Updated May 21, 11:30 a.m.
The Trump administration has proposed a "sweeping crackdown" on Medicaid payments that implements, and goes beyond, the reductions directed by last year's sweeping One Big Beautiful Bill Act.
Under a proposed rule, the Centers for Medicare & Medicaid Services takes aim at state-directed payments, aiming to bring Medicaid payments more in line with Medicare. The proposal would cap SDPs at 100% of Medicare rates in states that expanded Medicaid and 110% in non-expansion states for rating periods beginning on or after July 4, 2025. .
The agency said in an announcement that the change is consistent with historical fee-for-service payments in Medicaid and aligns with a significant overhaul of the program finalized as part of the legislation last year.
That said, the law specified SDP caps be applied to four areas of service: inpatient hospital services, outpatient hospital services, nursing facility services and qualified practitioner services at an academic medical center. As floated in "Dear Colleague" letters sent by CMS in September and February, the proposed rule extends the caps further to "all SDPs for all services in all states, the District of Columbia and territories for rating periods beginning on or after January 1, 2029," per a fact sheet.
CMS said its expanded proposal "would be a reasonable and appropriate approach" to ensure that states and hospitals don't try to circumvent the statutory caps by cost shifting provider payments to other services.
"For example, hospitals could seek to mitigate the impact of the payment limit by consolidating with other healthcare provider entities, such as independent provider practices and clinics, and by shifting certain services from an outpatient hospital setting to a clinic setting, where SDP payments would not be subject to the payment limit established in [OBBBA]," the agency wrote in its proposed rule. "Cost shifting practices of this nature are counter to our goal of greater fiscal integrity within the Medicaid program and could be used to obscure fraud, waste and abuse."
CMS also plans to implement the same limit for fee-for-service targeted practitioner payments where they're not already subject to an existing cap—for example, there is an upper limit for inpatient hospital services that is already in place, according to the fact sheet on the rule.
In addition to the planned payment caps, CMS said it wants to roll out national standards to improve transparency and accountability around Medicaid payments.
CMS estimates that the rule, if finalized, would drive $775 billion in savings over a decade, including $510 billion in savings to the federal government.
"Medicaid was never meant to be a blank check—it was meant to be a lifeline—and lifelines only work when they're strong, reliable, and built to last," CMS Administrator Mehmet Oz, M.D., said in the press release. "Right now, misaligned payment incentives and opaque financing arrangements are driving up costs without delivering better care."
"This rule restores balance by aligning Medicaid payments with Medicare standards, strengthening accountability, and ensuring taxpayer dollars support patients, not payment schemes," Oz continued. "When we hold the line on spending and put patients first, we protect Medicaid for the people who depend on it today and for generations to come."
CMS said it's acting on state-directed payments because they've grown significantly over the past decade, with two states using them in 2016 increasing to 41 by 2026. The agency said that these payments accounted for more than a quarter of Medicaid spending in the 2025 fiscal year.
Hospital industry groups—including the American Hospital Association, the Federation of American Hospitals and America's Essential Hospitals and the Association of American Medical Colleges—responded to the proposed rule release with concerns over their members' financial stability and ability to deliver care to vulnerable patients.
Ashley Thompson, AHA Senior Vice President for Public Policy Analysis and Development, for instance, said the supplemental payments being capped in the proposed rule offset "chronically inadequate base Medicaid payment rates" and their reduction "will have very real consequences for access to care."
CMS' proposed approach, she added, "raises important questions about how the statutory requirements will be implemented and the potential impact on providers' ability to rely on critical Medicaid payments."
AAMC Chief Health Care Officer Jonathan Jaffery, M.D., drew a more direct line to CMS' "unnecessary restrictions to supplemental payments to providers that are not included in the OBBBA," and urged the agency "to focus on implementing the provisions of the OBBBA that are consistent with the statutory language and to withdraw the proposed provisions that go beyond the statutory framework.”
AEH President and CEO Jennifer DeCubellis similarly said the proposed cuts "go far beyond what Congress intended. By cutting SDPs by hundreds of billions of dollars more than the Congressional Budget Office projected, CMS will devastate essential hospitals’ ability to provide high quality care to the patients and communities they serve."
Earlier this year the agency finalized a rule restricting the scale and implementation of states' Medicaid provider taxes, which are used in part to fund SDPs and also addressed in the OBBBA. CMS similarly said these "loopholes" have allowed states to draw substantial federal funds to be directed toward preferred groups, and that its crackdown would save the federal government $78.2 billion over the next decade.
Addressing fraud, waste and abuse across government has been a major focus for the White House, and the proposed rule is in line with an executive order on fraud in Medicaid that was issued in June 2025, the agency said.
Editor's note: This story was updated after publication with additional language from the proposed rule and reaction commentary from hospital groups.