CMS Issues Preliminary Guidance on Medicaid State Directed Payments Ahead of Final Rule

The Centers for Medicare & Medicaid Services (CMS) has issued preliminary guidance to states on new federal payment limits for State Directed Payments (SDPs) in Medicaid managed care. The move comes as the agency works toward a final rule implementing the requirements of the One Big Beautiful Bill Act. By releasing early guidance, CMS aims to give states additional time to align their Medicaid managed care programs with forthcoming federal standards.

In a letter to states, CMS outlined key elements of the changes, including reduced payment caps, criteria for a temporary grandfathering period, and specific next steps states must take. These measures reflect the administration’s intent to strengthen fiscal oversight of Medicaid while preserving the use of SDPs as a policy tool.

SDPs allow states to direct how Medicaid managed care plans compensate providers. Once limited in use, they have grown rapidly. Only 2 states used SDPs in 2016; today, 39 states have them in place. CMS projects that SDP spending will reach $124.3 billion in fiscal year 2025 and $144.6 billion in fiscal year 2026. The new limits are designed to address this rapid expansion and ensure payments are consistent with federal policy.

The guidance specifies that 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 academic medical centers will be capped. In Medicaid expansion states, payments cannot exceed 100% of Medicare rates; in non-expansion states, the limit is 110%. If no Medicare rate applies, the Medicaid state plan rate will govern.

Certain SDPs submitted or approved before July 4, 2025, may qualify for a temporary grandfather period. Eligible payments can continue under prior terms until rating periods beginning January 1, 2028. After that point, phased reductions will bring them into compliance with the new limits. This transition period is intended to give states and managed care plans time to adjust financing arrangements without immediate disruption.

CMS directed states to review and, if necessary, revise any pending or future SDP submissions to ensure compliance with Section 71116. Proposals that do not qualify for grandfathering must be updated before CMS will proceed with review. For SDPs currently under review, CMS will notify states in approval letters whether those payments qualify for grandfathering.

The early release of this guidance highlights the scale of upcoming changes for Medicaid managed care programs. For payers and managed care organizations, the new framework means preparing for capped provider payment levels, revisiting financial arrangements, and assessing how the shift may influence coverage policies. States will need to balance compliance with federal guardrails against local priorities for provider support and patient access.

Reference

CMS issues guidance to strengthen oversight of Medicaid state directed payments. Centers for Medicare & Medicaid Services. September 9, 2025. Accessed September 15, 2025. https://www.cms.gov/newsroom/press-releases/cms-issues-guidance-strengthen-oversight-medicaid-state-directed-payments