The End of ACR-Based Payments in Medicaid: How CMS Plans to Limit What States Can Pay Medicaid Providers

For over forty years, since Medicaid rates were delinked from Medicare, States have had substantial flexibility in designing their Medicaid payment systems. Today, CMS published in the Federal Register a proposed rule titled Medicaid Program; Medicaid Managed Care State Directed Payments and Medicaid Fee-For-Service Targeted Medicaid Practitioner Payments.¹ If finalized as proposed, the rule would, in the name of fiscal integrity, dramatically reduce that flexibility and cause significant reductions in payments to providers.

In part, these reductions are the result of restrictions on Medicaid managed care State Directed Payments (SDPs) required by the One Big Beautiful Bill Act (“OBBBA” or what CMS calls the “Working Families Tax Cut” or “WFTC”), but CMS goes significantly beyond the law’s requirements by proposing (1) expanded and harsher limits on SDPs and (2) new limits on fee-for-service (FFS) targeted payments that were not mentioned in the OBBBA.

The proposed rule comes three months after a February 2, 2026, Dear Colleague Letter (the “February 2026 Guidance”) outlining “preliminary” guidance on Section 71116 of the WFTC. The February 2026 Guidance was intended to “aid state planning efforts until a final rule is promulgated.” The proposed rule now supersedes that interim guidance (and similar prior guidance from September 2026). As explained below, there are several differences between the February 2026 Guidance and the proposed rule.

Rapid Growth of SDPs

State Directed Payments, first established by CMS in 2016, have become a dominant feature of Medicaid managed care provider reimbursement. In the proposed rule, CMS estimates that SDP spending reached approximately $143.8 billion in FFY 2025, representing 26 percent of all Medicaid managed care payments.² The number of SDP preprint submissions has grown from just four submissions across two States in 2016 to 366 submissions across 41 States in 2024.³

Proposed Changes to Managed Care SDPs (42 C.F.R. § 438.6)

Section 71116 of the OBBBA established a new Medicare-based payment limit that applies to SDPs submitted on or after July 4, 2025, for inpatient hospital services, outpatient hospital services, nursing facility services, and qualified practitioner services at academic medical centers that require CMS written approval. CMS proposes not only to implement the OBBBA requirements but also to extend the same Medicare-based payment limit to all other services, in all States (including territories), and for all new SDPs, including those that do not require prior written approval, beginning with rating periods on or after January 1, 2029. CMS bases this extension on its authority under its general program administration authority and its authority to approve managed care contracts.⁴   

Consistent with Section 71116 and the February 2026 Guidance, the proposed rule replaces the current Average Commercial Rate (ACR) payment limit with a Medicare-based limit defined as 100 percent of the total published Medicare payment rate for Expansion States, 110 percent for Non-Expansion States, or 100 percent of the State plan approved rate where no Medicare rate exists. This limit is constructed on a per-service or per-discharge basis, not as an aggregate upper payment limit, and is codified at 42 C.F.R. §438.6(c)(2)(iii)(C), with a proposed time-limited monitoring period once every three years. However, like the ACR limit, this limit appears to be applied on a class basis based on the class subject to a directed payment.

Section 71116 allowed most preprints that had been submitted before July 4, 2025, to be grandfathered until the first rating period on or after January 1, 2028, at which point the law directs the agency to reduce the value of the SDPs by 10 percentage points until they meet the Medicare-based payment limit. The February 2026 Guidance established the basic framework and timeline for so-called “grandfathered” SDPs, and the proposed rule aims to finalize each of these policies at 42 C.F.R. §438.6(a). The proposed rule further explains the phase-down mechanics that the February 2026 Guidance had not explained, such as how the 10 percentage-point reduction would work. The proposed rule would apply the 10 percentage-point annual reduction (for rating periods that start on or after January 1, 2028) to the grandfathered SDP’s total dollar amount, and reductions would continue annually until the SDP’s total payment rate equals the Medicare-based payment limit for the items and services covered by the SDP.

The proposed rule also addresses several additional policy areas not addressed by the February 2026 Guidance:

• Elimination of uniform increase SDPs. Beginning with rating periods on or after January 1, 2028, CMS proposes to eliminate uniform increase SDPs, requiring States to restructure these arrangements as minimum and/or maximum fee schedules that do not exceed the payment limit. The fee schedules would be required to comply with the total Medicare published rate limit on a per service basis. Grandfathered SDPs would be excepted from this requirement during the phase-down period.

• Heightened scrutiny of “grey area payments.” The proposed rule provides examples of what would be considered “unallowable practices” and, when an SDP is involved, “not consistent with the intent of SDPs to improve access to or quality of care for Medicaid beneficiaries,” including use of managed care incentive arrangements and withhold arrangements, rate setting practices using actuarial developed capitation rates, and directing managed care plans to pay a portion of SDP expenditures to specific entities, such as private consultants, provider associations, or the managed care plan itself, for activities unrelated to the utilization and delivery of services, whether imposed through plan contract provisions or SDP eligibility criteria.

