OBBB Act Brings Major Medicaid Changes: What North Carolina Providers Need to Know

By Francisco Morales, Josiah Irvin, Jim Wrenn and Robert Shaw

The One Big Beautiful Bill Act (P.L.119-21) (the “OBBB”) passed by slim margins in the U.S. Senate (51-50) and U.S. House (218-214) and was signed into law by President Trump on July 4, 2025. While the OBBB is over 800 pages and covers a wide swath of issues, we summarize here certain of the most salient impacts the OBBB will have on Medicaid and the potential impact on North Carolina healthcare providers.

According to estimates from the Congressional Budget Office (“CBO”), the OBBB is projected to reduce federal Medicaid spending by approximately $1 trillion over the next ten years. While the OBBB provisions dealing with Medicaid reductions are extensive and complex, the federal savings are primarily driven by (i) changes in how states finance their share of Medicaid costs through provider tax arrangements, (ii) new limitations on state-directed payments, (iii) reductions in the federal medical assistance percentage, and (iv) various requirements imposed on individual Medicaid eligibility, such as community engagement and work requirements and eligibility redeterminations.

While it is too early to determine how North Carolina will respond to the changes introduced by the OBBB, the OBBB will have a major impact on North Carolina healthcare providers who rely heavily on Medicaid and supplemental payments derived from state-directed payments. The OBBB may also create additional administrative costs for the state and counties that could require legislative action to address.

Part I – Brief Overview of Key Medicaid and Healthcare Provisions of the OBBB

Provider Taxes

Provider taxes are healthcare-related taxes that states impose on healthcare providers, such as hospitals, nursing homes, intermediate care facilities, and managed care organizations (“MCOs”), to help finance the state share of Medicaid expenditures. Provider taxes provide a dedicated revenue stream that states use to draw down federal matching funds for Medicaid. The most common types of provider taxes are those levied on hospitals (45 states use this type of tax) and nursing homes (46 states use this type of tax). North Carolina has both (see Hospital Assessment Act and Nursing Home Provider Assessment).

