On September 24, 2025, the U.S. District Court for the Eastern District of Texas invalidated a Final Rule and accompanying 2024 Bulletin issued by CMS concerning Medicaid financing and health care provider taxes. In State of Texas, et al. v. CMS, Case No. 6:23-cv-161-JDK, Judge Jeremy D. Kernodle granted summary judgment in part for Texas, concluding that CMS’s Final Rule violated the Administrative Procedure Act because it exceeded CMS’s delegated authority under the Social Security Act.
Background
Medicaid is a joint federal-state program in which the federal government matches state contributions for medical care provided to low-income individuals. While states may impose health-care provider taxes to raise their share of Medicaid funding, those taxes cannot include a “hold harmless” provision that guarantees providers a reimbursement equal to their tax burden. This safeguard was enacted by Congress in 1991 after states developed financing mechanisms that maximized federal matching funds without additional state contributions.
Texas operates a Medicaid financing mechanism through Local Provider Participation Funds (LPPFs), which collect mandatory payments from hospitals to help finance the non-federal share of Medicaid supplemental payments. In 2023, CMS issued a Bulletin that sought to expand the interpretation of what constitutes a prohibited “hold harmless” arrangement under the Social Security Act to also include guarantees by private parties in private agreements (2023 Bulletin). In Texas v. Brooks-LaSure, 680 F. Supp. 3d 791 (E.D. Tex. 2023), Texas challenged that 2023 Bulletin, and the Eastern District of Texas issued a preliminary injunction, holding that the 2023 Bulletin violated the Administrative Procedure Act by exceeding CMS’s statutory authority under the Social Security Act.
Despite that ruling, CMS proceeded in 2024 to publish a Final Rule and new Bulletin (2024 Final Rule and Bulletin) that largely adopted the same interpretation as the 2023 Bulletin previously rejected by the Court. The 2024 Final Rule and Bulletin implemented changes to 42 C.F.R. § 433.6, including expanding the “hold harmless” definition to cover private arrangements, and 42 C.F.R. § 430.3, requiring appeals of CMS disapprovals for State directed payments to be filed with the Departmental Appeals Board. Texas amended its complaint to challenge the 2024 Final Rule and Bulletin on the same grounds raised in Texas’s challenge to 2023 Bulletin, arguing that CMS’s actions violated the Administrative Procedure Act by exceeding its statutory authority under the Social Security Act. Texas requested the Court convert its preliminary injunction into a permanent injunction to preclude CMS’s enforcement of the 2024 Final Rule and Bulletin.
The Court’s Decision
Similar to the Court’s previous decision regarding the 2023 Bulletin, the Court concluded that the 2024 Final Rule and Bulletin are unlawful under the Administrative Procedure Act. The Court held that “the Final Rule and the 2023 and 2024 Bulletins exceed CMS’s statutory authority by expanding the meaning of ‘hold-harmless provision’ to include guarantees by private parties in private agreements and by attempting to strip federal courts of jurisdiction over certain disputes.” The Court explained that the 2024 Final Rule and Bulletin attempted to broaden the definition of “hold harmless” in a manner inconsistent with the statutory text.
The Court also distinguished CMS’s current interpretation from prior regulations, concluding that the agency had attempted to impose new obligations without proper statutory basis. In doing so, the Court reaffirmed its prior 2023 injunction analysis, again citing Fifth Circuit precedent that CMS may not “rewrite clear statutory terms to suit its own sense of how the statute should operate.”
As a result, the Court vacated 42 C.F.R §§ 438.6(c)(2)(ii)(G), 42 C.F.R § 438.6(c)(2)(ii)(H), and 42 C.F.R § 430.3(e), along with the 2023 and 2024 Bulletins, and enjoined CMS from enforcing the 2024 Final Rule and Bulletin. By striking down CMS’s expanded interpretation of the “hold harmless” provision, the Court preserves Texas’s current Medicaid financing structure through LPPFs.
A copy of the decision is available here.
