CMS Issues Guidance to Strengthen Oversight of Medicaid State Directed Payments

CMS Issues Guidance to Strengthen Oversight of Medicaid State Directed Payments
New federal payment limits to combat fraud, waste, and abuse while preserving access to care

The Centers for Medicare & Medicaid Services (CMS) is issuing preliminary guidance for states regarding the implementation of new federal payment limits for State Directed Payments (SDPs) in Medicaid managed care. Providing this guidance now, while CMS works to issue a final rule, allows states additional time to plan their efforts to meet the requirements laid out in the One Big Beautiful Bill Act . The letter sent today provides states with information on the reduced payment, details on eligibility for a temporary grandfather period, and additional next steps.

"Medicaid is a federal and state partnership and for years states have skirted their responsibilities to draw down more federal funds while contributing less state dollars. President Trump's One Big Beautiful Bill Act will hold states accountable and make sure the federal government isn't left to pick up the tab," Health and Human Services Secretary Robert F. Kennedy, Jr. said.

"Protecting Medicaid's long-term fiscal integrity is at the heart of the Trump Administration's promise to the American people," said CMS Administrator Dr. Mehmet Oz. "By implementing safeguards required in the One Big Beautiful Bill Act, CMS is helping states continue to use state directed payments as a tool, while ensuring they are sustainable, transparent, and fully aligned with our mission to protect beneficiaries and preserve Medicaid for future generations."

Under Medicaid managed care, states can direct how managed care plans pay providers through SDPs. These arrangements originally were not widespread, but they have ballooned in recent years. While only two states used them in 2016, 39 states use them today, and CMS projected that annual SDP spending would exceed $124.3 billion for FY 2025 and $144.6 billion for FY 2026.

By implementing the new required safeguards effective for rating periods beginning on or after July 4, 2025, CMS aims to ensure Medicaid resources are directed appropriately to strengthen program integrity and protect patient care. The letter to states provides key program elements and preliminary guidance on section 71116:

• Payment Limits: Beginning with rating periods on or after July 4, 2025, SDPs for inpatient hospital services, outpatient hospital services, nursing facility services and qualified practitioner services at an academic medical center must not exceed 100% of Medicare rates in Medicaid expansion states, or 110% of Medicare rates in non-expansion states. In the absence of a Medicare rate, the Medicaid state plan rate applies.
• Grandfathering Period: Certain eligible SDPs submitted or approved before July 4, 2025, may qualify for temporary grandfathering until rating periods beginning January 1, 2028, followed by a phased reduction until they meet the new payment limits.
• Next Steps for States: States must revise any pending or future SDP preprints that do not qualify for grandfathering to comply with Section 71116 before CMS will continue review. For applicable SDPs that are currently under review by CMS, CMS will notify states of whether an SDP likely qualifies for grandfathering in our approval letters for the SDP once CMS has completed its review.

For more information, states and stakeholders can review the full guidance letter at: https://www.medicaid.gov/medicaid/managed-care/guidance/state-directed-payments

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