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Federal reconciliation changes raise questions about provider taxes, state‑directed payments and audits
Summary
KDHE staff briefed the committee on changes in the federal reconciliation package and proposed CMS rules that could limit provider‑tax arrangements, reduce some state‑directed payments and expand the universe of audits that recover federal funds.
Christine Osterland, deputy secretary for agency integration and state Medicaid director at KDHE, told the committee the reconciliation package and proposed CMS rules carry several provisions that may affect Kansas Medicaid financing.
Osterland said Kansas’ provider assessment program — the state’s provider “tax” that draws federal matching funds — is likely protected at the 6% safe-harbor level for non‑expansion states, and KDHE submitted a 2026 preprint to CMS before the reconciliation effective date to preserve previously authorized payment arrangements. “We think our provider tax should be okay,” she said.
But she flagged two areas of uncertainty. First, the reconciliation language tightens the federal review of states’ payment error rates and restricts waivers of certain PERM findings; the bill also authorizes the HHS secretary to designate additional state audits to be treated as payment-error findings. KDHE staff said the provision is broadly written and states are seeking clarification from CMS because it could increase the risk of federal recoveries.
Second, a new step-down is in the reconciliation language for state‑directed payments: over several years non‑expansion states’ state‑directed payments will be reduced toward a cap of 110% of Medicare (a maximum of 110% of Medicare rates) unless further congressional action changes the schedule. Osterland said Kansas hospitals that receive state‑directed payments could see material reductions over time if the provision is implemented as written; the step-down would begin Jan. 1, 2028, as drafted.
Osterland also said the administration’s changes to eligibility and documentation-related rules will require agency review. The committee asked for a tighter summary and an agency analysis; KDHE said it would publish a detailed analysis by the end of the week and coordinate with national associations for CMS guidance.
Ending: KDHE cautioned that much depends on forthcoming CMS guidance; staff and committee members said they will continue follow-up to quantify the state and provider impacts of the federal changes.
