The Centers for Medicare & medicaid Services (CMS) recently released new Medicaid managed care regulations that update CMS policy on State Directed Payments (SDP). In this blog we’ll cover what SDPs are, how they can be used to improve access to care, and some changes in how CMS will allow and regulate them. You can find all of our blogs on CMS’s Managed Care Rule and companion Access Rule here.

Background on SDPs

The default policy in Medicaid managed care is that once a state contracts with a managed care plan, the state cannot direct the managed care plan’s spending. In other words, the state sets out the covered services and capitation levels, but then the plan controls how the capitation is spent, including timing and payment rates for health care providers. SDPs, which were formally established in regulations in 2016, are an exception to the default policy. SDPs create a limited authority for states to set conditions or requirements on payments to providers—allowing the states to “direct” plan payments.

Under the 2016 regulations, states can use SDPs to direct plan spending in a few different ways. States can require managed care plans to use a minimum or maximum fee schedule, set a uniform payment increase for selected providers, participate in multi-payer models, or use a value-based purchasing method.

Why SDPs Matter

SDPs are a tool for managed care states to increase access to Medicaid services and support health care safety-net infrastructure. Consider a state that has identified that there are serious access problems for some type of provider in the state’s Medicaid program. Using an SDP arrangement, the state can essentially require the managed care plans to increase rates or set minimum rates for that type of provider, which would be expected to improve access. Of course, this isn’t a freebie; the state will also have to put more money into the managed care rates, so financing SDPs can be a major issue for states, who often rely on provider taxes to finance the state share of SDP funding.

Depending on the design of the SDP arrangement, it may have a streamlined or more complex approval process. One important substantive change the new regulation makes to SDP policy is to create a new streamlined “directing” option for the state: the rule allows states to direct managed care plans to pay providers using a minimum fee schedule based on Medicare rates. Since Medicare rates tend to be higher than Medicaid rates, this new option could be a very reasonable, effective, and simple mechanism for improving Medicaid managed care rates.

Ultimately, SDPs are broadly important for state policy advocates in managed care states to consider as a tool to improve access in their state’s Medicaid program. For example, if access to pediatricians in your state’s Medicaid managed care program is problematic, your state could use SDPs to force the hand of managed care plans to make needed improvements in payment rates for these providers. The state could set an improved minimum payment rate for pediatricians that would begin to level the playing field for children in Medicaid trying to access those providers. While hospitals are by far the largest beneficiary of SDP funding, the Medicaid and CHIP Payment and Access Commission (MACPAC) found that nearly one-third of SDP arrangements (not funding) have targeted mental health and substance use providers, and SDPs have also been used to target dentists in several states.

Growth and Regulation of SDPs

Part of the impetus for CMS’s new regulations on SDPs has been the explosion of SDP funding in recent years. The same MACPAC analysis found that from 2020 to 2023, SDP spending projections nearly tripled, to almost $70 billion. The new regulations are an attempt to bring better reporting and evaluation to this funding stream, as existing regulations have only limited monitoring requirements. Under the Managed Care Rule:

• Starting September of this year, states must include SDP spending data in medical loss ratio reporting.
• After CMS develops reporting instructions, states will also have to report annual provider-specific SDP spending data through T-MSIS, allowing CMS to track how much money is flowing to which providers.
• States will be required to submit evaluation reports for most types of SDPs when they amount to more than 1.5% of managed care program costs, and these reports will need to be publicly posted by states. CMS also commits to publicly posting the reports in the preamble to the regulation.
• In four key service areas (inpatient hospital services, outpatient hospital services, nursing facility services, and qualified practitioner services at an academic medical center), CMS will allow some directed payment spending to go as high as the Average Commercial Rate (notably, this is higher than the ceiling allowed for many fee-for-service supplemental payments, which is set at the Medicare rate).
• CMS considered, but elected not to set any total expenditure caps for SDPs under the final regulation.
• CMS reiterates in the rule that provider taxes, an essential source of state Medicaid funding used in nearly all states, remain a permissible tool for financing the state share of SDPs, subject to existing federal requirements. Starting in 2028, CMS will additionally require states to collect new compliance attestations from taxed providers. CMS issued an Informational Bulletin parallel to the new regulations indicating it will be working collaboratively with states between now and 2028 to help them come into compliance with these new provider tax requirements.

The provisions requiring reporting and evaluation should generally allow CMS and stakeholders to better understand how SDP funding is being spent and impacting care. Here’s hoping SDPs improve access for individuals enrolled in Medicaid.