WASHINGTON, D.C. — Federal health officials issued preliminary guidance to states on how to implement new limits on Medicaid managed care payments, a move the Trump administration says is aimed at strengthening program integrity and curbing state practices that have shifted more costs onto the federal government.
The Centers for Medicare & Medicaid Services (CMS) guidance, released ahead of a forthcoming final rule, details changes required under the One Big Beautiful Bill Act. The law sets caps on certain State Directed Payments (SDPs), a tool states use to instruct managed care plans on how to pay providers.
“Medicaid is a federal and state partnership and for years states have skirted their responsibilities to draw down more federal funds while contributing less state dollars,” Health and Human Services Secretary Robert F. Kennedy, Jr. said. “President Trump’s One Big Beautiful Bill Act will hold states accountable and make sure the federal government isn’t left to pick up the tab.”
CMS Administrator Dr. Mehmet Oz said the new framework is intended to balance state flexibility with long-term fiscal stability. “By implementing safeguards required in the One Big Beautiful Bill Act, CMS is helping states continue to use state directed payments as a tool, while ensuring they are sustainable, transparent, and fully aligned with our mission to protect beneficiaries and preserve Medicaid for future generations,” he said.
Use of SDPs has grown sharply in recent years. Only two states used them in 2016, compared to 39 states today. CMS projects spending on SDPs will reach $124.3 billion in fiscal year 2025 and $144.6 billion in 2026.
The new limits, which take effect for rating periods beginning on or after July 4, 2025, will cap payments for inpatient and outpatient hospital services, nursing facilities, and certain academic medical center practitioners. In Medicaid expansion states, SDPs cannot exceed 100% of Medicare rates, while in non-expansion states the cap is 110%. If no Medicare rate exists, Medicaid’s state plan rate will apply.
CMS also outlined a temporary grandfather period. Some SDPs approved or submitted before July 4, 2025, may continue at existing levels until Jan. 1, 2028, after which payments must gradually be reduced to align with the new limits.
States will be required to update pending or future SDP submissions to comply with the law. CMS said it will notify states whether current requests qualify for grandfathering once reviews are completed.
The agency said the guidance is intended to give states more time to prepare for the transition while ensuring Medicaid dollars are directed appropriately to protect patient care and fiscal integrity.
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