• Proposed revisions for when SDPs require written prior approval. Beginning with rating periods on or after January 1, 2028, CMS proposes to require States to submit certain preprints to use for SDPs and will no longer require written prior approval for permissible minimum fee schedule or maximum fee schedule preprints.

• A solicitation of comments on how to define “provider class” to address single-provider SDPs. Since the 2024 final rule, CMS has seen States design SDPs with narrowly defined provider classes, sometimes as a single provider, and has become concerned that these arrangements may increase Medicaid expenditures. CMS is soliciting comments on whether and how to define “provider class” to inform future rulemaking. This development could have significant implications for safety-net hospitals and academic medical centers that have relied on these payment structures.

Proposed Changes to FFS Targeted Medicaid Payments (42 C.F.R. § 447.381)

Under current regulations, States have flexibility to target Medicaid non-DSH supplemental payments to practitioners and other provider types not covered by the regulatory upper payment limits up to the ACR. Under the proposed rule, for targeted payments in service categories not covered by an existing statutory or regulatory provision, Medicaid FFS payments would not be permitted to exceed 100 percent of the total published Medicare rates for Expansion States or 110 percent for Non-Expansion States, with some exceptions. This limit would apply on a per-service basis, meaning that payments for individual services paid to individual providers would not be permitted to be above the Medicare published rate for that service. According to CMS, this change will ensure rates are “economic and efficient” and that States “maintain a level of payment sufficient to enlist providers to furnish the relevant services to beneficiaries at high quality as required under section 1902(a)(30)(A) of the Act.”

States with approved State plan payments that exceed the limit must submit a State Plan Amendment with an effective date no later than the start of the first State fiscal year beginning on or after January 1, 2029. For States that fail to comply, future grant awards may be reduced by the amount of FFP attributable to payments exceeding the limit.

Fiscal Impact of the Proposed Rule

The Congressional Budget Office (CBO) estimated that Section 71116 will decrease federal Medicaid spending by $149.4 billion over the 2025 through 2034 time period.⁵ CBO’s estimate for Section 71116 gives important context to the extent by which CMS proposes to exceed the statutorily required changes to SDPs. Specifically, CMS projects the proposed rule would reduce total Medicaid spending by $774.8 billion from 2026 through 2035, with Federal savings of $510.1 billion and State savings of $264.4 billion.⁶ These estimates carry significant uncertainty—a low scenario projects $408.4 billion in total reductions, while a high scenario projects $989.7 billion. For FFS targeted payments specifically, CMS projects $2.44 billion in total spending reductions from 2029 through 2035.⁷ CMS’s projected fiscal impact of its implementation of Section 71116 will reduce federal Medicaid spending by $360.7 billion more than CBO’s original estimate.

Open Questions and Implications

As noted above, for decades States have had substantial flexibility in designing their Medicaid payment systems. The proposed rule would constitute a dramatic reduction in that flexibility, at times prescribing maximum amounts for physician services at the service level and re-tying payments to the Medicare program. The shift from limits based on ACR to Medicare-based limits represents a substantial reduction in payment flexibility for States and, if finalized as proposed, will cause dramatic reductions in payments to providers.

The rule applies the payment limit to all Value Based Payment SDPs in managed care, which could complicate States’ ability to structure performance-based and population-based payment models. CMS seeks comment on how to operationalize alternative value-based arrangements.

For providers paid under Medicare cost-based methodologies, CMS acknowledges complexity in applying a per-service limit prospectively, and proposes to use the most recent and complete Medicare cost report.

Next Steps

This proposed rule is one of several expected Medicaid proposed rules implementing OBBBA provisions. CMS notes potential interactions with other sections of the OBBBA, including Sections 71115 (provider taxes) and 71117 (waiver of uniform tax requirement, for which a final rule was issued earlier this year⁸) and expects to address those interactions in future rulemaking. Interested parties should note the 60-day comment window, which ends on July 21, 2026. 

We will continue to monitor developments and provide updates as additional proposed rules are released.

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1. 91 Fed. Reg. 30400 (May 22, 2026). ↩︎
2. 91 Fed. Reg. at 30447 ↩︎
3. 91 Fed. Reg. at 30404. ↩︎
4. Sections 1903(m)(2)(A)(iii) and 1902(a)(4) of the Social Security Act (“the Act”). ↩︎
5. CBO, Supplemental Cost Estimate, Public Law 119-21, Page 5 (Oct. 28, 2025), https://www.cbo.gov/system/files/2025-10/PL-119-21-Medicaid%20_0.pdf. ↩︎
6. 91 Fed. Reg. at 30451. ↩︎
7. 91 Fed. Reg. at 30453-54, 30456. ↩︎
8. 91 Fed. Reg. 4794 (Feb. 2, 2026). See Dentons on Call: The $78 Billion Question: What CMS’s Medicaid Health Care-Related Tax Rule Means for States, Feb. 2, 2026. ↩︎