CMS Publishes Medicaid State Directed Payment Proposed Rule

The Centers for Medicare & Medicaid Services (CMS) issued the Medicaid Managed Care State Directed Payments (SDP) and Medicaid Fee-For-Service (FFS) Targeted Medicaid Practitioner Payments proposed rule, implementing the SDP provisions of the Working Families Tax Cut legislation (WFTCL). The rule proposes additional regulations beyond those detailed in the WFTCL that restrict some FFS payments and other SDP payments.

State Directed Payments

The rule implements Section 71116 of the WFTCL, limiting the total payment rate for a SDP for inpatient and outpatient hospital services, nursing facility services, or qualified practitioner services at academic medical centers. During the rating period beginning on or after July 4, 2025, the total payment rate for these SDPs will be limited to 100% of the Medicare rate in states that expanded Medicaid and 110% of the Medicare rate in nonexpansion states.

Certain approved or pending SDPs for services named in the WFTCL will be identified as grandfathered and gradually reduced to the applicable percentage of the Medicare rate, with the phase-down starting for rating periods beginning on or after Jan. 1, 2028.

To qualify for grandfathering:

1. CMS must have approved the SDP by May 1, 2025, or
2. The state must have submitted a completed SDP preprint by July 4, 2025.

If SDPs meet the preprint criteria, they are eligible for grandfathering if their rating periods include any days from:

• Oct. 11, 2024, through July 3, 2025
• July 7, 2025, through March 27, 2026.

To calculate the applicable Medicare rate for SDPs, CMS will use the existing definition of the "total published Medicare payment rate." The payment limit will be calculated at a service or discharge specific level as it is for the Medicare inpatient prospective payment system. CMS expects states to use CMS published web pricers or fee schedules, which include "all the necessary Medicare components and adjustments that comprise the total published Medicare payment rate."

Grandfathered SDPs will be gradually phased down from the total amount to the applicable Medicare limit by 10 percentage points annually until the Medicare limit is reached. The rule defines the total amount as the total dollar amount listed in item 4 of SDP preprints. The SDPs will be phased down from the total dollar amount by 10 percentage points equal to the 10 percentage points off the grandfathered amount, using the original grandfathered total amount as the baseline. For example, if a state has an SDP with a $1 billion total dollar amount, the payments will be reduced by $100 million a year until the Medicare limit is reached.

The rule also proposes to delay compliance with the elimination of separate payment terms during the phase-down period for grandfathered SDPs.

Further, the rule proposes to limit all other SDPs for services that are not subject to grandfathering (e.g., professional services at non-academic medical centers) to 100% of the Medicare rate in states that expanded Medicaid and 110% of the Medicare rate in nonexpansion states. This will begin in rating periods on or after Jan 1, 2029 without a phase-down period.

FFS Targeted Payments

CMS proposes to establish a limit for targeted FFS Medicaid payments equal to 100% of the total published Medicare payment rate for an expansion state, or 110% of the total published Medicare payment rate for a nonexpansion state. FFS targeted payments refer to base and supplemental payments that are targeted to a subset of practitioners, rather than to all practitioners participating in the state Medicaid program. Limits will be specific to a practitioner or provider, unlike upper payment limit (UPL) payments for institutional providers.

States with approved state plan payments that exceed this limit will be required to submit an amendment to update these payments for the first state fiscal year that begins on or after Jan. 1, 2029. This new limit will apply to new payment proposals after the effective date of this rule.

Comments are due July 22.

America's Essential Hospitals will provide in-depth analysis of the proposed rule in a forthcoming Washington Briefing. The association will also review this rule at our next Medicaid Financing interest group meeting on May 28 at 2pm ET.

Contact Director of Policy Rob Nelb at [email protected] or 202.585.0127 with questions.