• Traditional Provider Tax Requirements. To comply with federal standards, provider taxes must be both broad-based (i.e., imposed on all providers within a specified class of providers) and uniform (i.e., all providers within a specified class must pay the same tax). A state may receive waivers of these two requirements from the Centers for Medicare and Medicaid Services (“CMS”) if the state can prove (i) the net effect of the provider tax is generally redistributive and (ii) the amount of the tax is not directly correlated to Medicaid payments for the services being taxed. In this context, “generally redistributive” means the tax program generates tax revenues from entities that serve relatively lower percentages of Medicaid beneficiaries and uses these revenues as the state’s share of Medicaid payments, even if those entities do not ultimately benefit as much from the tax compared to entities that serve higher percentages of Medicaid beneficiaries. A tax program that does the opposite, by establishing a lower tax rate on entities that serve lower percentages of Medicaid beneficiaries to prevent redistribution of tax revenue, is not generally redistributive. In addition, states cannot directly or indirectly guarantee that providers will receive back the same amount in Medicaid reimbursement as they pay in provider taxes (known as a hold harmless arrangement). Hold harmless arrangements often result in the federal government as the only net contributor to Medicaid payments that are supported by the tax program, since the non-federal share is both sourced from and paid back to the provider paying the tax. Current federal regulations provide a safe harbor to the hold harmless requirement: a provider tax applied at a rate of less than 6% of net patient revenues received by the provider is not considered to hold providers harmless and is thus permissible.
• Existing Concerns. In recent years, provider taxes have come under scrutiny due to the concern that certain states have exploited an unintended loophole while obtaining waivers of the broad-based and/or uniformity requirements under federal law. The statistical formula used under current federal regulations to determine if a tax program is generally redistributive is not sensitive to outlier data points. As a result, states have designed tax structures where the vast majority of the tax revenue comes from Medicaid providers (particularly MCOs), placing a much higher tax burden on Medicaid activities compared to commercial activities. Because non-Medicaid activities are not taxed significantly whatsoever under these tax structures, states are still able to pass the linear regression analysis required by federal regulation and take advantage of the lack of sensitivity in such analysis to outlier data points. As a result, this loophole has enabled states to violate the spirit of the generally redistributive requirement while still passing the current federal requirements.
• Changes Introduced by the OBBB. Casting these issues under the umbrella of “Stopping Abusive Financing Practices,” the OBBB seeks to prevent scenarios where states use tax structures such as the ones noted above to drawn down excessive federal Medicaid funds. The OBBB makes major changes on how states can use provider taxes to fund their Medicaid match, summarized as follows:
  • Reduction in Hold Harmless Safe Harbor. The most significant change relates to the 6% safe harbor threshold for the hold harmless requirement:
    • For North Carolina and other Medicaid expansion states, the 6% of net patient revenue safe harbor threshold for existing provider taxes will be gradually reduced to 3.5%. Beginning in fiscal year 2028, the maximum threshold will decrease by 0.5% annually until achieving the 3.5% mark in 2032. In addition, for any new provider tax enacted after the date of enactment of the OBBB (July 4, 2025), the applicable safe harbor threshold will be 0%, discouraging any new provider taxes because providers will be at risk of paying more in provider taxes than they receive in Medicaid reimbursement.
    • In a legislative win for the long-term care industry, expansion states’ existing provider taxes for nursing homes and intermediate care facilities are not subject to the gradual safe harbor reduction if those taxes were within the 6% safe harbor threshold as of the date of enactment of the OBBB.
    • For non-Medicaid expansion states, the safe harbor threshold for existing provider taxes will remain at 6% of net patient revenues and will not be subject to a gradual phased reduction. As is the case with expansion states, however, for any new provider tax enacted after the enactment of the OBBB, the applicable safe harbor threshold will be 0%, discouraging any new provider taxes in non-Medicaid expansion states as well.
  • Closing of the Statistical Loophole for CMS Waivers. Another significant change is the closing of the statistical loophole to obtain waivers for the broad-based and/or uniformity requirements. The OBBB explicitly defines arrangements that are not generally redistributive for purposes of obtaining waivers, even if such arrangements previously passed the statistical regression analysis required under federal law. These impermissible arrangements include:
    • Arrangements under which a group of similar providers (i.e., a permissible class) has a tax rate that is lower for providers with less Medicaid business (i.e., lower volume or percentage of Medicaid taxable units) and higher for providers with more Medicaid business.
    • Arrangements under which the tax rate imposed on a provider group based on their Medicaid taxable units is higher than the tax rate imposed on a provider group based on its non-Medicaid taxable units.
    • Arrangements designed to achieve the same prohibited effects as described in the two previous scenarios, except without explicitly using Medicaid terminology. This is a catch-all provision designed to prevent states from trying to creatively word their provider tax to mask the intent of unfairly targeting Medicaid-heavy providers or Medicaid-related revenue. It allows CMS to look at the effect of the tax, not just the exact wording of it.

State Directed Payments

Another area where the OBBB aims to reduce federal Medicaid spending is state-directed payments (“SDPs”) within Medicaid managed care programs. Generally, while MCOs have flexibility in negotiating payment rates with providers, SDPs (subject to CMS approval) allow states to require MCOs to pay providers certain rates, make uniform rate increases, or use certain payment methods to achieve specific health policy goals. Under rules issued during the Biden Administration, SDPs for inpatient or outpatient hospital services, skilled nursing services, or professional services in an academic medical center were permitted to be increased to amounts up to, but not exceed, the average commercial rate for said services.

• Future SDPs. The OBBB imposes caps on new SDPs that have not yet been submitted or received approval as of the date of enactment of the OBBB:
  • For North Carolina and other Medicaid expansion states, the OBBB caps the total payment rate for new SDPs at 100% of the Medicare fee schedule.
  • For non-Medicaid expansion states, the cap on new SDPs is 110% of the Medicare fee schedule.
• Existing SDPs. SDPs that were already approved or submitted prior to the date of enactment of the OBBB are grandfathered in, but they are subject to a gradual reduction in rates. Beginning with rating periods on or after January 1, 2028, existing SDP limits will be reduced 10% annually until they reach the payment caps described above.
• Rates Capped at Medicaid Fee Schedule in Some Instances. Medicaid generally has a broader range than Medicare. If a Medicaid service does not have an equivalent Medicare fee schedule, then cap for SDPs (both existing and new) for those services will be the Medicaid state plan payment rate (or the rate under a waiver of such plan).

