CMS warns it may reject state-directed payments

CMS signaled it will start rejecting state-directed payment (SDP) submissions from states if they fail to report – and improve on – quality data.

The plans from CMS, included in a recent bulletin, reiterated guidance from 2024 but added that it will start rejecting “effective immediately” SDP plans, called preprints, if they fail to provide the greater detail.

“The guidance does not make major changes to previous CMS policy on SDPs, but it does change the process,” said Susan Feigin Harris, co-head of healthcare, United States, for Norton Rose Fulbright US. “Instead of working back and forth with states to fix incomplete preprints, CMS now seems ready to deny submissions that are not complete from the start, which will limit the flexibility and teamwork previously observed.”

Historically, CMS has collaborated closely with states during the preprint process and often allowed a phased approach to meeting requirements, especially for new SDPs, said Morgan Craven, a director for ATI Advisory.

“Now, CMS is signaling that it will no longer review submissions that lack complete evaluation plans or fail to demonstrate how the payments advance managed care quality goals,” Craven said. 

The new guidance is separate and apart from changes to SDPs required by the budget reconciliation law, called the One Big Beautiful Bill Act (OBBBA). Specifically, the law limits all SDPs submitted after July 4 for hospitals to the Medicare rate in Medicaid expansion states and 110% of Medicare in non-expansion states. OBBBA’s changes to SDPs were projected by the congressional Budget Office to cut federal spending on them by $149 billion over the coming 10 years.

The new guidance comes as CMS has approved SDPs targeted at hospitals from 27 states and Puerto Rico, so far, in 2025, according to a FastFinance tally. Those approvals, as of Sept. 5, 2025, totaled nearly $39 billion in federal funding, which does not include the state share of SDP funding.

‘Systemic compliance issue’

The new CMS notice also included an analysis of 2024 approved SDPs that found:   

• 83% had evaluation plans that aligned with best practices in evaluation
• 65% of SDP renewals included evaluation findings
• More than 50% did not submit evaluation findings for all their renewal preprints in their state

“These findings suggest a systemic compliance issue in ensuring that there are accountable goals from state directed payments,” said the CMS notice.

CMS said it will no longer consider an SDP preprint complete and eligible to begin federal review unless it includes the newer minimum elements.

One of those elements: required data in the SDP not show “declining quality over a two-year period,” which is a newly stated enforcement standard, said Craven.

“CMS has not previously linked SDP approval so directly to quality outcomes in this short time period,” she said.

Like many aspects of Medicaid quality evaluation, state performance on metrics is often assessed over a longer timeframe and considered in the context of broader structural changes or disruptions, such as COVID-19, she said.

“This new standard introduces a more immediate and direct accountability mechanism,” said Craven.

Historically, CMS has rarely rejected SDPs outright and has typically worked with states to resolve issues through technical assistance, said Craven.

Overall, the notice signals a different approach by CMS, said Feigin Harris.

“I also think it is meant as a threat to SDP programs in that it signals closer scrutiny and a revisit to many SDPs across the U.S.,” she said.

State capabilities

Many states have made progress in aligning SDPs with quality goals, Craven said, but there is still variation in how consistently they meet CMS’s expectations around evaluation plans, performance targets and renewal reporting. For some, the new guidance may prompt refinements to existing processes and evaluation approaches, while for others there may not be a notable change.

“While the requirements themselves may not be entirely new, stricter enforcement and less tolerance by CMS for incomplete or noncompliant submissions indicate that states should proactively review and strengthen their processes for preparing and documenting SDPs to minimize the risk of denial,” Feigin Harris said.

The guidance also urged states to “limit their evaluation data to the Medicaid managed care population and the specific services covered under the SDP.”

Craven noted that providing data on just the Medicaid managed care population is not a formal requirement, even under the new guidance, but was highlighted as an encouraged practice, when feasible.

She said states often face barriers to stratifying data that way and may default to broader or blended data sets that reflect both fee-for-service and managed care delivery systems. “The guidance suggests CMS may be less willing to accept that approach going forward, depending on the state’s data constraints,” Craven said.