments. Under current law, CMS must recoup federal funds for erroneous payments and overpayments from a state to the extent the state’s eligibility error rate exceeded 3 percent but CMS could also waive the recoupment upon a good-faith showing by the state that it was taking steps to reduce the error rate. Effective for FY 2030, the Legislation reduces the amount of payments that can be waived and expands the definition of erroneous payments to include payments where insufficient information is available to confirm eligibility.
  • Cost-sharing requirements. Beginning Oct. 1, 2028, states can begin charging deductibles or other charges - but not premiums - on Medicaid expansion enrollees with family income that exceeds the applicable federal poverty level based on the enrollee’s family size. Cost-sharing amounts cannot exceed $35 per service, other than prescription drugs subject to SSA Section 1916A(c), and the aggregate cost-sharing amounts cannot exceed 5 percent of the family income. Providers can condition services on the payment of the cost-sharing amounts but can also waive those payments on a case-by-case basis. Certain services are exempt, such as services rendered to those under 18 (including vaccines), pregnancy-related services to pregnant women, hospice care, inpatient services in a facility where the person must spend all but a minimal portion of his/her income for the cost of medical care to be eligible for such care, emergency services, and family planning services and supplies.
  • Finance options for the state share of the Medicaid program. The Legislation modifies states’ options for financing their portion of the Medicaid program with restrictions on ways to raise matching funds and enhance reimbursement for services.
  • Provider taxes. One of the most significant changes to state financing options relates to the ability of states to use provider taxes as a financing mechanism for their Medicaid program. Currently, states are permitted to tax certain provider classes, excluding nursing or intermediate care facilities, up to 6 percent of their revenue to use as the state’s share of Medicaid to draw down federal dollars. Additionally, provider taxes must be broad based and uniform across the provider class and a state cannot guarantee providers that they will receive their money back (i.e., a “hold harmless” provision) – these prohibitions limit a state’s ability to disproportionally tax those providers who have high Medicaid utilization – but CMS can grant waivers if the net impact of the tax is to draw funds from non-Medicaid sources (i.e., “generally redistributive”). The Legislation:
    • Froze existing provider taxes as of July 4, 2025 (both as to rate and the class of items or services that were covered by the tax) and will limit a state’s ability to use these taxes to draw down additional federal dollars.
    • Increased the “hold harmless threshold” to 6 percent (from 5.5 percent) but beginning in 2028, expansion states will see their threshold reduced 0.5 percent per year until reaching 3.5 percent in 2032 and beyond. Any state that did not have a provider tax in place for a provider class as of the enactment of the Legislation cannot impose a provider tax on that class going forward.
    • Narrowed the definition of “generally redistributive.”

As a result of these changes states may be forced to fund their Medicaid program through intergovernmental transfers and general revenue funds.

• State-directed payments. Beginning Jan. 1, 2028, total state-directed payments (Medicaid payments to providers through Medicaid managed care organizations) for Medicaid services are limited to 100 percent of Medicare rates for expansion states and 110 percent of Medicare rates for non-expansion states. Starting Jan. 1, 2028, current state-directed payment rates will begin to reduce 10 percent annually until the above thresholds are met.
• Home-based care waivers. Beginning July 1, 2028, states may request a 1915(c) waiver to provide home- and community-based care for those enrollees who do not require an institutional level of care in a nursing facility. If HHS grants the waiver, the waiver will last for three years with possible extension for additional five-year terms. States will be required to annually report to HHS on the cost of these home-based care services compared to the cost of providing institutional care. CMS was allocated a total of $150 million for implementation and for making payments to the states to support these initiatives.
• “Prohibited entities” and abortion services. Under the Legislation, no federal “direct spending” Medicaid funds may be paid to “prohibited entities” and this ban is effective for a one-year period from the date of enactment of the Legislation. Under current law, direct spending generally means mandatory federal expenditures that are not subject to annual appropriations. A “prohibited entity” is one that meets the following criteria: (i) is a 501(c)(3) entity; (ii) is an essential community provider primarily engaged in family planning services, reproductive health and related services; (iii) performs abortions - with Hyde Amendment exceptions for rape, incest or where the life of the mother is in danger as certified by a physician; and (iv) received more than $800,000 in total Medicaid reimbursement in FY 2023 either directly or through a nationwide healthcare provider network, including “any affiliates, subsidiaries, successors, or clinics of the entity.” This provision of the Legislation is currently in litigation, primarily around the network concept. CMS was allocated $1 million for FY 2026 for implementation efforts.
• Budget neutrality of demonstration projects under Section 1115. For any Medicaid demonstration project (new or renewing of existing projects) under Section 1115 requested by a state, the state must demonstrate that the project will be budget neutral by producing more savings than federal fund outlays. Budget neutrality must be certified by the CMS chief actuary. This provision becomes effective Jan. 1, 2027 and CMS has been allocated an additional $5 million for each of FYs 2026 and 2027.

