The Center for Medicare and Medicaid Services (CMS) is proposing a significant restructuring of how states may use Medicaid managed care state directed payments (SDPs) and certain targeted fee-for-service payment arrangements. Published on May 22nd, the proposed rule would create new Medicare-based payment limits for SDPs, phase down certain existing arrangements and impose new documentation and monitoring requirements on states. Comments are due July 21st. 

The proposal reflects CMS’ growing scrutiny of supplemental Medicaid payment arrangements, particularly state-directed payments. CMS frames the rule as an effort to improve transparency, fiscal integrity and consistency across Medicaid delivery systems. However, the proposal also signals a broader federal push to constrain Medicaid payment growth by tying more state payment flexibility to Medicare-based benchmarks.  

Under the proposed rule, CMS would establish new SDP payment limits for inpatient hospital services, outpatient hospital services, nursing facility services and qualified practitioner services furnished at academic medical centers. For Medicaid expansion states, these payments generally could not exceed 100% of the applicable Medicare rate. For non-expansion states, the limit would generally be 110% of Medicare. If no Medicare rate exists, CMS proposes using 100% of the state plan approved rate as the payment ceiling. 

CMS wants to expand this framework over time. Beginning January 1, 2029, the Medicare-based payment limits would apply to all state directed payment services in all states, the District of Columbia and U.S. territories. This would mark a major shift from the current environment, where many state-directed payment arrangements rely on a range of payment methodologies, including commercial benchmarks or state-specific approaches. 

The proposal includes a temporary grandfathering process for certain existing state-directed payments, but these arrangements would not be permanently exempt. Beginning January 1, 2028, grandfathered arrangements would be subject to a mandatory phase-down, requiring states to reduce the grandfathered total dollar amount by at least 10% annually until the arrangement reaches the applicable Medicare-based limit. Annual monitoring requirements for grandfathered payments would begin January 1, 2027. 

Operationally, the proposed rule would create substantial new documentation expectations for states. CMS would require states to submit provider lists, National Provider Identifiers, applicable Medicare benchmark rates, validation methodologies and service-level payment calculations. States may also need to revise managed care contracts, update actuarial certifications, develop Medicare rate crosswalks and modify payment methodologies to demonstrate compliance. 

The proposed rule would also eliminate new uniform increase SDPs beginning January 1, 2028, except for certain grandfathered arrangements during the transition period. CMS would continue to allow minimum and maximum fee schedule for SDPs, but those arrangements would still need to comply with the new Medicare-based payment limits and related contract and rate certification requirements. 

In addition to managed care state- directed payments, CMS proposes a new limit for certain targeted Medicaid fee-for-service payments. These limits would generally mirror the managed care framework: 100% of Medicare in expansion states and 110% of Medicare in non-expansion states. CMS indicates that the policy could apply broadly to targeted payments involving physicians, advanced practice providers, clinics, academic medical centers, behavioral health providers, transportation providers and other targeted provider categories. 

The proposal raises several practical questions for states and providers. Many Medicaid-covered services don’t have exact Medicare equivalents, which could require states to develop crosswalks or comparable-service methodologies. CMS acknowledges this challenge and seeks comment on how services without direct Medicare equivalents should be handled. The proposal also raises broader questions about how states will preserve access-focused payment strategies while operating within a more standardized federal payment ceiling. 

Overall, the proposed rule represents a substantial federal effort to narrow state flexibility around Medicaid supplemental payment design. While CMS presents the proposal as a transparency and program integrity initiative, the practical effect would be to move Medicaid payment policy closer to Medicare-based limits and reduce the use of state-specific or commercial-benchmark payment methodologies.