Massive Overreach will Undermine Access to Health Care for People Covered by Medicaid
Last week, on May 20, 2026, the Centers for Medicare and Medicaid Services (CMS) released a proposed regulation on state-directed payments (SDP). SDPs are a mechanism for states to improve managed care payments to providers (some previous background is here). Using SDPs, states can “direct” the managed care plans to pay consistent with state criteria (such as using a minimum fee schedule or value-based purchasing) or to make other additional payments to improve rates. It’s not surprising that CMS issued new regulations, since last year’s budget reconciliation legislation, H.R. 1, mandates huge cuts to SDP payments—in the form of Medicare-based payment caps—that as drafted would be harmful to states, providers, and ultimately, people enrolled in Medicaid. CMS’s proposed regulation, however, goes wildly outside the bounds of H.R. 1, far beyond what Congress could have imagined, much less what they actually legislated. I hate to tell you “he told you so,” but my colleague Edwin Park told you this was coming last February.
The Congressional Budget Office (CBO) looked at the SDP provision Congress drafted, and concluded it would amount to a $149.4 billion dollar cut in federal spending (over 10 years, 2025-2034). This would already be a devastating cut in payments to health care providers that serve children, families, and other low-income people on Medicaid and would likely result in reduced beneficiary access to needed care. But CMS’s own regulatory impact analysis of the proposed regulation concludes it will result in about a $515 billion dollar cut in federal spending (2026-2035). While CBO and the CMS actuaries likely used somewhat differing assumptions and data, that’s still more than three times the cut expected from the actual law CMS is supposed to be implementing.
So why does the proposed SDP regulation do so much more harm than the actual legislation? The short answer is: it goes far beyond the requirements of the legislation and just adds all kinds of new restrictions on SDPs and other supplemental payments made to Medicaid health care providers. Here are some top examples:
- H.R. 1 creates new caps on SDPs in “states,” and the legislation specifically says “[t]he term ‘State’ means 1 of the 50 States or the District of Columbia.” In its proposed regulation, however, CMS chose to apply the caps on U.S. territories, including Puerto Rico (starting January 1, 2029).
- H.R. 1 specifically sets out only four types of services that are subject to the new SDP caps (inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at academic medical centers). In its proposed regulation, CMS chose to apply the SDP caps to all service types (starting the first rating period beginning on or after January 1, 2029).
- Even within the four types of services, H.R. 1 only applies the caps to certain types of SDPs (SDPs come in a few varieties—for example, they can be based on fee schedules, value-based purchasing concepts, uniform dollar increases, among others). CMS’s proposed regulation applies the caps to all types of SDPs (starting the first rating period beginning on or after January 1, 2029).
- Speaking of types of SDPs, this may be the worst thing the regulation does. The regulation entirely eliminates (starting with rating periods beginning on or after January 1, 2028) an SDP type known as the “uniform dollar or percentage” option, in which the state directs managed care plans to simply pay providers a specific dollar or percentage amount in addition to the normal managed care payment. This is by far the most popular type of SDP, accounting for at least two-thirds of SDP spending. This cut has no basis whatsoever in H.R. 1—CMS just pulled it out of thin air. The change would mean that states would have to scramble to try to redesign and transform uniform dollar or percentage SDPs into other types of SDPs by the 2028 deadline. At best, this is a massive administrative ordeal—such as translating aggregate percentage increases into fee schedule service increases, re-drafting managed care contracts, filing new pre-prints with CMS, among many other obligations. At worst, switching to different SDPs may not be politically and financially viable. Billions of dollars of SDP payments may just disappear.
- As mentioned earlier, the proposed regulation applies the payment limit to all SDP services, well beyond the four specified services in H.R. 1. This raises an additional problem when combined with another problematic policy in the proposed regulation: the rule would require that when no Medicare payment rate is available to serve as the payment limit benchmark, states have to use Medicaid state plan base rates as the payment limit. While H.R. 1 does consider using state plan rates in the absence of Medicare rates, Congress drafted the H.R. 1 policy to only apply to the four services. Many home and community based services (HCBS), pediatric, and maternal health services that are not among the four services are precisely services that do not have Medicare rates, and would be subject to the state plan cap under the rule. Congress never meant to set payment limits on these services at all, much less subject them to a payment limit set at the state plan level as opposed to Medicare. In doing so, the proposed regulation effectively eliminates SDPs for all services for which a Medicare rate is not currently available. This limits the ability of states to address huge problems the nation faces with maternal mortality and morbidity and impedes their ability to make improvements in access to care for children, seniors, and people with disabilities.