Rural Health Support

In an effort to protect rural hospitals and providers that may be impacted by the changes to the Medicaid program, and to gain support for the Legislation, the Rural Health Transformation Program (the Program) was established. Under the Program, a total of $50 billion was allotted to state grants, with $10 billion in grants available for each (US government) fiscal year beginning Oct. 1, 2025 (FY 2026) and ending with the fiscal year ending Sept. 30, 2031 (FY 2030). Funds will be available only to states – the District of Columbia and US territories cannot participate in the Program. State-allotted funds – generally those which will be available for expenditure by the state through the end of the fiscal year following the fiscal year in which the funds are allotted - must be used by a state to support rural health facilities and providers and the expansion, provision and delivery of quality healthcare services in rural communities as more particularly set forth below. “Rural health facility” includes rural health clinics, critical access hospitals, federally qualified health centers, community mental health centers, and certain opioid treatment centers and certified community behavioral health clinics.

CMS will administer the Program and has been allocated $200 million for FY 2025 to fund implementation of the Program, including the development of the Program application form. CMS has indicated that it will distribute applications to the states in early September. The Program will go into effect Jan. 1, 2026, and any state wanting to participate in the Program must apply by Dec. 31, 2025. CMS must decide by that same date which applications are approved for the Program. To be eligible to participate in the Program, a state must submit to CMS (i) a completed application by the deadline, (ii) a detailed rural health transformation plan that includes, among other things, a defined strategy focusing on rural hospitals’ long-term financial stability and system transformation, increasing workforce, local partnerships and technology-driven approaches to help rural hospitals and providers offer appropriate care in and to the rural community and (iii) a certification that none of the funds will be used by the state for inter-governmental transfers, certified public expenditures or any other expenditure to finance the non-federal share of expenditures required under any provision of law, including under a state plan or waiver. Once approved, a state will be eligible for an allotment for each fiscal year of the Program’s duration (i.e., FY 2026 - FY 2030), unless CMS finds that the state is not appropriately using the funds in the manner described in the application and the detailed rural health transformation plan submitted with the application.

The Legislation prescribes the use of Program allotted funds; states must use the funds for at least three of the following purposes:

• Promoting evidence-based, measurable interventions to improve prevention and chronic disease management
• Providing payments to health care providers for the provision of health care items or services, as specified by the CMS administrator
• Promoting consumer-facing, technology-driven solutions for the prevention and management of chronic diseases
• Providing training and technical assistance for the development and adoption of technology-enabled solutions that improve care delivery in rural hospitals, including remote monitoring, robotics, artificial intelligence, and other advanced technologies
• Recruiting and rtaining clinical workforce talent for rural areas, with commitments to serve rural communities for a minimum of five years
• Providing technical assistance, software, and hardware for significant information technology advances designed to improve efficiency, enhance cybersecurity capability development, and improve patient health outcomes
• Assisting rural communities to right-size their health care delivery systems by identifying needed preventative, ambulatory, pre-hospital, emergency, acute inpatient care, outpatient care, and post-acute care service lines
• Supporting access to opioid use disorder treatment services, other substance abuse disorder treatment services, and mental health services
• Developing projects that support innovative models of care that include value-based care arrangements and alternative payment models, as appropriate
• Additional uses designed to promote sustainable access to high-quality rural health care services, as determined by the CMS administrator

One-half of the yearly allotment will be allocated equally across the states with an approved application and the remaining one-half will be distributed based on criteria to be determined by CMS – and under the Legislation CMS has been given broad discretion over fund distribution. Importantly, no CMS decision regarding fund distribution is subject to administrative or judicial review. There are also provisions allowing for redistribution of unexpended or unobligated funds with respect to a fiscal year as well as the recoupment of funds that CMS determines were not appropriately used by a state in a manner consistent with the state’s submitted application. Any unused or unobligated Program funds remaining as of Oct. 1, 2032, will be returned to the U.S. Treasury.

