The Centers for Medicare & Medicaid Services (CMS) proposed changes to state directed payments mark a significant inflection point for Medicaid financing. For states, plans, and providers, the coming months will be critical in understanding the rule’s final shape—and how they can position themselves for a more constrained and standardized payment environment.

Federal Medicaid policy is entering a period of rapid change. Policymakers are advancing a series of interconnected proposals—including Medicaid community engagement (work) requirements, program integrity initiatives, and new scrutiny of financing mechanisms that shape how dollars flow through the program. 

Among the most significant developments: the CMS’s proposed changes to Medicaid state directed payments (SDPs). As outlined in HMA’s recent Issue Brief, the proposal signals a meaningful shift in how federal policymakers approach provider reimbursement, managed care financing, and oversight of supplemental payment arrangements. 

Health Management Associates (HMA) will further examine these developments in future articles, briefs, and its Medicaid summer webinar series, which will focus on SDPs, work requirements, and program integrity—three policy areas now moving in parallel and reshaping the Medicaid landscape. This article provides an executive overview of the SDP rule. 

What are Medicaid State Directed Payments? 

State directed payments (SDPs) are a key Medicaid financing tool that allows states to direct how managed care organizations reimburse providers. 

States use SDPs to: 

• Increase provider payment levels 
• Target specific provider types or services 
• Support delivery system reforms 

Over time, SDPs have become a central component of Medicaid managed care financing. As the HMA issue brief emphasizes, their growing scale and complexity have drawn increased federal scrutiny. 

What Does CMS Propose to Change? 

The CMS proposed rule implements the statutory changes approved in the 2025 budget reconciliation act (P.L. 119-21, which CMS refers to as the Working Families Tax Cut Act, or WFTCA). The rule introduces a new framework for how SDPs are structured, regulated, and reviewed. Based on HMA’s analysis, the proposal advances several core policy shifts: 

1. Expanded Federal Limits on Payment Levels. CMS proposes new constraints on how much states can direct plans to pay providers, extending payment limits across a broader range of services and delivery systems. Specifically, CMS proposes to lower the payment ceiling for all SDPs to either 100 percent of Medicare for states administering Affordable Care Act (ACA) expansion programs or 110 percent of Medicare for states without an ACA expansion program. CMS plans to grandfather certain SDPs at levels above Medicare and provide a transition period with an annual 10 percent reduction until the payments are reduced to Medicare levels. In addition, this rule proposes limiting SDPs to the total published Medicare payment rate at the service level—a departure even from Medicaid fee-for-service (FFS) upper payment limits, which are limited to a reasonable estimate of what Medicare would pay but are calculated at the aggregate level by ownership class. 
2. Extends Limits Across Programs and Delivery Systems. The proposal seeks to align the limitations on practitioner payments under fee-for-service with the new limitations on SDPs. If a state makes payments to a subset of targeted practitioners, the new proposed limit would be actual Medicare payment rates applicable to the practitioner or provider for the same time period as the Medicaid state plan rate year. The crosswalk of Medicaid payment rates to Medicare will likely be administratively burdensome—especially for states that set Medicaid rates using an entirely different methodology than Medicare’s. Applying the Medicare payment limit at the service level will limit states’ ability to incentivize certain service types that may need enhanced reimbursement amounts to preserve access to care (e.g., primary care, neonatal, etc.). 
3. Broader Applicability Across Providers. The changes extend beyond a narrow set of provider types, affecting a wider range of stakeholders participating in Medicaid financing and delivery. For example, the WFTCA called for the reduced payment ceiling to be applied to the specified four classes of providers. This rule proposes that all providers be limited to the same ceiling and that the revised limits also apply to US territories. 

Why Is CMS Focusing on State Directed Payments Now? 

As highlighted in the HMA Issue Brief, federal policymakers are increasingly focused on the growth and complexity of SDPs as well as the role of SDPs in broader Medicaid financing strategies. In addition, CMS policy officials are prioritizing program integrity and fraud, waste, and abuse and have couched the current SDP policies as inefficient use of taxpayer dollars. 

These priorities align with a broader shift toward tighter federal oversight of Medicaid funding mechanisms. 

What Are the Implications for States, Plans, and Providers? 

The proposed changes have wide-ranging implications across the Medicaid ecosystem. 

States: SDPs have been a flexible tool for shaping payment policy and directing resources. New federal parameters may limit that flexibility and require states to reassess existing financing strategies. 

