The Trump administration issued new guidance Tuesday outlining changes to state-directed Medicaid payments, citing these outlays as a key issue in the push to root out fraud, waste and abuse.
The Centers for Medicare & Medicaid Services (CMS) said it chose to issue the guidance ahead of final rulemaking to give states additional time to adjust to changes under the One Big Beautiful Bill Act. The new guidelines will take effect for rating periods after July 4, 2025.
The guidance says SDPs for inpatient and outpatient hospital care, skilled nursing and services from a qualified practitioner must be capped at 100% of Medicare rates in states that expanded Medicaid and 110% in non-expansion states.
If a Medicare rate is unavailable, the payments will be based on state Medicaid rates, per the CMS.
The agency said certain eligible payments submitted either on or before the July 4 deadline may be grandfathered through rating periods beginning Jan. 1, 2028, and then be under a phased-in approach until the new limitations are met.
For states, the next step is to revise SDPs that will not qualify for the grandfathered period to comply with the guidance. The CMS said it will notify states as to whether certain payments qualify for grandfathering in its review process.
"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," CMS Administrator Mehmet Oz, M.D., said in the press release.
SDPs were circled as a key source of wasteful healthcare spend as part of the negotiations for the massive reconciliation package. The CMS said in the announcement that while these payments did not start out as commonplace, they have since become fairly widespread.
Just two states used SDPs in 2016, and that has since grown to 39. The CMS estimated that annual spending on SDPs would be more than $124.3 billion this year.
The agency first proposed in May that it would overhaul state-directed Medicaid payments to providers along with provider taxes, and reform in this area has been a priority of the Paragon Health Institute, a conservative think tank that's played a key role in the policy conversation under the Trump White House.
This effort has drawn ire from the hospital industry, which argues that SDPs and provider taxes help fill key reimbursement shortfalls.
“Let’s be clear: provider taxes and state directed payments provide the means to offset the crippling underpayment by Medicaid for critical care that meets the medical needs of so many kids, mothers, disabled, and seniors,” Federation of American Hospitals President and CEO Chip Kahn said in a March statement to Fierce Healthcare.