- Under H.R. 1, states that already have payments above the level of the new SDP caps are allowed to keep them in place until the first rating period beginning on or after January 1, 2028, and then they have to slowly reduce these “grandfathered SDPs” by 10 percentage points every year until they comply with the cap. H.R. 1 specifies that existing SDPs qualify as grandfathered if they meet any one of three criteria. CMS’s proposed regulation eliminates one of those options entirely (one available for states that were making a good-faith effort to implement an SDP before the caps were in place), and requires states to meet both of the other two criteria to get the grandfather designation (these changes would be immediately effective). This makes it harder for states to get their SDPs grandfathered, and so some existing SDPs could be immediately reduced or eliminated. The proposed regulations also add numerous new and burdensome reporting requirements for states operating SDPs that are granted grandfathered status (these too would be immediately effective).
- As mentioned above, H.R. 1 eventually requires (at the first rating period beginning on or after January 1, 2028) grandfathered plans that are above the new SDP payment limit to reduce payments by 10 percentage points annually until coming into compliance with the new limit. During the legislative process, this was understood (and likely scored by CBO) to mean a state would have to bring its excessive payments into compliance over the course of ten years (that is, reduce payments by 10 percent each year so that they come into compliance with the Medicare-based caps by the tenth year). In the proposed rule however, CMS takes the less coherent position that the total amount of SDP payments (whatever they are) will be broadly reduced 10 percentage points a year. Such an interpretation means that the phaseout time will vary from SDP to SDP, even within the same state, based on just how far above the payment limit the specific SDP originally started. In some cases, the SDP may be reduced to Medicare-based levels in just a few years — instead of ten. This interpretation has the effect of significantly restricting the benefits of the grandfathering provision to states and providers.
- Current regulations setting limits on SDPs (at 42 C.F.R. 438.6(a), define the “Total Payment Rate”) by looking at the “aggregate” payment to all providers in the provider class for a given service. CMS’s proposed regulation would apparently change this policy to apply the caps at the level of the particular service — meaning every service would have to meet the cap. This could mean that some SDPs currently meeting an aggregate test would fail a service-by-service requirement, and states will have a massive administrative burden to implement service level caps. When you also factor in political and financial viability, this could have the effect of eliminating and sharply reducing SDPs, even if they are grandfathered or otherwise compliant with the H.R. 1 caps (This change occurs across many provisions, some of which are effective immediately.)
- SDPs are a managed care payment mechanism. H.R. 1 sets limits only on these managed care payments. CMS, nonetheless, wrote its proposed regulation to set equivalent caps on certain fee-for-service supplemental payments that have nothing to do with managed care or SDPs at all (and also include many services outside the four service types that H.R. 1 was targeting in the first place). As described in the prior bullet, the proposed rule applies caps at a services level, which is entirely different than the aggregate approach historically used for supplemental payments in fee-for-service that are subject to Upper Payment Limits (UPLs). (States must submit a State Plan Amendment to comply with this requirement no later than the first state fiscal year beginning on or after January 1, 2029.)
As is probably (painfully) evident at this point, CMS’s regulation relentlessly and systematically pushes far beyond the H.R. 1 legislation that CMS is actually charged with implementing, in order to institute even more draconian cuts to state Medicaid programs, health care providers, and ultimately people enrolled in Medicaid. A law that was already going to hurt state budgets, push some providers toward bankruptcy, and reduce access to care is being made three times worse. It’s hard not to interpret this as a reckless and lawless attempt to further slash Medicaid and gut the program. We hope CMS finds its way back to sensible policy and proper statutory implementation in the final regulations, and we are on record with respect to some needed reform in this area. Otherwise, if CMS finalizes this regulation as proposed, it may find itself in court in short order.
Note: Public comments to this proposed rule are due by July 21, 2026, and can be filed here.