Health Plans: Plans may face a more standardized and regulated environment for implementing SDP arrangements, with less variation driven by state policy choices. 

Providers: Many providers rely on SDPs to supplement base Medicaid payment rates. Changes to these payments could affect reimbursement levels and financial stability, particularly for organizations serving large Medicaid populations. 

As the HMA brief underscores, the impact will vary significantly by state, depending on how SDPs are currently structured. 

How This Fits into Broader Medicaid Policy Changes 

CMS is advancing a broader recalibration of how SDPs fit within Medicaid policy. However, the SDP proposal is also part of a larger set of federal Medicaid policy developments, including: 

• Medicaid community engagement (work) requirements and other changes to eligibility and redetermination rules included in a June 1, 2026, interim final rule 
• Program integrity and oversight initiatives 
• Changes to financing structures and supplemental payments 

Taken together, these policies signal a transition toward greater federal standardization and increased oversight of funding flows. 

What Should Stakeholders Watch Next? 

CMS’s proposed changes to Medicaid state directed payments mark a turning point in Medicaid financing policy. 

Stakeholders should expect continued movement toward greater oversight, tighter payment parameters, and increased consistency across the program. They should begin planning now for a more constrained and standardized payment environment. Key questions center on: 

• How CMS will implement and phase in payment limits across states 
• The extent to which existing arrangements will be grandfathered in or phased down 
• How states respond in redesigning Medicaid payment strategies 

The proposed SDP rule is open for public comment through July 21, 2026, with final policy decisions expected following federal review. As pending issues are resolved, stakeholders across the Medicaid landscape will need to reassess financial models, policy approaches, and operational strategies. 

Stakeholders should begin evaluating potential impacts now, as the policy direction is clear, even if final details are still evolving. 

Staying Ahead of Medicaid Financing Changes 

Given the pace and breadth of these developments, staying informed is critical. HMA’s upcoming Medicaid summer webinar series will provide timely analysis of the SDP proposal alongside related policy changes, including community engagement and work requirements and program integrity initiatives. These sessions are designed to help states, plans, and providers understand policy changes and prepare for operational and financial implications, identify compliance gaps, and address sustainability issues. Register for one or multiple webinars here.  

To understand how these Medicaid policy changes affect your organization, contact one of HMA’s Medicaid experts. 

This article was adapted based on a blog written by Laura Pence and Sara Singleton on behalf of NASDOH, an alliance managed by Leavitt Partners. NASDOH is a multi-sector coalition of stakeholders seeking to make a material improvement in the health of individuals and communities by advancing the adoption of effective policies and programs to address upstream drivers of health, such as food insecurity, housing instability, interpersonal safety, and transportation insecurity. You can find the full blog post here and learn more about the alliance at www.nasdoh.org. 

Medicaid programs are the primary provider of healthcare benefits to tens of millions of Americans with limited incomes and resources, many of whom may experience food and nutrition insecurity and other health-related social needs (HRSNs), which have a significant impact on healthcare spending and health outcomes. Although more could be done, there has been bipartisan recognition in recent years that improving health outcomes and lowering healthcare costs—including in the Medicaid population—requires addressing the underlying causes of poor health outcomes.  

As a result of ongoing federal and state efforts as well as private sector innovations, a growing body of evidence shows that interventions addressing nutrition, housing, and other social drivers measurably improve health outcomes and reduce costly healthcare utilization.

Medicaid Policy Context: Authorities Supporting Health-Related Social Needs 

In 2021, the first Trump Administration released a letter to state health officials outlining the key authorities and consolidating state guidance around how these authorities may be used to address social needs, including:

• in lieu of services (ILOS);   
• Medicaid managed care rule provisions that encourage or require Medicaid managed care organizations (MCOs) to address social needs;   
• Section 1915 Home- and Community-Based Services (HCBS) waivers, which may be used to address non-medical needs of individuals to facilitate their opportunity to live and work in the community if they would otherwise need institutional care;   
• 1915(i) state plan amendments that can be used to provide HCBS to people who meet state-defined needs-based criteria that are less stringent than institutional criteria; and   
• Section 1115 Demonstration waivers, which provide states flexibility to address or incorporate social needs interventions into their Medicaid programs.  

