What CMS’s Proposed Medicaid Payment Rule Could Mean for State Directed Payments
The Centers for Medicare & Medicaid Services (CMS) recently released a proposed rule that would change how certain Medicaid payments are limited, documented, and reviewed. The proposal focuses on Medicaid managed care state directed payments and certain targeted Medicaid fee-for-service (FFS) payments.
Most notably, CMS proposes replacing some current payment guardrails, including average commercial rate benchmarks, with limits tied to Medicare payment rates or, when no Medicare rate is available, the applicable Medicaid state plan or waiver rate. CMS also proposes new documentation and oversight requirements for these payment arrangements.
The rule is still proposed, and stakeholders have until July 21, 2026, to submit comments. If finalized, the changes could affect how state Medicaid agencies design, finance, and justify existing and future payment arrangements.
Why State Directed Payment Changes Matter for Medicaid Programs
State directed payments (see additional resources for more detail) are a key Medicaid managed care financing tool that allow states, within federal requirements, to direct managed care plan payments to certain providers or services. Because many states use these arrangements as part of broader Medicaid payment strategy, changes to the federal guardrails could require states to review existing payment methodologies, financing structures, and future program design assumptions.
State directed payments have become a major component of Medicaid financing nationally. CMS estimates these payments could grow from approximately $107 billion in 2024 to nearly $296 billion by 2034 absent policy changes.1 Because many states use these arrangements to support hospitals, physician payments, workforce investments, and access goals, changes to federal payment limits could have significant downstream implications for state Medicaid financing strategies. In the proposed rule, CMS states that these arrangements can help states advance access and quality goals when designed with appropriate fiscal and program integrity safeguards. At the same time, CMS raises concerns that some arrangements may increase Medicaid spending without a clear connection to beneficiary access or quality of care.
Why CMS Is Proposing Changes to Medicaid Payment Limits
The proposed rule follows the OBBBA federal legislation enacted in July 2025 that directed CMS to revise payment limits for certain state directed payments. The statutory changes apply to state directed payments for four service categories: inpatient hospital services, outpatient hospital services, nursing facility services, and qualified practitioner services at academic medical centers.
For those services, CMS proposes to limit total payment rates to 100 percent of Medicare in Medicaid expansion states and 110 percent of Medicare in non-expansion states. If there is no applicable Medicare rate, CMS proposes using the Medicaid state plan or waiver-approved rate.
Medicaid Financing and Provider Payment Implications
CMS also connects the proposed rule to broader concerns about Medicaid financing arrangements, including arrangements involving provider taxes and intergovernmental transfers. In the proposed rule, CMS describes concerns about situations where the non-federal share of Medicaid payments is supplied by providers or local governmental entities and then returned to providers through Medicaid payments.
For states and providers, this could raise practical questions about how Medicaid payment arrangements are financed, how payment increases are justified, and how states document the relationship between payment policy, access, and quality. The proposal does not eliminate state directed payments, but it could change how some payment levels
Bottom Line for Medicaid Programs
For state Medicaid agencies and providers, the proposed rule could have significant implications. If finalized, it could reduce future Medicaid supplemental payment growth nationally and require states to re-evaluate financing strategies, provider payment priorities, and broader Medicaid transformation investments. In states that rely heavily on these arrangements, policymakers may need to make difficult decisions about how to prioritize limited Medicaid funding.
For state Medicaid agencies and providers, the implementation of this rule will be extremely impactful. If finalized, the rule could significantly reduce future Medicaid supplemental payment growth nationally and may require states to re-evaluate financing strategies, provider payment priorities, and broader Medicaid transformation investments.