CMS proposes to restrict Medicaid SDPs

CMS issued a proposed rule outlining plans to place new limitations on Medicaid state-directed payments (SDP) to reduce federal costs and better align Medicaid payments with Medicare standards. However, the new restrictions could create additional financial pressure for organizations that rely on supplemental Medicaid payments to offset low base reimbursement rates.

An SDP is a Medicaid managed care payment arrangement that allows states to direct how managed care plans reimburse providers, rather than allowing plans to negotiate payment rates independently. Use of SDPs has rapidly expanded over the last decade, going from two states in 2016 to 41 states today, according to CMS. These payments accounted for more than a quarter of all Medicaid managed care spending in fiscal year (FY) 2025. Without any policy changes, CMS projects annual SDP spending will nearly triple from $107 billion in FY 2024 to $296 billion by FY 2034.

CMS is proposing to cap applicable SDPs at 100% of Medicare payment rates for expansion states and 110% for non-expansion states. If no comparable Medicare rate exists, the payments would default to 100% of the approved Medicaid state plan rate. This proposal would initially apply to inpatient hospital, outpatient hospital, and nursing facility services, as well as qualified practitioner services at academic medical centers, for rating periods beginning on or after July 4, 2025. CMS plans to extend these SDP restrictions to all services in all states, the District of Columbia, and territories for rating periods beginning on or after January 1, 2029.

The proposed rule also includes similar provisions related to targeted Medicaid fee-for-service payments. Comments on the rule are due by July 21, and revenue integrity professionals can read CMS’ fact sheet and press release for more information.