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05-26-26

CMS Releases Proposed Rule on State Directed Payments

by NASHP

Last week the Centers for Medicare and Medicaid Services (CMS) published a proposed rule, Medicaid Managed Care State Directed Payments and Medicaid Fee-For-Service Targeted Practitioner Payments, to implement Section 71116 of the One Big Beautiful Bill Act (OBBBA) or Working Families Tax Cut Legislation (WFTC). Section 71116 established payment limits for state directed payments (SDPs) to hospital inpatient and outpatient services, skilled nursing facility services, and qualified practitioner services at academic medical centers.

Comments on the proposed rule are due by July 21, 2026.

With federal approval, a state may require Medicaid managed care organizations (MCOs) to make SDPs to providers with goals such as improving quality, access, or incentivizing value-based payment. Many SDPs resulted in reimbursement to providers at commercial rates, which are often higher than Medicare or Medicaid rates. Under Section 71116 of the WFTC, states are now required to limit SDPs to 100 percent of the Medicare published rate in expansion states and 110 percent Medicare published rate in non-expansion states (or 100 percent of a Medicaid approved rate in the absence of a published Medicare rate). New SDPs must immediately comply with these limits, while existing SDPs that meet grandfathered criteria have a transition period before a mandatory 10 percent annual phase-down begins on January 1, 2028.

The proposed rule details how CMS will implement Section 71116 by calculating Medicare payment limits, ensuring states with grandfathered SDPs meet the new payment limits, restricting uniform payment increases as an option for SDPs, and clarifying impermissible practices. The proposed rule, however, also extends beyond what is identified in Section 71116 of WFTC. Specifically, CMS proposes to (i) expand the Medicare payment limits for SDPs to all services beginning on January 1, 2029, and (ii) extend the Medicare payment limits for SDPs to targeted Medicaid fee-for-service payments beginning on January 1, 2029.

As the proposed rule will have broad impact across how states reimburse Medicaid providers, NASHP will continue to help states understand these provisions and provide additional information when the rule is finalized.