CMS Moves to Rein In Misused Medicaid Dollars and Reward Quality Care
Proposed Rule Caps Excessive State Payment Practices, Potentially Saving Taxpayers More Than $775 Billion Over 10 Years
The Centers for Medicare & Medicaid Services (CMS) proposed today a sweeping crackdown on state Medicaid payment practices that have driven payment rates well above Medicare levels, leading to excessive federal costs. The Medicaid Managed Care State Directed Payments (SDP) and Medicaid Fee-for-Service (FFS) Targeted Practitioner Payments Proposed Rule would set clear caps and better align Medicaid payments with Medicare standards. If finalized, the proposed rule would generate an estimated $775 billion in total savings over 10 years, including $510 billion in federal savings. Our goal: to refocus Medicaid dollars on individuals and families instead of inefficient payment schemes.
An SDP is an arrangement in which the state directs the health plan on how to pay provider reimbursement rather than allowing the plan to negotiate provider payment. States have often used these arrangements to increase provider payments toward a limited set of providers, typically those capable of providing the non-federal share through provider taxes and intergovernmental transfers. Provider taxes are fees charged to entities such as hospitals based on health care services, and an intergovernmental transfer is when a local government entity (like a public hospital) transfers funds to the state to be used as the non-federal share, both of which are used as the state’s portion of Medicaid payments made back to those same providers. Essentially, shifting money from federal coffers to state coffers. By combining these financing tools with excessive payments, states can shift the state’s share of Medicaid financing to federal taxpayers by drawing more federal dollars without equivalent state fund spending; as a result, the federal government's effective match rate has shifted far higher than specified in federal law.
In a June 2024 report, the Medicaid and CHIP Payment and Access Commission (MACPAC) found that while overall, 70% of non-federal share for managed care payments come from state funds, “more than half of [state] directed payments are financed by [intergovernmental transfers] or provider taxes.”1 This is one of the key reasons why stronger oversight and accountability measures are so important. When misused, SDPs drive up costs without improving care. When used correctly, SDPs can properly fulfill their role to expand access, lower cost, and improve quality of care and health outcomes for Medicaid enrollees.
“Medicaid was never meant to be a blank check — it was meant to be a lifeline — and lifelines only work when they're strong, reliable, and built to last,” said CMS Administrator Dr. Mehmet Oz. “Right now, misaligned payment incentives and opaque financing arrangements are driving up costs without delivering better care. This rule restores balance by aligning Medicaid payments with Medicare standards, strengthening accountability, and ensuring taxpayer dollars support patients, not payment schemes. When we hold the line on spending and put patients first, we protect Medicaid for the people who depend on it today and for generations to come.”
Use of SDPs has rapidly expanded, from two states in 2016 to 41 states today, and accounts for over a quarter of all Medicaid managed care spending in FY 2025. Unchecked, annual SDP spending is projected to nearly triple from $107 billion in FY 2024 to $296 billion by FY 2034. The use of provider taxes as a financing mechanism has similarly increased over time, with 49 states and the District of Columbia currently imposing at least one provider tax, up from 35 states in 2004.2 The current system lacks clear, enforceable guardrails, allowing states to increase federal spending without consistent accountability for value or outcomes. This proposed rule is being released to implement section 71116 of the Working Families Tax Cut (WFTC) legislation and to propose additional policy changes consistent with a Presidential Memorandum, “Eliminating Waste, Fraud, and Abuse in Medicaid,” issued on June 6, 2025.
CMS is proposing these and other revisions to Medicaid managed care and FFS payment arrangements to improve fiscal and program integrity over a transitional timeframe so that states and providers would have the time they need to adjust payment arrangements.
The proposed rule would:
- Cap SDP provider payment rates at 100% of Medicare payment rates for expansion states and 110% of Medicare payment rates for non-expansion states (or 100% of the Medicaid state plan rate if a comparable Medicare rate is not available), consistent with section 71116 of the WFTC legislation and historical Medicaid FFS payment levels,
- Apply similar limits to certain targeted Medicaid fee-for-service payments, and
- Establish consistent national standards to improve transparency and accountability.
CMS is seeking public comment on the proposed rule, including feedback on implementation. To view the proposed rule on the Federal Register, visit: https://www.federalregister.gov/d/2026-10292.
To view the fact sheet, visit: https://www.cms.gov/newsroom/fact-sheets/medicaid-managed-care-state-directed-payments-medicaid-fee-service-targeted-medicaid-practitioner
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