Upcoming regulations and budget talks could be consequential for Medicaid supplemental payments

Note: This article was updated May 2.

The system of directed payment programs (DPPs) has helped make Medicaid more financially viable for providers, but that system is under increasing political pressure.

CMS has queued up a proposed rule that is undergoing a standard review at the Office of Management and Budget (OMB) and then is expected to be formally published. The rule potentially will modify the funding system for DPPs, specifically “the process for states to obtain a waiver of the statutory requirements that healthcare-related taxes are broad based and uniform,” according to regulatory language filed with OMB.

A 2019 proposed rule by the first Trump administration contained restrictive language about healthcare-related taxes and donations, and similar provisions could carry over into the upcoming rule. The American Hospital Association estimated the previously proposed changes would reduce Medicaid payments to hospitals by between $23 billion and $31 billion, with the latter figure representing a nearly 17% decline.

Those prior regulations, which were never finalized, sought to increase reporting requirements and make technical changes primarily to supplemental funding in Medicaid fee for service, whereas DPPs, also referred to as state-directed payments, apply to Medicaid managed care.

Nonetheless, if included in a future rule, regulations pertaining to provider taxes would have implications for all Medicaid supplemental funding. According to a report by the Medicaid and CHIP Payment Advisory Commission (MACPAC), of 29 DPPs that were projected to increase payments to providers by more than $1 billion a year, 26 were financed by providers through taxes or intergovernmental transfers.

CMS under the Biden administration issued a 2024 final rule that included several DPP technical and procedural updates, among them a requirement starting in 2028 for providers to formally attest that they are meeting regulations prohibiting participation in hold-harmless tax arrangements.

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May 2 update

The Wall Street Journal reported on delays stemming from the reviews being undertaken by CMS on states’ directed payment program applications. Per the report, sustained delays have affected at least 10 states dating back to Fall 2024.

In the report, CMS attributed the delays to a surge in applications, with volume jumping from four applications in some entire past years to roughly 150 since late 2024. Stricter compliance requirements stemming from regulations finalized a year ago also are a factor, according to the agency.

As noted below, approvals have been granted over the last couple of months for DPPs in Arizona and Nevada.

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Legislative developments

The extent of possible new restrictions on DPPs and other supplemental payments will be clearer when the proposed rule is published. Regardless, scrutiny of the payment arrangements is ratcheting up on Capitol Hill as well as in the Trump administration.

Concern among some policymakers and analysts is that provider tax dollars are used to obtain greater amounts of federal funding, since federal payments are linked to a state’s level of Medicaid spending. Paragon Health Institute, a conservative think tank at which leadership has ties to the first Trump administration, issued a March 2025 report describing the payments as money laundering.

Congress is looking to decrease federal Medicaid spending, possibly by hundreds of billions of dollars, as part of the ongoing budget reconciliation process. House GOP members have indicated that the chamber’s various committees will write up the specifics of their proposed cuts over the next two weeks.

The House Energy and Commerce Committee, which oversees Medicaid, will be looking to slash 10-year projected spending levels by a target figure of $880 billion. That number is not locked in, however, with the official bicameral budget resolution requiring much smaller minimums and theoretically no cuts to healthcare programs.

Assuming Congress seeks to enact substantial cuts, supplemental payments are receiving consideration as an area in which to reduce Medicaid spending, in part because such changes are spinnable as a way to be fiscally responsible without directly affecting enrollee benefits.

Constraints on Medicaid provider tax payments are “absolutely on the table, and I expect that to get done, whether it’s in reconciliation or in some form by a regulation,” Dave McNitt, partner with The National Group lobbying firm, said during a recent webinar hosted by Juniper Advisory and Epstein Becker Green.

Not necessarily improper

Republicans may find it trickier than expected to argue that DPPs and their financing structures represent some type of inappropriate scheme. The party line has been that large Medicaid cuts are possible just by focusing on improper payments.

In a recent webinar hosted by KFF, policy experts said DPPs conceptually do not constitute fraud or abuse, and likely not even waste.

“I don’t think it’s a hundred percent fair to say that because provider taxes are allowed in the system, that it’s money laundering or that it’s resulting in services that shouldn’t otherwise be provided,” said Timothy Hill, a MACPAC commissioner and senior vice president with the American Institutes for Research.

Christi Grimm, previously the HHS inspector general, said that as part of any investigation by her former office into a Medicaid supplemental payment program, the first step would be to examine language in the state plan.

“Then we would look at whether states were following their own rules,” she said during the KFF webinar. “Certainly, we would find instances where they were tucking in things — family planning was a big one that we had looked at. But just by seeing that something doesn’t look right, you [still] do have to look at what CMS has essentially allowed to go on and what the states had applied for and done.”

The political calculus could prove thorny for red-state members of Congress.

“To some degree, it is a budget gimmick,” McNitt said during the Epstein Becker Green webinar. “But it is how some of these states — particularly, ironically, [Medicaid] non-expansion states — make those budgets work. If you get rid of provider taxes or curb the use of them, it is going to really hurt Texas, it is going to really hurt Florida.”

High-stakes outcome

The significance of DPPs can be seen in Q1 financial reporting by for-profit hospital systems. HCA Healthcare said it realized a year-over-year increase of $80 million in its net DPP benefit, mostly because of a reconciliation payment received through one state’s program as accrued in Q4 2024.

The company’s full-year 2025 guidance ranges from a year-over-year improvement of $50 million in Medicaid supplemental payments to a decline of $200 million. That wide gamut is based largely on whether Tennessee’s DPP proposal receives the go-ahead from CMS. Nashville-headquartered HCA has a substantial presence in the state, with more than 15 hospitals and medical centers in Nashville and Chattanooga.

“As we’ve talked about on past calls, the projection or the guidance related to state supplemental payment programs [is] really the most difficult thing that we predict,” said Mike Marks, CFO.

In its Q1 earnings call, Community Health Systems (CHS) said it was waiting on CMS to approve a DPP proposal from New Mexico as well as Tennessee. Even as it examines the DPP concept more closely, CMS has approved programs in at least two other states, Arizona and Nevada, this year.

“We’re just still in a wait-and-see [mode],” said Kevin Hammons, CHS’s president and CFO. “As we sit here today, we know of no reason that they will not be approved, going forward.”

Although losing such programs would hurt the bottom lines of many hospitals, the benefit of the current system should not be exaggerated.

“I want to remind everyone that after considering Medicaid state supplemental payments and related provider taxes, total Medicaid reimbursement [still] does not cover our cost of caring for Medicaid patients,” Marks said during HCA’s investor call.