Affordable Care Act Exchanges/Marketplace Changes

See our analysis of the 2025 federal tax changes under the One Big Beautiful Bill Act, published on July 8, for a discussion of changes to premium tax credit eligibility standards under the ACA.

In addition to such changes, the Legislation made the following changes to ACA plan requirements:

• Shortened open enrollment period. The open enrollment period for marketplaces currently runs from Nov. 1 to Jan. 15 in most states. However, effective in fall 2026, the open enrollment period will be changed to Nov. 1 to Dec. 15 for all marketplaces. This change is being implemented through the Legislation in conjunction with a final rule issued by HHS on June 25, 2025 (Patient Protection and Affordable Care Act; Marketplace Integrity and Affordability" Federal Register, U.S. Department of Health & Human Services. June 25, 2025).
• New pre-verification requirements for premium tax credits. Under current regulations, returning enrollees are automatically re-enrolled in their current plan if they take no action during an open enrollment period; new enrollees have a 90-day grace period to provide verification documentation. Under the Legislation, effective for taxable years beginning after Dec. 31, 2027, exchanges must annually verify an applicant’s eligibility before the applicant can be enrolled in a plan or receive premium tax credits. Exchanges have broad discretion in the available data they can use to verify eligibility, but at a minimum, the following information must be affirmed: household income, family size, immigration status (i.e., eligible alien), health coverage status or eligibility for coverage, residence, or any additional information as determined by the HHS secretary. Note that these changes effectively eliminate (i) auto enrollment in marketplace coverage and (ii) availability of premium tax credits or cost-sharing reductions for enrollees prior to verification of eligibility. Pre-approval for financial assistance will end and thus enrollees must pay for plans until verification is complete.
• Limitations on special enrollment periods and cost-sharing reductions. Special enrollment periods occur outside the standard open enrollment period and are due to “qualifying life events” such as marriage, increase in family size or other similar changes in circumstances. Under the Legislation, effective for plan years after Dec. 31, 2025, anyone enrolling in a plan during a special enrollment period for reasons other than a qualifying life event is not eligible to receive premium tax credits or cost-sharing reductions.

Conclusion

With the first budget reconciliation bill of this Trump administration enacted, taxpayers should determine the expected impacts and consider adjustments and compliance issues as appropriate.

Those who operate in or adjacent to the healthcare industry should decide how best to steer their organization through the changes ahead, which have the potential to bring long-term transformational change to the industry, health systems and delivery of care. With impending cuts in government payors spending, and program cuts and changes, it is prudent for those in the industry to have a clear view of the potential impact of these changes on the financial and operational aspects of their organization’s business and business model. This may necessitate a top-down approach to conducting a comprehensive and strategic review of financial and operational models within the organization, including involvement of the leadership teams, the governing board, finance committee and other appropriate board and operational committees. Such review may identify opportunities for developing innovative models for delivering high-quality, but lower-cost, healthcare items and services.

Some of the proposed changes and spending cuts that were dropped solely because the Senate parliamentarian ruled that inclusion would have violated the Byrd Rule, which governs the reconciliation process, may be revisited during the FY 2026 appropriations process and through stand-alone legislation during the remainder of the 119th Congress. With respect to provisions included in the Legislation, clients should turn their focus toward offering input as federal agencies develop and issue implementing regulations and related guidance.

One or more additional reconciliation bills are likely during late 2025 and 2026, which present opportunities for enactment of additional provisions, as well as changes, corrections and improvements to the Legislation. BakerHostetler will continue to assist our clients with advancing their federal policy goals; challenging and, when necessary, litigating IRS enforcement missteps; and keeping our clients and friends updated on federal tax- and budget-related developments.

[View source.]