WASHINGTON, D.C. — The Centers for Medicare & Medicaid Services proposed sweeping restrictions on state Medicaid payment arrangements that federal officials argue have inflated reimbursement rates far above Medicare benchmarks, a policy shift the agency estimates would reduce Medicaid spending by $775 billion over the next decade.
The proposal would cap certain Medicaid managed-care and fee-for-service payments at or near Medicare reimbursement levels while tightening oversight of financing structures involving provider taxes and intergovernmental transfers that CMS contends allow states to draw disproportionate federal funding.
According to the agency, the rule would generate roughly $510 billion in federal savings over 10 years if finalized.
The proposal represents one of the most significant federal attempts in years to curb state financing mechanisms that critics argue enable states to maximize federal Medicaid matching funds without proportional state spending.
CMS Administrator Mehmet Oz argued the current structure creates distorted financial incentives that increase federal costs without corresponding improvements in patient care.
“Right now, misaligned payment incentives and opaque financing arrangements are driving up costs without delivering better care,” Oz said.
State-directed payments, or SDPs, allow states to require Medicaid managed-care plans to reimburse providers according to state-defined payment arrangements rather than rates negotiated directly by insurers and providers.
Federal officials argue some states have used SDPs alongside provider taxes and transfers from public hospitals to increase federal reimbursement flows while limiting direct state financial exposure.
CMS cited a 2024 report from the Medicaid and CHIP Payment and Access Commission finding that more than half of state-directed payments are financed through provider taxes or intergovernmental transfers.
The use of SDPs has expanded sharply over the last decade, growing from two participating states in 2016 to 41 states in 2026, according to CMS. The agency estimated SDP spending could nearly triple from $107 billion in fiscal 2024 to $296 billion by fiscal 2034 without additional restrictions.
Under the proposed rule, expansion states would generally face payment caps set at 100% of Medicare reimbursement levels, while non-expansion states would be capped at 110% of Medicare rates. Similar limits would apply to certain targeted Medicaid fee-for-service payments.
The proposal also seeks to establish national transparency and reporting standards intended to increase federal oversight of Medicaid financing arrangements.
CMS stated the rule would implement provisions tied to the Working Families Tax Cut legislation and a June 2025 presidential memorandum directing agencies to reduce “waste, fraud, and abuse” in Medicaid.
The agency indicated the restrictions would be phased in over a transition period intended to give states and healthcare providers time to adjust financing and reimbursement structures.
CMS is accepting public comment on the proposed rule through the Federal Register process. The proposal is available at Federal Register docket 2026-10292.
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