红领巾瓜报

The Centers for Medicare & Medicaid Services (CMS) proposed changes to state directed payments mark a significant inflection point for Medicaid financing. For states, plans, and providers, the coming months will be critical in understanding the rule鈥檚 final shape鈥攁nd how they can position themselves for a more constrained and standardized payment environment.

Federal Medicaid policy is entering a period of rapid change. Policymakers are advancing a series of interconnected proposals鈥攊ncluding Medicaid community engagement (work) requirements, program integrity initiatives, and new scrutiny of financing mechanisms that shape how dollars flow through the program.听

Among the most significant developments:听the听CMS鈥檚听proposed changes to Medicaid state听directed payments (SDPs). As outlined in听红领巾瓜报鈥檚 recent听Issue听Brief, the proposal signals a meaningful shift in how federal policymakers approach provider reimbursement, managed care financing, and oversight of supplemental payment arrangements.听

红领巾瓜报 (红领巾瓜报)听will听further听examine these developments in听future articles, briefs, and听its Medicaid summer听webinar听series, which will focus on听SDPs, work requirements, and program integrity鈥攖hree policy areas now moving in parallel and reshaping the Medicaid landscape.听This article听provides an executive overview of the听SDP rule.听

What听are Medicaid State听Directed Payments?听

State听directed payments (SDPs)听are a key Medicaid financing tool that allows states to direct how managed care organizations reimburse providers.听

States use SDPs to:听

• Increase provider payment levels听
• Target specific provider types or services听
• Support delivery system reforms听

Over time, SDPs have become听a central component听of Medicaid managed care financing. As the听红领巾瓜报 issue brief听emphasizes, their growing scale and complexity have drawn increased federal scrutiny.听

What听Does听CMS Propose听to Change?听

The听CMS proposed听rule听implements the statutory changes approved in听the 2025 budget reconciliation act (P.L.听119-21,听which CMS refers to听as the Working听Families听Tax Cut听Act,听or听WFTCA). The rule听introduces a new framework for how SDPs are structured, regulated, and reviewed. Based on 红领巾瓜报鈥檚 analysis, the proposal听advances听several core policy shifts:听

1. Expanded听Federal Limits on Payment Levels.听CMS proposes new constraints on how much states can direct plans to pay providers, extending payment limits across a broader range of services and delivery systems. Specifically, CMS proposes to lower the payment ceiling for all SDPs to either 100 percent of Medicare for states administering Affordable Care Act (ACA) expansion programs or 110 percent of Medicare for states without an ACA expansion program. CMS plans to grandfather certain SDPs at levels above Medicare and provide a transition period with an annual 10 percent reduction until the payments are reduced to Medicare levels. In addition, this rule proposes limiting SDPs to the total published Medicare payment rate at the service level鈥攁 departure even from Medicaid fee-for-service (FFS) upper payment limits, which are limited to a reasonable estimate of what Medicare would pay but are calculated at the aggregate level by ownership class.听
2. Extends Limits听Across Programs听and Delivery Systems.听The proposal听seeks听to align听the limitations on practitioner payments under听fee-for-service听with the new limitations on SDPs. If a state makes payments to a subset of targeted practitioners, the new proposed limit would be actual Medicare payment rates applicable to the practitioner or provider for the same听time period听as the Medicaid state plan rate year.听The crosswalk of Medicaid payment rates to Medicare will听likely be听administratively burdensome鈥攅specially for states that set Medicaid rates using an entirely different听methodology听than Medicare鈥檚. Applying the Medicare payment limit at the service level will limit states鈥� ability to incentivize certain service types that may need enhanced reimbursement amounts to preserve access to care (e.g., primary care, neonatal, etc.).听
3. Broader Applicability Across Providers.听The changes extend beyond a narrow set of provider types, affecting a wider range of stakeholders听participating听in Medicaid financing and delivery.听For example, the WFTCA听called for the reduced payment ceiling to be applied to the specified four classes of providers. This rule proposes that all providers be limited to the same ceiling and that the revised limits also apply to US territories.听