Reductions in Federal Medical Assistance Percentage (“FMAP”) 

FMAP refers to the share of state Medicaid costs for which the federal government is responsible.  States have a regular FMAP that depends on their relative wealth, which can range between 50% and 83%.  In addition, states that expanded Medicaid under the Affordable Care Act (“ACA”) to cover adults up to 138% of the federal poverty level receive an enhanced FMAP of 90% for the expanded coverage.  Various other statutes provide further adjustments to the FMAP. The OBBB made three notable changes:

• The American Rescue Plan Act (“ARPA”) provided an additional temporary 5% increase in the state’s FMAP for states that newly adopted Medicaid expansion after March 2021. The OBBB ends the temporary enhanced FMAP under ARPA effective January 1, 2026. States that newly adopt Medicaid expansion will no longer receive the temporary FMAP incentive under ARPA.
• The OBBB also limits the enhanced FMAP for payments for emergency medical conditions furnished to individuals who would be eligible for Medicaid expansion coverage except for their immigration status. Instead of obtaining an enhanced FMAP for these individuals, effective October 1, 2026, the FMAP will be reduced to the standard FMAP for the state.
• Finally, under the OBBB, if a state has a qualifying improper payment error rate in excess of 3%, then the U.S. Department of Health and Human Services (“HHS”) must reduce such state’s federal financial participation. This provision begins in 2030.

Various Requirements Imposed on Individual Eligibility

The OBBB also makes several changes that will affect individual Medicaid eligibility:

• Community Engagement/Work Requirements for Medicaid Expansion Population: Effective January 1, 2027, requires 80 hours of community engagement per month for Medicaid expansion non-elderly, non-disabled adults to maintain Medicaid coverage, with certain exceptions for individuals experiencing short-term hardships. Community engagement includes work, work programs, community service, educational programs, or a combination of the foregoing.
• Eligibility Redeterminations for Medicaid Expansion Population: Effective January 1, 2027, requires automated eligibility redeterminations every six months for Medicaid expansion adults (instead of annually). For non-Medicaid expansion adults, eligibility redeterminations are required every 12 months.
• Cost Sharing Requirements for Certain Medicaid Expansion Individuals: Effective October 1, 2028, for Medicaid expansion adults with income between 100% and 133% of the federal poverty level, requires that states impose deductions, cost sharing, or similar charges above $0 and below $35 with respect to certain care, items, or services, as determined by the state.
• Preventing Dual Enrollment: Requires the establishment of a system to share information with states for purposes of preventing individuals from being enrolled in multiple Medicaid programs.
• Immigrant Eligibility: Restricts the definition of qualified immigrants for purposes of Medicaid. Effective October 1, 2026, federal Medicaid payments shall not be made to a state for medical assistance furnished to an individual unless such individual is (i) a citizen or national of the United States, (ii) an alien lawfully admitted for permanent residence as an immigrant, or (iii) certain Cuban and Haitian refugees and certain lawful residents under a Compact of Free Association with Pacific Island sovereign nations.
• Retroactive Coverage: Effective January 1, 2027, limits retroactive coverage to one month prior to application for Medicaid expansion enrollees (down from three months under ACA Medicaid expansion) and two months prior to application for traditional enrollees. For residents typically served in long term and post-acute care, coverage is reduced from 90 days to 60 days.
• Enrollment Verification: Requires quarterly reviews of the Social Security Administration’s Death Master File to determine whether providers enrolled in Medicaid are deceased.

