Federal Judge Sides With Texas, Strikes Down CMS Medicaid Tax Funding Rule

A Trump-appointed federal judge has struck down a U.S. Centers for Medicare & Medicaid Services (CMS) rule about how states can provide funding for their share of Medicaid costs, according to multiple outlets.

U.S. District Judge Jeremy Kernodle in Tyler, Texas, on Wednesday permanently halted CMS from imposing a regulation that alters how states calculate their portion of Medicaid costs, Reuters reported on Wednesday. The judge ruled that the agency had overstepped its authority after it reinterpreted what types of provider tax arrangements constituted impermissible “hold harmless” agreements in a 2024 rule, Bloomberg Law reported on Thursday.

In April 2023, Republican Texas Attorney General Ken Paxton announced that he had filed a lawsuit against the Biden administration’s Department of Health and Human Services (HHS) and CMS challenging an informational bulletin from the agency that would force the Texas Health and Human Services Commission to provide information regarding private mitigation arrangements. (RELATED: Trump-Appointed Judge Strikes Down Administration’s Anti-DEI Directives)

Paxton said in an April 2023 statement that CMS’s actions “imperil not only local governments’ ability to support Medicaid providers in their area, but the entire State of Texas’s ability to adequately fund its Medicaid program.” He further argued that the “unlawful” policy change would “endanger vulnerable Texans’ access to health care and handicap local providers’ ability to serve our citizens in every community across the state.”

WASHINGTON, DC – MARCH 20: Texas Attorney General Ken Paxton attends the executive order signing ceremony to reduce the size and scope of the Education Department in the East Room of the White House on March 20, 2025 in Washington, DC. (Photo by Chip Somodevilla/Getty Images)

CMS had argued that these private arrangements were “akin to illegal hold-harmless arrangements,” National Review reported in January 2024.

Texas’ lawsuit alleged that CMS had “wielded its oversight role as a cudgel to force Texas to adopt its policy preferences.” The Lone Star State’s lawsuit also alleged that the agency’s bulletin would require Texas to monitor private-party arrangements “on pain of the loss of billions of dollars in federal funding.”

Additionally, there have previously been reports that Biden’s CMS seemingly took aim at some red states with Medicaid program audits.

Paxton’s office and CMS both did not immediately respond to a request for comment from the Daily Caller News Foundation.

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