Why Is CMS Focusing on State听Directed Payments Now?听

As highlighted in the 红领巾瓜报听Issue听Brief, federal policymakers are increasingly focused on the growth and complexity of SDPs听as well as the role of SDPs in broader Medicaid financing strategies.听In addition,听CMS policy officials are听prioritizing program integrity and fraud, waste,听and abuse and have couched the current SDP policies听as inefficient use of taxpayer dollars.听

These priorities align with a broader shift toward tighter federal oversight of Medicaid funding mechanisms.听

What Are the Implications for States, Plans, and Providers?听

The proposed changes have wide-ranging implications across the Medicaid ecosystem.听

States:听SDPs have been a flexible tool for shaping payment policy and directing resources. New federal parameters may limit听that flexibility听and require states to reassess existing financing strategies.听

Health Plans:听Plans may face a more standardized and regulated environment for implementing SDP arrangements, with less variation driven by state policy choices.听

Providers:听Many providers rely on SDPs to supplement base Medicaid payment rates. Changes to these payments could affect reimbursement levels and financial stability, particularly for organizations serving large Medicaid populations.听

As the听红领巾瓜报 brief听underscores, the impact will vary significantly by state, depending on how SDPs are currently structured.听

How This Fits into Broader Medicaid Policy Changes听

CMS is advancing a听broader recalibration of how SDPs fit within Medicaid policy.听However, the SDP proposal is听also听part of a larger set of federal Medicaid policy developments, including:听

• Medicaid community engagement (work) requirements听and other changes to eligibility and redetermination rules听included in听a June 1, 2026,听interim final rule听
• Program integrity and oversight initiatives听
• Changes to financing structures and supplemental payments听

Taken together, these policies signal a transition toward听greater federal standardization听and increased oversight of funding flows.听

What Should Stakeholders Watch Next?听

CMS鈥檚 proposed changes to Medicaid state听directed payments mark a turning point in Medicaid financing policy.听

Stakeholders should expect continued movement toward greater oversight, tighter payment parameters, and increased consistency across the program. They听should begin planning now for a more constrained and standardized payment environment.听Key questions听center on:听

• How CMS will implement and phase in payment limits across states听
• The extent to which existing arrangements will be grandfathered听in听or phased down听
• How states respond in redesigning Medicaid payment strategies听

The proposed SDP rule is open for public comment听through听July听21,听2026, with final policy decisions expected following federal review. As听pending听issues are resolved, stakeholders across the Medicaid landscape will need to reassess financial models, policy approaches, and operational strategies.听

Stakeholders should begin evaluating potential impacts now, as the policy direction is clear,听even if final details are still evolving.听

Staying Ahead of Medicaid Financing Changes听

Given the pace and breadth of these developments, staying informed is critical. 红领巾瓜报鈥檚听upcoming听Medicaid听summer webinar series听will provide听timely听analysis of the听SDP proposal alongside related policy changes, including community engagement and work requirements and program integrity听initiatives.听These sessions are designed to help states, plans, and providers understand policy changes and prepare for operational and financial implications,听identify听compliance gaps, and address sustainability issues.听Register for one听or multiple webinars here.听听

To听understand听how听these Medicaid听policy changes affect your organization,听contact听one of听红领巾瓜报鈥檚听Medicaid experts.听

This鈥痑rticle听was鈥痑dapted based on a blog听written鈥痓y Laura Pence and Sara Singleton鈥痮n behalf of鈥疦ASDOH,鈥痑n alliance managed by Leavitt Partners. NASDOH is鈥痑 multi-sector coalition of stakeholders鈥痵eeking鈥痶o make a material improvement in the health of individuals and communities by advancing the adoption of effective policies and programs to address upstream drivers of health, such as food insecurity, housing instability, interpersonal safety, and transportation insecurity.鈥痀ou can find the full blog post听 and learn more about the鈥痑lliance鈥痑t .鈥�

