CMS outlines changes to state-directed Medicaid payments

The Centers for Medicare and Medicaid Services is issuing preliminary guidance for states on changes to state-directed Medicaid payments.

The agency is implementing new federal payment limits for State Directed Payments (SDPs) in Medicaid managed care.

Under Medicaid managed care, states can direct how managed care plans pay providers through SDPs. These arrangements originally were not widespread, but according to CMS, they've ballooned in recent years. While only two states used them in 2016, 39 states use them today, and CMS projected that annual SDP spending would exceed $124.3 billion for FY 2025 and $144.6 billion for FY 2026.

The agency said it's aiming to ensure that Medicaid resources are directed appropriately. It is issuing the guidance now, while it works to issue a final rule. This gives states more time to ensure they're in compliance with the requirements in the One Big Beautiful Bill Act, according to CMS.

"Medicaid is a federal and state partnership, and for years, states have skirted their responsibilities to draw down more federal funds while contributing less state dollars," said Health and Human Services Secretary Robert F. Kennedy Jr.

The American Hospital Association said it is reviewing CMS guidance and will send out an advisory soon.

CMS sent a letter to stakeholders with information regarding "applicable rating period criteria," preprint status criteria, the definition of a "completed preprint," the definition of "good faith effort," and limits for grandfathered SDPs, the AHA said. 

Starting with rating periods on or after July 4, SDPs for inpatient hospital services, outpatient hospital services, nursing facility services and qualified practitioner services at an academic medical center will be prohibited from exceeding 100% of Medicare rates in Medicaid expansion states, or 110% of Medicare rates in nonexpansion states. 

In the absence of a Medicare rate, the Medicaid state plan rate applies. Certain SDPs may qualify for a temporary grandfathering period.

Next, states will be required to revise any pending or future SDP preprints that do not qualify for grandfathering to comply with Section 71116 before CMS will continue the review.

For SDPs currently under review, CMS will notify states of whether an SDP likely qualifies for grandfathering, the agency said.

"Protecting Medicaid's long-term fiscal integrity is at the heart of the Trump Administration's promise to the American people," said CMS Administrator Dr. Mehmet Oz. "By implementing safeguards required in the One Big Beautiful Bill Act, CMS is helping states continue to use state directed payments as a tool, while ensuring they are sustainable, transparent, and fully aligned with our mission to protect beneficiaries and preserve Medicaid for future generations."