The Biden Administration expanded on this by issuing guidance on how states could use 1115 demonstrations – commonly called 1115 waivers – to address HRSNs in Medicaid. More than 20 states have ongoing 1115 waivers that include efforts to address HRSNs such as housing, nutrition, and employment supports. Although the 1115 waiver guidance issued during the Biden Administration have now been rescinded, 1 several underutilized opportunities to address HRSNs still exist within the Medicaid program.

Key Medicaid Opportunities to Address Health-Related Social Needs 

Although 1115 waivers have become a prominent mechanism among states to advance efforts to screen for and address HRSNs, states and other stakeholders should consider previously underutilized authorities, including in lieu of services (ILOS), state plan amendments, and managed care contracts.  

KFF’s Survey of Medicaid officials indicate that states are already using these tools to: 

• Screen enrollees for behavioral health and social needs 
• Provide referrals to social services 
• Partner with community-based organizations 
• Require providers to capture SDOH 

States are also increasingly using ILOS to address specific needs such as nutrition, while continuing to rely on state plan amendments to expand coverage pathways for preventive services, case management, rehabilitative services, and HCBS. 

As states negotiate with CMS over expiring 1115 waivers, it will be critical to consider how these alternative authorities can support continuation of interventions with demonstrated impact, including:  

• The CMS Accountable Health Communities (AHC) model found that connecting Medicaid beneficiaries with unmet social needs to community resources led to a 3 percent reduction in hospitalizations, a 3 percent reduction in avoidable emergency department visits, and overall cost savings of more than $200 million.  
•  Research on medically tailored meals, which several states cover through Medicaid authorities including ILOS, estimates that these interventions can avert millions of hospitalizations nationally and generate net healthcare savings, while improving management of chronic conditions such as diabetes and heart disease.  
• States can consider proposing new HRSN interventions within 1115 waivers. Section 1115 waivers are intended to support “experimental, pilot, or demonstration project[s],” creating an opportunity for proposing innovative interventions rather than carrying out programs that have already developed an evidence base. For interventions that already have an evidence base, funding them through the other mechanisms described will ensure continued authority to provide them.  

Medicaid Innovation and Value-Based Models Continue to Support HRSN Strategies 

Beyond the Medicaid-specific authorities and flexibility, the CMS Innovation Center continues to advance models that integrate HRSNs into value-based care that improves health outcomes. Building on efforts such as the AHC Model and the Medicare Advantage Value-Based Insurance Design (VBID) model, the Innovation Center has developed numerous frameworks that address HRSNs and SDOH. Upcoming models – including MAHA ELEVATE, LEAD, and ASPIRE – provide opportunities to address HRSNs.  

The Innovation Center continues to provide opportunities for research and evidence gathering on screening for and addressing HRSNs as a part of value-based care. Participation in voluntary models that involve screening for and addressing HRSNs provides an opportunity for stakeholders to receive reimbursement for these activities while generating data and resources to support other entities. States, providers, and community-based organizations can participate in Innovation Center models to advance efforts that address SDOH.  

Rural Health Transformation Fund  

The Rural Health Transformation Fund also encourages states and stakeholders to address SDOH. The application instructions from CMS require states to describe SDOH in rural communities, including income levels, employment sectors, unemployment rates, education attainment, and availability of public transportation.  

In response, many states included proposals for addressing HRSNs in rural communities. For example, Alaska’s application recognized a need for “nutrition programs addressing food insecurity and teaching healthy eating habits” and proposed to use funding to support community wellness centers to create dedicated spaces for physical activity and nutrition education. Further, Georgia proposed increasing access to nutrition services for children with autism spectrum disorder and dietitian/nutritionist support for women aged 19–44 who meet certain clinical requirements.  

The Rural Health Transformation Fund (RHTF) allows states to pilot innovative interventions and address HRSNs that could later be included in the state’s Medicaid program.   

Why Addressing Health-Related Social Needs Matters for Medicaid Outcomes 

Opportunities to address HRSN and SDOH in Medicaid, CMMI demonstrations, and the Rural Health Transformation Fund remain significant, even as federal policy evolves. States and stakeholders have a variety of authorities and programs they can consider to address SDOH. In addition, CMS should develop more guidance on activities that align with the agency’s goals, as well as examples for states to adopt. Appropriately addressing individual social drivers of health will require collaborative and innovative approaches across the private and public sectors.  

You can read the original blog post in full and learn more about the alliance at www.nasdoh.org.