OBBBA Medicaid impacts: How to navigate state-directed payment revenue reduction 

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, initiating one of the most significant shifts in federal fiscal policy in recent years. The legislation introduces sweeping tax reforms and spending reductions, with healthcare providers positioned to experience the most substantial impact.  

OBBBA authorizes a $1 trillion reduction in federal Medicaid spending over 10 years. These cuts will be implemented through a phased approach beginning in 2026, requiring providers and state agencies to prepare for long-term financial adjustments. Among OBBBA’s most complex provisions are those related to state-directed payments (SDPs) — a mechanism that allows states to direct Medicaid managed care organizations (MCOs) to pay providers according to state-defined parameters. 

While SDPs have long been a critical component of Medicaid funding, OBBBA’s new restrictions and definitions raise significant questions for healthcare providers, particularly in the areas of revenue recognition.   

OBBBA imposes caps on SDP rates and introduces new conditions for grandfathering higher payment levels. These changes, which are intended to curb federal spending, create uncertainty for providers who rely on SDPs as a major revenue source. OBBBA specifies that SDP rates will be capped at the total published Medicare payment rate — 100% for Medicaid expansion states and 110% for non-expansion states. Provisions also allow for state-directed payments with completed preprints (completed SDP submission template to CMS with proposed payment arrangement) to be submitted and grandfathered at higher rates.  

Previously, states could set payments at average commercial rates (ACR), which were often much higher than Medicare rates. Grandfathered SDPs can continue to pay providers at the ACR until the start of the phase-down period (Jan. 1, 2028). Such changes require CMS approval. However, the methodology for applying these caps remains undefined, leaving providers with critical unanswered questions.  

Two terms introduced in OBBBA — “good faith effort” and “completed preprint” — will determine whether providers qualify for grandfathered higher rates. CMS has yet to issue formal guidance on these definitions. Until clarified, providers face ambiguity in assessing eligibility and planning for future revenue streams. Further complicating the accounting for SDPs is the fact that state plan specifics, implementation and payment processing will vary on a state-by-state basis. SDPs that assess fees (taxes) are required to do so uniformly for all participants and avoid “hold harmless” methods for providers that receive benefit that is less than the assessed fees. 

Evaluating SDP program revenue 

OBBBA introduces significant changes to Medicaid funding that introduce substantial complexity in estimating and recognizing revenue under the Financial Accounting Standards Board Accounting Standards Codification ASC 606 recognition model. Importantly, ASC 606 itself has not changed; rather, the economic environment and underlying assumptions that providers must consider have shifted dramatically. 

As a reminder, under ASC 606, there is a five-step process for recognizing revenues in the financial statements. OBBBA introduces changes that may materially affect each step of the revenue recognition process for state-directed payments. To support the accounting for SDP program revenue, providers should analyze and document these steps in alignment with existing health system policies and ASC 606 standards. Key considerations for evaluating SDP program revenue for each step under OBBBA include the following. 

Step 1: Identify the contract. States must first approve the specific SDP program plan at the respective state level and then submit detailed contracts and payment methodologies to CMS for approval, describing how payments are calculated and ensuring compliance with federal rules.   

The uncertainty of state-directed payments, which requires evaluation on a state-by-state basis, raises the first critical question: Does a contract exist? Key factors to consider include: 

• Was the SDP program contract approved by the state and CMS prior to the provider’s fiscal year end? Given that providers have different year-ends, the answer to this question could be different in the same state. For example, a contract that is approved by CMS on Oct. 5, 2025, would not have CMS approval for providers with June or September fiscal year ends. Another factor to consider is that the SDP program fiscal year (i.e., June 30) could also be different from a provider’s fiscal year (i.e., Dec 31). 
• If contract approval has not occurred as of a provider’s year-end, management will need to evaluate if the subsequent approval by CMS is substantive or more administrative in nature. If there are significant changes to the historical SDP subject to approval by CMS, that could be more indicative of a substantive change with a higher level of uncertainty (i.e., possible significant revisions by CMS) as to whether a contract existed as of the provider’s fiscal year end.   
• States define specific provider class eligibility (e.g., hospitals, nursing facilities, behavioral health providers) eligible for state directed payments. Only providers meeting the specific state eligibility criteria and participating in the program receive allocations. A key question for a provider to consider in determining if a contract exists: Is the provider eligible for SDPs under the specific state program guidelines?  For example, some state programs include hospitals but specifically exclude critical access hospitals. 

If no contract exists, revenue cannot be recognized. Where a contract is confirmed, subsequent steps apply. 

Step 2: Identify performance obligations. Once provider eligibility is determined, most states allocate state directed payments based on providers’ Medicaid service utilization — such as the number of Medicaid inpatient days, outpatient visits, other service units delivered to Medicaid beneficiaries, or payments made by managed care MCOs to providers. Thus, the performance obligation is based on the provider’s Medicaid services provided to patients based on the defined SDP metrics.  SDP payment mechanics may depend on MCO attribution and encounter patterns which enhance the variability of the performance obligations. 

Steps 3, 4 and 5: Determination and allocation of transaction price and revenue recognition. Perhaps the most challenging step related to SDP programs is the evaluation of transaction price determination and variable consideration constraint. Payments are often distributed pro-rata with providers receiving a share of the payment pool proportional to their Medicaid service utilization state-defined metrics compared to other participating providers. ASC 606 requires estimation using the expected value method (weighted average of possible outcomes) or the most likely amount method (single most likely outcome). 