Medicaid programs are the primary provider of healthcare benefits to tens of millions of Americans with limited incomes and resources, many of whom鈥痬ay鈥痚xperience food and nutrition insecurity and other鈥痟ealth-related social needs (HRSNs), which have a significant impact on healthcare spending and health outcomes.鈥疉lthough鈥痬ore鈥痗ould鈥痓e done, there has been bipartisan recognition鈥痠n recent鈥痽ears that improving health outcomes and lowering healthcare costs鈥攊ncluding in the Medicaid population鈥攔equires addressing鈥痶he underlying causes of poor health outcomes.鈥�听

As a result鈥痮f鈥痮ngoing鈥痜ederal and state鈥痚fforts鈥痑s well as鈥痯rivate sector innovations, a鈥痝rowing body of evidence shows that interventions addressing nutrition, housing, and other social drivers measurably improve health outcomes and reduce costly healthcare utilization.

Medicaid Policy Context: Authorities Supporting Health-Related Social Needs听

In 2021, the first Trump Administration鈥痳eleased a鈥�鈥痶o鈥痵tate鈥痟ealth鈥痮fficials outlining the key authorities and consolidating state guidance around how these authorities may be used to address social needs, including:

• in lieu of services鈥�(ILOS);鈥�鈥�听
• Medicaid managed care rule provisions鈥痶hat鈥痚ncourage or require Medicaid managed care organizations (MCOs) to address social needs;鈥�鈥�听
• Section 1915 Home-鈥痑nd Community-Based Services (HCBS) waivers, which鈥痬ay鈥痓e used to address non-medical needs of individuals to鈥痜acilitate鈥痶heir opportunity to live and work in the community if they would otherwise need institutional care;鈥�鈥�听
• 1915(i) state plan amendments that can be used to鈥痯rovide HCBS to鈥痯eople鈥痺ho meet state-defined needs-based criteria that are less stringent than institutional criteria;鈥痑nd鈥�鈥�听
• Section 1115 Demonstration waivers,鈥痺hich provide states flexibility to address or incorporate social needs interventions into their Medicaid programs.鈥�听

The Biden Administration鈥痚xpanded on this by issuing guidance on how states could use鈥�1115听demonstrations 鈥� commonly called 1115 waivers 鈥撎齮o听address HRSNs in Medicaid.鈥疢ore than 20鈥痵tates have ongoing鈥�鈥痶hat include efforts to address HRSNs鈥痵uch as鈥痟ousing, nutrition, and employment鈥痵upports.鈥疉lthough the鈥�1115 waiver鈥痝uidance鈥痠ssued during the Biden Administration have now been rescinded, 1 several underutilized opportunities to address HRSNs still exist within the Medicaid program.

Key Medicaid Opportunities to Address Health-Related Social Needs听

Although鈥�1115 waivers have become a prominent mechanism among states to advance efforts to screen for and address HRSNs, states and other听stakeholders鈥痵hould鈥痗onsider鈥痯reviously underutilized authorities,鈥痠ncluding鈥痠n lieu of services (ILOS),鈥痵tate plan amendments,鈥痑nd managed care contracts.鈥�听

碍贵贵鈥檚鈥�Survey鈥痮f Medicaid听officials鈥痠ndicate听that states are already using these tools to:听

• Screen enrollees for behavioral health and social needs听
• Provide referrals to social services听
• Partner with community-based organizations听
• Require providers to capture听SDOH听

States are also increasingly using听听to address specific needs such as nutrition, while continuing to rely on state plan amendments to expand coverage pathways for preventive services, case management, rehabilitative services, and听HCBS.听

As states negotiate with CMS over expiring 1115 waivers,听it will be critical to consider听how these听听can support continuation of interventions with听demonstrated听impact, including:听听