Other Changes

The OBBB also made a variety of other potentially significant changes to federal health policy, including:

• Section 1115 of the Social Security Act gives HHS authority to approve experimental, pilot, or demonstration projects that promote the objectives of the Medicaid and Children’s Health Insurance Program (CHIP) programs. Under this authority, the Secretary may waive certain provisions of the Medicaid law to give states additional flexibility to design and improve their programs. Section 1115 waivers have traditionally required budget neutrality. The OBBB now requires that the Chief Actuary for CMS certify the budget neutrality for Section 1115 waiver programs for each renewal period and allows claw-backs for non-compliance.
• Section 1915(c) of the Social Security Act authorizes HHS to waive certain requirements of federal Medicaid law allowing states to cover a broad range of home and community-based services (“HCBS”) for certain persons with long-term care needs. The OBBB permits a new class of three-year Section 1915(c) waivers for HCBS, with the option for five-year renewals.
• A one-year 2.5% payment increase to the Medicare Physician Fee Schedule (PFS).
• New restrictions on Medicare eligibility for non-citizens (matching the Medicaid restrictions noted above).
• New restrictions on Medicaid providers’ ability to provide abortion health care services.
• The OBBB allows the Biden-era enhanced tax credits for ACA coverage to continue through the end of 2025. Thereafter, the OBBB will allow them to revert to the traditional, more restrictive eligibility. In addition, the OBBB imposes new verification requirements for income.
• Prohibits CMS from implementing the nursing home staffing rules until September 30, 2034. For nursing home operators, this change provides substantial relief from a rule that many in the nursing home industry viewed as burdensome and unfeasible and allows more time to address staffing challenges without immediate federal penalties.

Rural Health Transformation Program

Finally, a late addition by the U.S. Senate to the OBBB was the inclusion of a Rural Health Transformation Program. This was added to the OBBB in response to concerns about the impact of the law’s broader changes to Medicaid, especially as it applies to rural hospitals and providers.

The OBBB establishes a $50 billion fund to be used by CMS to grant payments to states to improve rural health. The fund’s objectives are to improve access to hospitals, other healthcare providers, and health care items and services furnished to rural residents of the state; improve health care outcomes of rural residents of the state; prioritize the use of new and emergent technologies to emphasize prevention and chronic disease manage; promote quality improvement, increase financing stability, and share best practices in care delivery; prioritize data driven solutions that help rural hospitals and other health care providers; and to identify causes driving the accelerating rate of closures, conversions, or service reductions at stand-alone rural hospitals.

States are required to submit applications for these funds and have them approved by December 31, 2025.

Half of the total available funds will be distributed equally among all states with an approved application. The other half of the funds will be allotted based on an approach to be determined by CMS considering criteria such as the state’s rural population, the number of rural health facilities in the state relative to the national count, and the situation of hospitals that serve a high population of rural residents. States will not be required to provide any matching funds as a condition of receiving the allotment.

It should be noted the Rural Health Transformation Program is temporary, spanning five fiscal years (2026-2030). All funds must be spent before October 1, 2032.

Part II - Impact of the OBBB Changes on North Carolina Healthcare Providers

Provider Taxes

• As previously mentioned, existing provider taxes for nursing homes and intermediate care facilities are not subject to the gradual safe harbor reduction if those taxes were within the 6% of net patient revenues threshold as of the date of enactment of the OBBB. North Carolina’s nursing home assessment and the intermediate care facility assessment were within the 6% safe harbor threshold as of July 4, 2025. Accordingly, these provider taxes are not subject to downward adjustment.
• North Carolina has an existing hospital provider assessment (i.e., a provider tax). The gradual safe harbor reduction will significantly impact this assessment, which will have to decrease to a rate not exceeding 3.5% of net patient revenues by 2032. The revenue collected under the hospital assessment is used, among other purposes, to fund the state’s share of Medicaid expansion, as well as the North Carolina Healthcare Access and Stabilization Program (“HASP”). As discussed below, the loss of this additional tax revenue, combined with the gradual reduction in rates paid under HASP due to the new caps on SDP payments, threatens the continued viability of HASP.
• In addition, the existing North Carolina hospital provider assessment is set forth in a fixed statutory formula. Lawmakers will need to consider whether the formula needs to be updated in light of the OBBB.

