CMS gives updates on upcoming Medicaid state-directed payment limits

CMS has issued guidance to Medicaid programs about implementing required restrictions on the state-directed payments (SDPs) made through Medicaid managed care organizations (MCOs).

The budget reconciliation law known as the One Big Beautiful Bill Act (OBBBA) includes a provision that all SDPs submitted after July 4 for hospitals must be limited to the Medicare rate in Medicaid expansion states and 110% of Medicare in non-expansion states. If the Medicare rate has not been specified, the applicable percentage would be relative to the rate established in the state’s Medicaid plan.

In a letter to states, CMS has given additional details about the limits and how they will be applied. The agency emphasized that the guidance is preliminary in advance of formal regulations to be distributed at a later date.

Rollout of the new limits

SDPs for which a completed preprint (i.e., an application) was filed before July 4, when President Donald Trump signed the OBBBA into law, can continue to be paid at the average commercial rate until 2028. At that time, a multi-year phase-down will begin until all SDPs reach the Medicare-based limits.

In the letter, CMS clarifies that SDPs submitted for rating periods within 180 days before or after the July 4 enactment date can be grandfathered. Thus, submitted SDPs can temporarily be paid at the higher rate if they pertain to 12-month rating periods that include any days from Jan. 5 through July 3, 2025, or from July 5 through Dec. 31.

That generally means SDPs covering state FY25, state FY26 or CY25 are eligible for the temporarily higher payments. Between approval of a grandfathered payment rate and the 2028 beginning of the phase-down to the lower limits, however, an SDP cannot be increased.

If the completed preprint was filed after July 4, the SDP is immediately subject to the lower rates.

An unresolved request for an amended preprint or a renewal for CY26 or beyond requires the state to submit a revision at the lower payment rate, or CMS will not finish its review. That edict also includes any open renewal request that would raise the state’s current SDP rate in CY26 or later, since rate increases already are halted except for pending grandfathered arrangements.

The agency pledged to provide preliminary feedback via standard adjudication letters as to whether a requested SDP is eligible for the higher rate until 2028.

A high-stakes issue

A CMS news release states that SDPs have expanded from two states in 2016 to 39 this year and will generate projected Medicaid spending of $124 billion in FY25 and $144.6 billion in FY26.

Via the guidance, CMS “aims to ensure Medicaid resources are directed appropriately to strengthen program integrity and protect patient care,” the agency states.

As one of numerous Medicaid cost-saving measures in the OBBBA, the lower limits on SDPs would save $149.4 billion in federal revenues over a decade, according to an estimate by the Congressional Budget Office.

Critics of SDPs include the Committee for a Responsible Federal Budget, which recently released a report mentioning various other forms of supplemental payment (e.g., disproportionate share hospital payments) that “provide billions of dollars to hospitals and obviate the need for further relief from uncompensated care.”

Hospital advocates point to the Medicaid shortfall, meaning the gap between what the program pays and what hospitals spend on care for beneficiaries, as a justification for keeping SDP rates higher.

“These state-directed payments are nothing more than the state stepping back into their privatized Medicaid managed care programs and telling the insurance companies to increase their reimbursement rates — in this case to hospitals,” Mary Mayhew, president and CEO of the Florida Hospital Association, said in a recent interview.

She said Florida hospitals are reimbursed at 48 cents on the dollar for labor and delivery services, with a pending SDP preprint — submitted just before the grandfathering cutoff — likely taking the ratio into the high 60s.

“We will still be losing money on a service that is critical so that moms don’t have to drive farther and farther distances to deliver their babies,” Mayhew said.

News on prior authorization

In other Medicaid happenings, a report published Sept. 9 by HHS’s Make America Healthy Again (MAHA) Commission could usher in increased prior authorization requirements for the program in specific scenarios.

The wide-ranging report on strategies for improving childhood health includes consideration of ways to address what the commission, an initiative of HHS Secretary Robert F. Kennedy Jr., describes as excessive prescription of some drugs for school-age children. Drugs prescribed for attention-deficit hyperactivity disorder are mentioned as a particular concern. The report includes scant details about prospective regulatory changes.

State Medicaid programs and MCOs have broad latitude to establish prior authorization policies. A 2024 report by the Medicaid and CHIP Payment and Access Commission (MACPAC) notes that prior authorization is common for prescription drugs, with medications generally requiring authorization if they do not appear on a formulary or a preferred drug list.

In another Medicaid-related recommendation, MCOs also should be subject to new clinical quality metrics that measure health improvements made through steps such as nutrition coaching, according to the MAHA report.

Among various other policies of note in the report are pledges to continue emphasizing price transparency and to promote increased access to direct primary care (DPC), including via OBBBA provisions that authorize health savings accounts to be used for DPC.

The commission also reiterated HHS’s plans to create a new agency, the Administration for a Healthy America, that is proposed to absorb several current agencies such as the Health Resources and Services Administration and the Substance Abuse and Mental Health Services Administration.

The report also mentions ensuring the U.S. has “the best childhood vaccine schedule.” Vaccine policy has been a point of contention under Kennedy’s leadership, including at a recent Senate hearing.