Revenue from variable consideration can only be recognized to the extent that it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty is resolved. Challenges under SDP programs include the following: 

• Lack of transparency into underlying participating provider pool data exists. Medicaid service utilization state-defined metrics create challenges in validating underlying supporting data for management and auditors. What is the likelihood of participating providers challenging the underlying metrics impacting the allocations and the resulting impact of such challenges being material to pool allocations? 
• Some states incorporate quality improvement or value-based metrics into their allocation formulas, rewarding providers for meeting specific performance targets. Are state-specific quality metrics provider-specific, pool-based or a combination of both? Pool-based metrics result in a lack of transparency and ability to estimate quality results. 
• SDPs frequently undergo retrospective reconciliations that may cause materially different final payments versus estimated amounts, especially for new programs. Some states, like Wisconsin, do this by withholding portions of payments due to providers and later reconcile to a final amount which tends to yield lump sum settlements vs. recoupments. 
• Lack of historical SDP information that can be relied on to estimate current estimated payments under programs is common. According to MACPAC, “the absence of data on actual directed payment amounts at the provider level limit the ability for stakeholders to assess how these directed payments may relate to specific state policy goals.”¹ 
• Directed payments for Medicaid Managed Care are subject to CMS approval of actuarial reports after claims analysis. This is meant to ensure amounts do not exceed the Medicare threshold, thus potentially extending a period of uncertainty

After careful evaluation of the previous steps, management will need to determine what amount, if any, of SDP revenue can be readily estimated given consideration to whether it is probable a significant reversal will occur. Different conclusions could be reached, depending on provider and/or SDP program fiscal year-ends, CMS approval dates, transparency of underlying metrics, as well as state-specific facts and circumstances. Also, providers may conclude that they can recognize the baseline SDP payment, but not the quality component due to significant uncertainty constraining such revenue. Revenue should be recognized when the obligation is fulfilled, either over time or at a specific point in time, based on transfer of control.   

Further, ongoing assessment will be required, including consideration of information that becomes available after the provider’s year-end through the date their financial statements are issued or available to be issued, as applicable. Consideration will need to be given to determine whether such subsequently available information requires revision in the current reporting year as a recognized subsequent event or in the subsequent reporting year as a change in estimate as a non-recognized event that may require disclosure.  

Given that SDP program revenue is expected to be significant in most cases, appropriate financial statement footnote disclosure should be made around the nature of the state-specific SDP program, amount of revenue recognized, factors impacting the estimation process. There are also uncertainties and contingencies, such as the SDP allocations being subject to appeals by providers and potential adjustments, which cannot be estimated at the present time. Such adjustments, if any, would typically be recognized in the period in which they are known or can be estimated. In future years, management should disclose the impact of revisions to prior-year estimates, similar to treatment for other third-party settlements.  

A new era for state-directed payment 

In summary, OBBBA marks a major shift in Medicaid funding and provider payments, introducing strict caps and new rules for SDP programs. While ASC 606 revenue recognition principles remain unchanged, the new law’s complexity means healthcare providers must navigate significant uncertainty around contract existence and approvals, eligibility and variable consideration constraints. Providers should consider disclosure of key assumptions, uncertainties and contingencies in their financial statements, and be prepared to revise estimates as new information emerges. Ultimately, OBBBA’s changes demand a proactive, well-documented approach to SDP revenue recognition and financial reporting in an evolving regulatory landscape.

Principles and Practices Board members 2025-2026 

• Ryan Caldwell, CPA, FHFMA, Chief Financial Officer, Springfield Clinic, Springfield, IL 
• Christina Dutch, CPA, Partner, PwC, Morristown, NJ 
• Martha Garner, CPA, Retired Managing Director, PwC, Randolph, NJ 
• James Howe, CPA, Vice President, Controller, Bon Secours Mercy Health, Cincinnati OH  
• William G. Love, CPA, Partner, KPMG LLP, Baltimore, MD 
• Celeste M. McIntrye, CPA, CHFP, SVP, Corporate Controller, Corewell Health, Grand Rapids, MI  
• Norman C. Mosrie, FHFMA, CPA (Chair), Partner, Forvis Mazars, Charleston WV  
• Dawn M. Stark, CPA, CHFP, Partner, Plante Moran, Columbus, OH 
• Dan Steingart, CFA, Associate Managing Director, Moody’s Investors Service, Seattle, WA 
• David J. Wiessel, CPA, Partner, EY LLP, Iselin, NJ  
• Gregory L. Wilgocki, CPA, FHFMA SVP, Accounting, Reimbursement and Tax, Ballad Health, Johnson City, TN  

Other expert contributors 

• Steven R. Blake FHFMA, CPA, CGMA, MBA, President, Steven R Blake CPA Accountancy Corp, Financial Advisor to Pipeline Health, LLC, Anaheim, CA  
• Andrew Gutierrez, CPA, Chief Financial Officer, ProHealth Care, Waukesha WI 
• Sabrina Preston, CPA, Partner, Forvis Mazars, Greenville SC 
• Richard Gundling FHFMA CMA, Senior Vice President Professional Practice and Chief Mission Officer, Healthcare Financial Management Association, Washington DC