• The听CMS Accountable Health Communities (AHC)鈥痬odel found that connecting Medicaid beneficiaries with unmet social needs to community resources led to a 3鈥痯ercent鈥痳eduction in鈥痟ospitalizations, a 3鈥痯ercent鈥痳eduction in avoidable emergency department visits, and overall cost savings of more than $200 million.鈥�听
• 鈥�鈥痮n medically tailored meals, which several states cover through Medicaid authorities including ILOS, estimates that these interventions can avert millions of hospitalizations nationally and generate net healthcare savings, while improving management of chronic conditions such as diabetes and heart disease.鈥�听
• States听can consider听proposing new HRSN interventions within 1115 waivers.鈥疭ection 1115 waivers are鈥痠ntended to support 鈥�,鈥濃�痗reating鈥痑n opportunity for proposing innovative interventions rather than carrying out鈥痯rograms that have already developed an evidence鈥痓ase.鈥疐or interventions that already have an evidence base, funding them through the other mechanisms described鈥痺ill鈥痚nsure continued authority to provide them.鈥�听

Medicaid Innovation and Value-Based Models Continue to Support HRSN Strategies听

Beyond the听Medicaid-specific authorities and flexibility, the CMS Innovation Center鈥痗ontinues to听advance听models听that听integrate听HRSNs听into听value-based care that improves health outcomes.鈥疊uilding on听efforts such as the听AHC鈥疢odel听and the听Medicare Advantage听Value-Based Insurance Design听(VBID)鈥痬odel,鈥痶he Innovation Center has developed听numerous听frameworks鈥痶hat address HRSNs and SDOH. Upcoming models 鈥� including听,鈥�,鈥痑苍诲鈥�鈥�鈥� provide听opportunities to address HRSNs.鈥�听

The Innovation Center鈥痗ontinues to provide鈥痮pportunities鈥痜or听research听and鈥痚vidence鈥痝athering on screening for and addressing HRSNs as a part of value-based care. Participation in voluntary models that involve screening for and addressing HRSNs听provides an opportunity for stakeholders听to receive reimbursement for these activities while generating data and resources to support other entities.鈥疭tates, providers, and community-based organizations can听participate听in鈥疘nnovation Center鈥痬odels to advance efforts鈥痶hat鈥痑ddress SDOH.鈥�听

Rural Health Transformation Fund鈥�听

The Rural Health Transformation Fund also鈥痚ncourages鈥痵tates and stakeholders to address SDOH.鈥疶he鈥�鈥痠nstructions from CMS require states to describe SDOH in rural鈥痗ommunities, including income levels, employment sectors, unemployment rates, education attainment, and availability of public transportation.鈥�听

In response, many states鈥痠ncluded proposals for addressing HRSNs in rural communities.鈥疐or example,鈥疉laska鈥檚鈥�鈥痳ecognized a need for 鈥渘utrition programs addressing food insecurity and teaching healthy eating habits鈥� and proposed to use funding to support community wellness centers to create dedicated spaces for physical activity and nutrition education.鈥疐urther,鈥疓eorgia鈥�鈥痠ncreasing access to nutrition services for children with autism spectrum disorder and dietitian/nutritionist support for women aged鈥�19鈥�44 who meet certain clinical requirements.鈥�听

The Rural Health Transformation Fund鈥�(RHTF)鈥痑llows鈥痵tates to pilot innovative interventions鈥痑nd鈥痑ddress HRSNs that could鈥痩ater鈥痓e included in the state鈥檚 Medicaid program.鈥�鈥�听

Why Addressing Health-Related Social Needs Matters for Medicaid Outcomes听

Opportunities to address听HRSN and SDOH听in Medicaid, CMMI鈥痙emonstrations, and the Rural Health Transformation Fund听remain significant, even as federal policy evolves.听States and stakeholders have a听variety of authorities and programs听they can consider听to address听SDOH.鈥疘n addition, CMS should develop more guidance on activities that align with the agency鈥檚 goals,鈥痑s well as examples for states to adopt.鈥疉ppropriately addressing individual social鈥痙rivers鈥痮f health will require collaborative and innovative approaches across the private and public sectors.鈥�听

You can read the听original听 and听learn more about the鈥痑lliance鈥痑t听.鈥�听听