News Alert: CMS Proposes Sweeping Limits on Medicaid State Directed Payments and Fee-for-Service Targeted Payments

On Wednesday afternoon, CMS released the first of a number of expected Medicaid proposed rules that will implement provisions from the One Big Beautiful Bill Act (“OBBBA”) (P.L. 119-21). The Wednesday release, which will be formally published in the Federal Register on Friday, relates to limits on Medicaid Managed Care State Directed Payments (SDPs) included in the OBBBA (CMS references the law as the “Working Families Tax Cut” or “WFTC”), and proposes additional limits on Medicaid Fee-for-Service Payments (which were not included in the OBBBA). Below are the key takeaways from our preliminary analysis of the proposed rule:

• CMS proposes to extend Medicare-based payment limits far beyond legislative requirements. While Section 71116 of the OBBBA mandates provider reimbursement limits for four specified service categories — inpatient hospital services, outpatient hospital services, nursing facility services, and qualified practitioner services at academic medical centers — as of January 1, 2028, the proposed rule not only implements those limits, it goes beyond the law’s requirements by proposing to apply those Medicare-based limits to all services in all states (including territories) for all new SDPs beginning January 1, 2029, a sweeping expansion of scope. CMS would also apply similar limits to fee-for-service (FFS) payments as of January 1, 2029, as described below. 

• Grandfathering protections are specified and are generally more restrictive than legislative requirements. The rule describes the 10 percentage point annual mandatory reduction beginning January 1, 2028, as applying to the total payment amount, regardless of the magnitude by which the grandfathered SDP exceeds the applicable payment limit. This means that some grandfathered SDPs will have a minimal phase down period.

• CMS proposes to eliminate uniform increase SDPs and signals further restrictions on narrow provider classes. The preamble solicits comment on whether or how to define “provider class” at §438.6(a) in ways that could effectively bar single-provider SDPs or SDPs that benefit a very small number of providers. This development could have significant implications for safety-net hospitals and academic medical centers that have relied on these payment structures.

• The rule introduces an entirely new federal cap on FFS targeted practitioner payments that has no basis in the OBBBA. Proposed §447.381 would limit FFS targeted payments to 100% of Medicare in expansion states and 110% in non-expansion states, representing a significant change that will reshape the economics of Medicaid provider reimbursement.

A comprehensive analysis of the proposed rule is in process.