State financing tools tighten—pressure will show up in rates and “optional” services
A practical playbook for HCBS & LTSS leaders (mapped to workforce, compliance, client support, and advocacy)
The One Big Beautiful Bill Act (Public Law 119-21) tightens the two biggest state financing levers that have quietly propped up Medicaid rates and supplemental payments for years: provider taxes and state-directed payments (SDPs) in managed care. It also hardens 1115 waiver budget neutrality. When these screws tighten, states look to slow spending growth—and history says the strain is often felt in rates and “optional” benefits like many HCBS services. Here’s the rundown and what to do next.
What changed
Moratorium on new or higher provider taxes (effective on enactment).
States are barred from creating new provider taxes or increasing rates/bases of existing ones going forward (with narrow transition allowances). Provider taxes are a major source of the non-federal share in Medicaid; fewer tax options = less state match, which constrains rate-setting.Lower “safe harbor” for provider tax hold-harmless rules in expansion states.
Beginning FY2028, the safe-harbor level (the share of net patient revenue a tax can equal without being presumed to “hold providers harmless”) ratchets down by 0.5 points a year in Medicaid expansion states, reaching 3.5% in FY2032 (from today’s 6%). Nursing facilities and ICF/IIDs are excluded from this reduction; other providers are included. Translation: even existing taxes may need to be scaled back, shrinking available match.SDPs capped to Medicare-level ceilings.
HHS must revise rules so that for inpatient hospital and nursing-facility services, total state-directed payment rates are capped at 100% of Medicare in expansion states and 110% in non-expansion states. New SDPs above the cap can’t take effect (with a rural hospital exception), and existing approvals above the cap phase down by 10 percentage points per year starting Jan 1, 2028.Tighter rules for “uniformity/broad-based” provider tax waivers.
The law narrows when states can receive uniformity waivers, curbing some tax designs (e.g., certain MCO taxes) that previously passed muster. Up to 3 years of transition is allowed.1115 waiver budget neutrality is locked down.
CMS’s Chief Actuary must certify that 1115 waivers won’t raise federal costs versus the “without-waiver” baseline; savings treatment is specified in statute. Expect tighter negotiations for demonstrations that fund delivery-system or workforce investments. Effective Jan 1, 2027.
Why this matters to HCBS/LTSS: When provider taxes and SDPs are capped or curtailed, state Medicaid budgets have fewer flexible dollars. That increases pressure to hold base rates flat, trim supplemental payments, or narrow optional benefit scope—areas where HCBS often lives.
Timeline you can take into payer/State meetings
Now (enactment): Freeze on new/increased provider taxes; tighter waiver criteria for tax uniformity (with up to 3-year transition).
Oct 1, 2027 (FY2028): Safe-harbor reduction begins in expansion states; steps down to 3.5% in FY2032.
Upon enactment/New approvals: New SDPs above 100%/110% Medicare cannot start (rural hospital exception).
Jan 1, 2028: Phase-down of existing SDPs above the cap begins (-10 percentage points/year).
Jan 1, 2027: 1115 budget-neutrality certification by CMS Chief Actuary required.
What this means for your operation (by priority lane)
1) Workforce development
Goal: Protect recruitment/retention when rate growth slows.
Build productivity without rushing care. Standardize visit structures, huddles, and mobility/dementia micro-skills that reduce rework and no-shows—without sacrificing dignity and autonomy.
Career ladders that retain. Codify steps from Companion → Personal Care → Advanced Dementia/Behavioral Health aide. Use micro-credentials (2–4 hrs) to justify skill-based differentials when across-the-board raises aren’t viable.
Diversify training dollars. If 1115/SDP dollars tighten, line up workforce boards, community colleges, and philanthropy to co-fund apprenticeships, tuition, and supervised practicums.
2) Compliance adherence
Goal: Stay audit-proof as financing rules shift.
