CMS’s Medicaid state-directed payment rule would expand limits beyond hospitals

CMS’s proposed rule on Medicaid state-directed payments (SDPs) would implement limits authorized by the One Big Beautiful Bill Act (OBBBA) while applying restrictions to a broader swath of Medicaid, including certain fee-for-service (FFS) supplemental payments.

Essentially, the agency issued proposed regulations that would take some of the OBBBA’s Medicaid provisions a step further.

Services previously set to be affected via SDP constraints in the 2025 law include all those furnished in hospital inpatient and outpatient units, in skilled nursing facilities, and by practitioners in academic medical centers. Those caps are scheduled to take effect in 2028, per the OBBBA.

The proposed rule applies similar limits to SDPs for virtually all other healthcare services starting in 2029, including physicians, behavioral health providers, and home- and community-based services (HCBS), along with most any other category of provider and site of service (e.g., federally qualified health centers, rural providers).

Some steps that go beyond the OBBBA in the proposed rule are meant to apply the principles described in a June 2025 Medicaid memo issued by President Donald Trump, according to CMS.

“When misused, SDPs drive up costs without improving care,” CMS wrote in a news release. “When used correctly, SDPs can properly fulfill their role to expand access, lower cost, and improve quality of care and health outcomes for Medicaid enrollees.”

Comments on the rule are due by July 21.

Hundreds of billions of dollars in SDP impact

The potential impact of the rule is seen in CMS’s projections.

While acknowledging the net effect is tricky to gauge for several reasons, including a lack of standardized pricing data across states, CMS projects that under the OBBBA and the proposed rule, Medicaid spending relative to baseline would be $18.2 billion lower in 2026 and $122.1 billion lower in 2035. The total decline over a decade would be $775 billion.

CMS does not attempt to quantify the specific impact on providers, saying such projections are difficult due to a lack of provider-level data.

A source of savings for providers likely would stem from paying less in the taxes and intergovernmental transfers (IGTs) that would help fund the less-lucrative SDPs.

“To the extent providers pay provider taxes or IGTs that are used to support the non-federal share for SDPs, the net change in provider revenue (SDPs minus provider taxes and IGTs paid and transferred by providers) could be significantly less,” the proposed rule states.

Separately, the OBBBA calls for new limits on provider taxes, starting with a prohibition on new or increased taxes effective with last year’s enactment of the legislation. Existing taxes must be phased down to 6% of net patient revenue in non-expansion states and 3.5% in expansion states over a five-year period beginning in FY28.

‘We anticipate that reducing the amount of provider tax collections under these provisions may also lead to reductions in SDPs,” CMS wrote in the new rule.

More on the changes facing Medicaid SDPs

The OBBBA limits new SDPs to 110% of the Medicare rate in Medicaid non-expansion states and 100% of Medicare in expansion states. Grandfathered payments are set to be reduced by 10% per year starting in 2028 until reaching those rates.

Prior to the OBBBA, SDP rates could equal the average commercial payment rate.

CMS said it considered implementing regulations that would interpret the relevant OBBBA provision as reducing the SDP payment-rate percentage by 10 points annually until reaching the statutory limits.

The proposed approach entails more accelerated reductions, based on decreasing the current-law dollar amounts by 10% per year until reaching the Medicare-based limits. In such a methodology, Medicare inflation would not act to soften the cuts year over year.

“Under the proposed approach, we expect all SDPs will be reduced to the new limits within 10 years,” CMS wrote. “However, under the alternative approach, we believe that it may not be until as late as 2075 that all SDPs would be reduced to the new limits.”

The interpretation could be a source of contention during the comment period for the rule if providers argue that the regulations diverge from the statutory language.

The rule “raises important questions about how the statutory requirements will be implemented and the potential impact on providers’ ability to rely on critical Medicaid payments,” the American Hospital Association said in a written statement.

A noteworthy aspect of the proposed rule would be a prohibition starting in 2028 on most SDP structures that provide for uniform increases (e.g., all recipients get the same annual percentage increase). Instead, CMS could require that payments be linked to specific performance metrics, financial data such as amounts of uncompensated care, or certain service lines.

Fee-for-service payments also taking a hit

States also would face new limits on supplemental FFS payments, specifically those that resemble SDPs in structure. Examples include payments that are targeted to specific provider categories and exceed the Medicare rate. Disproportionate share hospital payments are not affected by the rule.

The maximum rates would mirror those for SDPs: 110% of Medicare in non-expansion states and 100% of Medicare in expansion states. New payment structures would be subject to the limits with the effective date of the final rule, while existing payments would need to comply starting in 2029.

The idea is to align payment policy across Medicaid and remove the option to shift funding from SDPs to FFS arrangements, CMS indicated.

FFS supplemental payments that are subject to the proposed rule amount to vastly less than SDPs, according to CMS’s numbers: $2.64 billion in 2024, more than half of which went to physicians. SDPs totaled $107.3 billion that year.