CMS Proposes New Rules to Cap Medicaid Payments

WASHINGTON—The Centers for Medicare & Medicaid Services (CMS) has proposed tighter on state Medicaid payment practices that the organizations said 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 specific caps and align Medicaid payments with Medicare standards. CMS said if finalized, the proposed rule would generate an estimated $775 billion in total savings over 10 years, including $510 billion in federal savings. 

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 healthcare 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 nonfederal share, both of which are used as the state’s portion of Medicaid payments made back to those same providers. CMS said 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.

In a June 2024 report, the Medicaid and CHIP Payment and Access Commission (MACPAC) found that while overall, 70% of nonfederal share for managed care payments come from state funds, “more than half of [state] directed payments are financed by [intergovernmental transfers] or provider taxes.” 

“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 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.”

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 nonexpansion states (or 100% of the Medicaid state plan rate if a comparable Medicare rate is not available), consistent with section 71116 of the working families tax cut and historical Medicaid FFS payment levels.
• Apply similar limits to certain targeted Medicaid fee-for-service payments.
• Establish consistent national standards to improve transparency and accountability.
   

CMS said it is seeking public comment on the proposed rule, including feedback on implementation. To view the proposed rule on the Federal Register, click here.

To view the fact sheet, click here.