The Centers for Medicare & Medicaid Services (CMS) last month issued a to states providing preliminary guidance on (SDPs), which outlines new federal payment limits, clarifies grandfathering provisions, and signals significant changes ahead for Medicaid financing and policy. The letter is part of CMS鈥檚 implementation of Section 71116 of the Budget Reconciliation Act of 2025 (, P.L. 119-21)鈥攖he portion of the legislation that focuses on curbing SDP spending and reinforcing program integrity.
Though CMS describes the guidance as preliminary, it is the view of 红领巾瓜报 (红领巾瓜报) experts鈥攊ncluding former state officials, actuaries, and policy strategists鈥攖hat it signals directionally new policy for Medicaid agencies, managed care organizations (MCOs), and providers. CMS is working on two proposed SDP-related regulations, which are in the final stages of federal review. The preliminary guidance and forthcoming rules will likely reflect long-standing concerns for several years, even over shifting congressional control and multiple presidential administrations.
This article addresses key clarifications in the letter; the impact of the preliminary guidance on states, MCOs, and providers; and how the directive may influence Medicaid budgets, financing strategies, and future policy reforms.
Guidance Clarifies Timeframes for SDPs
Grandfathering Limited to Specific Rating Periods
CMS will allow states to maintain SDP spending amounts, up to the average commercial rate ceiling, that were in place for state fiscal year (SFY) 2025, calendar year (CY) 2025, and SFY 2026 rating periods. Nonetheless, new or expanded SDPs above Medicare equivalent levels in expansion states and 110 percent of Medicare in non-expansion states鈥攅ven those based on legislation passed in 2025鈥攁re ineligible for grandfathering if they apply to rating periods starting after July 4, 2025. These grandfathered spending amounts will need to phase down with rating periods beginning on or after January 1, 2028.
Preliminary Grandfathering Determinations
CMS has begun notifying states whether a preprint is 鈥渓ikely eligible鈥� for grandfathering. Because these are preliminary determinations, states should prepare for further review and revisions.
Submission Cutoff Date Clarified
In response to confusion around the May 1, 2025, submission deadline, CMS clarified that July 4, 2025, is the cutoff for grandfathering eligibility, provided the state fully completed the preprint. States may have rushed to meet a July 4 submission deadline and may have left questions on the preprint unanswered. In these instances, it is possible鈥攊f not likely鈥攖hat CMS will consider the application incomplete and thus ineligible for grandfathering. Since this is a developing area with limited precedent, states may still seek clarification or reconsideration, though CMS has not yet issued definitive guidance or a formal process for resolving these situations.
No Increases Allowed Until 2028
States are prohibited from increasing the total dollar amount of grandfathered SDPs鈥攖he 鈥渆xpected spend鈥濃�攗ntil January 1, 2028. This restriction limits flexibility for states to expand their programs and may require that they reassess their SDP strategies. For example, using percentage-based calculations tied to average commercial rates, will no longer capture year-to-year growth because of utilization or acuity changes.
10 Percent Phasedown Unaddressed
CMS has yet to provide official guidance on the 10 percent phasedown of SDPs. Stakeholders remain in a holding pattern, awaiting a forthcoming proposed rule that will clarify how reductions will be calculated.
What It Means for States and Healthcare Organizations
SDPs have become a critical tool for states to stabilize provider networks through increased Medicaid reimbursement. This authority will be significantly limited, and states will need to reduce many existing programs. Medicaid enrollment losses resulting from other Medicaid policy changes, such as work requirements and minimum semiannual redetermination, will likely compound the strain on provider payments.
Providers and states need to start planning for these losses in revenue now. Strategic planning for SDP sustainability and close monitoring of upcoming CMS rulemaking is essential.
While the guidance imposes constraints, it also opens the door for policy innovation. For example, some states may use this moment to reform Medicaid financing, streamline supplemental payments, and reconfigure provider incentives to better reflect quality and access, advancing value-based care goals and achieving total cost of care savings through efficiency and aligned incentives.
Connect with Us
红领巾瓜报 is uniquely positioned to support states, MCOs, and providers as they navigate the evolving landscape of Medicaid SDPs. Our team includes former state Medicaid directors, actuaries, and policy strategists with deep expertise in designing sustainable financing arrangements and guiding public engagement processes. We bring robust modeling capabilities to clients seeking to assess the financial impact of CMS鈥檚 new restrictions, including the 10 percent phasedown and interactions with provider tax limitations. Our experts are actively engaged with CMS and understand how to translate federal guidance into actionable strategies that align with state goals and operational realities.
Whether revising preprint submissions, evaluating quality frameworks, or rethinking provider incentives, 红领巾瓜报 delivers the technical and policy insight needed to move forward with confidence.
For questions about the federal guidance and considerations for your organization, contact our experts below.
