Judge Blocks HHS Effort to Crack Down on Health Provider Taxes

A district court in Texas permanently blocked the federal government from enforcing a regulation that would have increased oversight of a specific tax the state levies on hospitals to fund its Medicaid program.

The US District Court for the Eastern District of Texas on Wednesday found that the Centers for Medicare & Medicaid Services exceeded its statutory authority when it unilaterally reinterpreted which kinds of provider tax arrangements amounted to impermissible “hold harmless” agreements in its 2024 final rule.

The state of Texas levies taxes on providers, such as hospitals, to increase state revenue and draw down additional supplemental payments from the federal government. Under federal law, states may not use funds generated from these taxes to indemnify the original taxpayer. These prohibited agreements are called hold-harmless arrangements.

At issue in this case was a move by the CMS to issue a final rule that required states to ensure that taxpaying private entities did not redistribute Medicaid payments among each other. Previously, the CMS only defined these redistribution pacts as hold-harmless agreements if states were directly involved.

Under the rule, states were required to ensure attestations from these providers upon request. If not, states would have to provide an “explanation that is satisfactory to CMS about why specific providers are unable or unwilling to make such attestations.”

Judge Jeremy D. Kernodle found this rule exceeded CMS’s statutory authority by “expanding the meaning of ‘hold-harmless provision’ to include guarantees by private parties in private agreements.”

He also found that a separate provision of the rule that would require disputes over these payments to be heard by the agency’s internal appeals board unlawfully attempted to “strip federal courts of jurisdiction” over these challenges.

Kernodle cited the US Court of Appeals for the Fifth Circuit’s decision in Texas Medical Association v. Health and Human Services as a rationale to expand the scope of his decision to states beyond Texas.

That case found that “universal vacatur is appropriate” because “a party-specific injunction would thwart ... uniformity and predictability.”

The Office of the Texas Attorney General represents the plaintiffs.

The case is Texas v. CMS, E.D. Tex., No. 6:23-cv-00161, order 9/24/25.