Among the many provisions in the 2025 Republican budget bill (H.R. 1) that gut Medicaid, one of the most consequential is the imposition of new limits on directed payments, which states use to boost reimbursements to providers who serve a large number of Medicaid patients. Specifically, the bill will cut state directed payments (SDPs) to hospitals, nursing facilities, and academic medical centers, while exempting primary care and behavioral health.

Taken together, this policy change will lead to a loss of $149.4 billion in federal Medicaid spending over the next 10 years. As a result, at least 29 states will now have to slash payments to providers, as estimated by Families USA in a new Health Affairs article, threatening safety-net provider sustainability and exacerbating existing Medicaid provider shortages.

Without question these federal changes are going to hurt state Medicaid programs. However, advocates still have an opportunity to prevent further harm by urging state and federal officials not to pursue additional cuts to provider payments given their importance in achieving an affordable, cost-effective health care system.

Advocates should be prepared to submit comments once CMS issues proposed rulemaking, underscoring the critical role that SDPs play in supporting primary and behavioral health services and warning against any further cuts to essential providers in their states.

Background on State Directed Payments & Their Role in Delivering Primary Care and Behavioral Health

Through SDPs, states require Medicaid managed care organizations to increase provider rates in targeted ways to strengthen access to care and keep financially struggling safety-net providers afloat. Of the 41 states and the District of Columbia with SDPs, 36 have SDPs in place (or have had one in the recent past) that direct higher payment to behavioral health and/or primary care providers (see map). Having an SDP in place does not mean states pay providers exorbitant fees - in fact, most SDPs pay primary and community-based providers far below Medicare rates.

These SDPs serve many critical functions, including:

1.. Strengthening Primary Care and Behavioral Health Provider Networks

SDPs are one tool states use to ensure community-based providers are paid a living wage so they can remain in the health care workforce. For example, an SDP in North Carolina increases wages for home- and community-based service (HCBS) providers with the goal of maintaining adequate network capacity and supporting widespread HCBS availability across the state. In other states, SDPs help expand Medicaid provider networks for primary care (for example, Maryland) and behavioral health (for example, Louisiana and Utah). Research shows that even small increases in payment rates translate to more providers participating in Medicaid and increased access to primary care.

2. Reducing Costs by Shifting Care to Community Settings

SDPs that direct services away from hospitals to community-based settings are a cost-effective way to support quality patient care. Several states, including New Hampshire, incentivize timely follow-up after emergency department (ED) visits to connect patients to community-based providers and prevent future ED admissions. SDPs can also help prevent patients from needing hospital care in the first place, such as Wisconsin's increased rate to community-based residential facilities that treat severe mental illness and reduce burden on area hospitals. Wisconsin's payment bolsters delivery of evidence-based services in the community, and, at just one-third the cost of an inpatient hospital stay, is an efficient use of Medicaid resources.

3. Increasing Preventive Screenings

Several state SDPs incentivize preventive care. Since 2018, Tennessee has offered an enhanced fee to primary care providers who complete Early and Periodic Screening, Diagnostic and Treatment (EPSDT) screenings. These add-on payments have been successful in increasing EPSDT well-child visits: in 2024, the state reported its EPSDT screening rate reached a historical high of 75%, up from below 60% in 2020. Numerous studies show that EPSDT screenings give the health care system greater opportunity to address health issues early in life, preventing serious and costly health problems down the road.

4. Bolstering Emergency System Response

Washington state ranks among the lowest in the nation in serving people with behavioral health needs, in part due to poor access to mental health workers and community crisis response. An SDP helps address this gap by offering supplementary compensation to mobile crisis providers so they can train additional staff to respond to behavioral health crises promptly. While aimed at Medicaid providers, this SDP builds system capacity for all Washingtonians and decreases emergency department use and related costs.

5. Advancing System-Wide Improvement and Targeting Specific Communities with Greater Needs

Some SDPs support statewide infrastructure to improve care coordination and advance whole person care initiatives (for example, Vermont and Arizona). Other SDPs direct payment to specific regions that need additional support, such as Illinois' enhanced payment to primary care providers in two underserved Chicago-area zip codes. SDPs can support state health care goals, big or small.

Making the Case for Improved Use of SDPs for Primary Care and Behavioral Health

Faced with Medicaid budget challenges in the wake of H.R. 1, states may feel they have no choice but to look for savings by making immediate cuts to provider rates. But instead states can and should look for ways to incentivize cost-efficient care. SDPs are an important mechanism to ensure that Medicaid beneficiaries do not turn to expensive acute care settings because they lack access to community-based care.

Despite their potential, SDPs are not well-utilized to enhance community-based care: of all current SDPs, just 11% increase rates for primary care and 13% increase rates for community-based behavioral health.

What Advocates Can Do to Prevent Further Harm

Advocates should clearly articulate to state policymakers the value of maintaining SDPs for primary care and behavioral health, especially as some states have begun slashing provider payments as a quick fix to Medicaid budget gaps. Washington and Idaho have both announced Medicaid provider pay rate cuts and Colorado has suspended a planned rate increase.

Yet, with sufficient public pressure, payment cuts are not inevitable. In October 2025, North Carolina announced plans to reduce Medicaid provider payments by up to 10 percent, but reversed course after sustained pressure from advocates, including from families who rely on Medicaid coverage for community-based behavioral health services (including those supported through the state's SDP) that help keep their children out of costly institutional care.

Advocates are going to need to continue to be vocal in pushing back against similar state proposals, while keeping in mind that future federal cuts to SDPs are not inevitable either.

The Centers for Medicare & Medicaid Services (CMS) recently stated it is "considering" extending H.R.1's SDP limitations to additional provider categories, meaning payment for primary care and behavioral health could be limited to the Medicare rate in the future. In the wake of H.R. 1, states need to retain the flexibility to increase provider compensation in ways that keep provider networks strong and support access to lower-cost care.