Document rate logic & contracts. If your MCO contracts include SDP-linked add-ons, track each approval’s Medicare-cap exposure and phase-down schedule (10-point annual reductions after 1/1/2028). Keep payer attestation letters.
Track provider-tax pass-throughs. If local taxes previously supported add-ons, monitor state transitions under the moratorium/safe-harbor changes and keep board minutes on contingency planning.
1115 dependencies map. Inventory any programs you rely on that sit inside an 1115 (e.g., SDoH pilots, workforce incentives); flag items that could face tighter budget-neutrality certification.
3) Client support
Goal: Hold the line on access and continuity if rates stall.
Stability beats churn. Double down on renewal coaching and appointment logistics (transportation, caregiver relief, dementia supports) to avoid missed visits that can cascade into worse outcomes—especially if agencies limit hours to manage budgets.
Transparent communication. If states revise approved service arrays or utilization limits, provide plain-language notices and offer warm referrals to community resources so people aren’t left without support.
4) Advocacy
Goal: Shape state choices that protect HCBS amid fiscal tightening.
Ask your Medicaid agency/MCOs:
How will you prioritize HCBS rates if SDP caps reduce hospital/NF supplements?
What’s the plan to re-base HCBS rates using cost-to-serve data rather than relying on SDPs that don’t reach HCBS?
Which provider taxes are affected by the safe-harbor step-down, and what’s the replacement strategy for the non-federal share?
How will you use published dashboards (waitlists, hours authorized vs. delivered, turnover) to monitor access as financing tightens?
Bring solutions: propose outcome-tied HCBS adjustments (falls reduction, hospital-avoidance metrics), standardized career-pipeline consortia, and administrative simplifications that lower avoidable costs without cutting services.
Practical budgeting moves (start this quarter)
Scenario test 2028–2032 with: flat base rates; partial SDP step-downs; and provider-tax taper in expansion states.
Re-negotiate with MCOs: convert fragile add-ons into base rates where possible; seek quality-linked addenda that sit safely under the new caps.
Protect margins operationally: reduce avoidable overtime/no-show waste; optimize routing and caseload balance; standardize visit prep and documentation.
“Hallway” questions for ADvancing States HCBS
Which SDPs in our state will hit the 100%/110% Medicare ceiling first, and what’s the phase-down plan? (Hospitals/NFs today—spillovers tomorrow.)
Which provider taxes are impacted by the safe-harbor ratchet in expansion states, and how will the state replace the non-federal share?
Can we re-base HCBS rates using a standardized cost model so community supports aren’t the “balancing item”?
For 1115 demonstrations we touch: what data will satisfy the Chief Actuary that initiatives are budget-neutral (e.g., ED/admits avoided)?
Bottom line
OBBB narrows Medicaid financing headroom. As provider taxes flatten and SDPs step down to Medicare-level caps, states will feel real pressure. HCBS & LTSS leaders who (1) shore up workforce pipelines, (2) keep compliance tidy around SDP and tax changes, (3) support clients to prevent costly instability, and (4) advocate for cost-based community rates can protect access and dignity—even when the budget gets tighter.
References
Congress.gov. (2025). H.R. 1—One Big Beautiful Bill Act (Public Law No. 119-21): Subpart C—Stopping Abusive Financing Practices (Secs. 44132 provider-tax moratorium; 44133 SDP caps & phase-down; 44134 uniformity-waiver criteria; 44135 1115 budget neutrality). Retrieved August 21, 2025, from the Library of Congress website. (Congress.gov)
KFF. (2025, Aug 4). Health Provisions in the 2025 Federal Budget Reconciliation Law (Financing: provider taxes safe-harbor reduction; uniformity waivers; state-directed payment caps and timelines). Retrieved August 21, 2025. (KFF)
Congressional Research Service. (2025, Aug). Health Provisions in P.L. 119-21, FY2025 Budget Reconciliation (notes SDP caps at 100%/110% of Medicare and related timelines). Retrieved August 21, 2025. (Congress.gov)