SDPs / HASP

• North Carolina expanded Medicaid on December 1, 2023, bringing coverage to an estimated 600,000 new individuals. HASP was established in connection with the state’s Medicaid expansion to encourage hospital participation in managed care and maintain beneficiary access to care. HASP is structured as an SDP, meaning that the program directs MCOs to make enhanced payments to participating hospitals. These enhanced payments aim to bring Medicaid reimbursement rates closer to commercial reimbursement rates. HASP is also specifically designed to strengthen critical access hospitals and safety net hospitals, particularly those in rural areas, that often struggle financially due to a high volume of Medicaid patients. A key selling point of HASP is that it was designed to be budget neutral for North Carolina’s general fund because HASP is funded by the hospital provider assessment discussed above.
• The looming loss of tax revenue due to the lowering of the safe harbor threshold on North Carolina’s hospital assessment from 6% to 3.5% presents a significant funding challenge for HASP, unless North Carolina finds an alternative funding source unrelated to the hospital assessment.
• In addition, although HASP is a grandfathered-in SDP because it was approved prior to the enactment of the OBBB, it is still subject to the gradual reduction in rates paid under SDPs, with a cap not to exceed 100% of the Medicare fee schedule. This reduction in payment rates will gradually eliminate the enhanced payments under HASP, regardless of whether North Carolina finds an alternative funding source for HASP. As such, larger changes to the program will be required to make it viable in the long term.
• The new restrictions on SDPs and the resulting implications for HASP may also impact the Medical Debt Initiative implemented by the Cooper administration. Under the initiative, as a condition of eligibility to receive enhanced HASP payments, North Carolina hospitals were required to adopt medical debt policies including relief of all outstanding medical debt owed by Medicaid enrollees dating back to January 1, 2014. North Carolina hospitals also had to implement new policies designed to prevent low- and middle-income consumers (defined as both uninsured and insured patients with incomes less than or equal to 300% of the federal poverty level) from incurring medical debt in the future. Given the unclear future of HASP, the continued viability of the Medical Debt Initiative, which was implemented in conjunction with enhanced HASP payments, is also uncertain.

FMAP and Medicaid Expansion

• While North Carolina is a beneficiary of the temporary enhanced FMAP under ARPA, which the OBBB ends effective January 1, 2026, North Carolina will not be impacted by this change because North Carolina’s temporary enhanced FMAP was already set to expire prior to that date.
• North Carolina’s Medicaid expansion statute has a so-called “trigger” provision for its repeal relating to FMAP. If the Medicaid expansion population FMAP falls below 90%, then Medicaid expansion is automatically repealed (see N.C.G.S. § 108A-54.3C).  By its terms, the OBBB did not pull this trigger – the Medicaid expansion population FMAP remains at 90% under federal law.
• The OBBB allows higher provider taxes and SDPs in non-expansion states.

Potential Impact of New Administrative Costs

• Under current North Carolina law, the North Carolina Department of Health and Human Services (“NC DHHS”) is also statutorily required to end Medicaid expansion if the state cannot fully fund all the state and county costs associated with Medicaid expansion using (i) hospital assessments receipts, (ii) added insurance premium taxes collected as a result of Medicaid expansion, and (iii) any other state savings from expansion (see N.C.G.S. § 108A-54.3B). How strictly NC DHHS interprets this separate trigger will inform whether legislative action is needed to maintain Medicaid expansion in North Carolina.
• The OBBB will create administrative costs for the state and counties as they are required to implement more frequent Medicaid redeterminations and new work requirements for beneficiaries. It is possible that such increased administrative costs could be interpreted to implicate this separate trigger and thus require either a change in the law or for the General Assembly to increase insurance program taxes to pay for such costs.

Additional Individual Eligibility Requirements

• The CBO expects that these changes will reduce the number of Medicaid eligible individuals, increase the number of individuals being disenrolled, and reduce the amount of federal matching fundings, all reducing overall Medicaid expenditures and FMAP outlays.

Rural Health Transformation Program

• North Carolina has only a few months to submit and obtain approval for a portion of the Rural Health Transformation Program, which must be accomplished by December 31, 2025.
• Assuming approval, the monies that the State receives may temporarily offset a small portion of the financial impact of the OBBB-related cuts in the designated programmatic areas.

New Waiver Considerations

• North Carolina has an existing Section 1115 waiver (Medicaid Reform Demonstration). Going forward, this waiver program will be subject to review for budget neutrality by the Chief Actuary for CMS.
• North Carolina has several existing Section 1915(c) waivers. It may seek the expanded three-year period to provide more long-term stability for these waivers.

If you have any questions about this Client Alert, please reach out to the authors of this article or any member of the Smith Anderson Health Care team. The team regularly advises clients on these issues.