HMA Weekly Roundup

CMS Clarifies Grandfathering Rules for State Directed Payments

The Centers for Medicare & Medicaid Services (CMS) last month issued a letter to states providing preliminary guidance on Medicaid State Directed Payments (SDPs), which outlines new federal payment limits, clarifies grandfathering provisions, and signals significant changes ahead for Medicaid financing and policy. The letter is part of CMS’s implementation of Section 71116 of the Budget Reconciliation Act of 2025 (OBBBA, P.L. 119-21)—the portion of the legislation that focuses on curbing SDP spending and reinforcing program integrity.

Though CMS describes the guidance as preliminary, it is the view of Health Management Associates (HMA) experts—including former state officials, actuaries, and policy strategists—that it signals directionally new policy for Medicaid agencies, managed care organizations (MCOs), and providers. CMS is working on two proposed SDP-related regulations, which are in the final stages of federal review. The preliminary guidance and forthcoming rules will likely reflect long-standing concerns for several years, even over shifting congressional control and multiple presidential administrations.

This article addresses key clarifications in the letter; the impact of the preliminary guidance on states, MCOs, and providers; and how the directive may influence Medicaid budgets, financing strategies, and future policy reforms.

Guidance Clarifies Timeframes for SDPs

Grandfathering Limited to Specific Rating Periods

CMS will allow states to maintain SDP spending amounts, up to the average commercial rate ceiling, that were in place for state fiscal year (SFY) 2025, calendar year (CY) 2025, and SFY 2026 rating periods. Nonetheless, new or expanded SDPs above Medicare equivalent levels in expansion states and 110 percent of Medicare in non-expansion states—even those based on legislation passed in 2025—are ineligible for grandfathering if they apply to rating periods starting after July 4, 2025. These grandfathered spending amounts will need to phase down with rating periods beginning on or after January 1, 2028.

Preliminary Grandfathering Determinations

CMS has begun notifying states whether a preprint is “likely eligible” for grandfathering. Because these are preliminary determinations, states should prepare for further review and revisions.

Submission Cutoff Date Clarified

In response to confusion around the May 1, 2025, submission deadline, CMS clarified that July 4, 2025, is the cutoff for grandfathering eligibility, provided the state fully completed the preprint. States may have rushed to meet a July 4 submission deadline and may have left questions on the preprint unanswered. In these instances, it is possible—if not likely—that CMS will consider the application incomplete and thus ineligible for grandfathering. Since this is a developing area with limited precedent, states may still seek clarification or reconsideration, though CMS has not yet issued definitive guidance or a formal process for resolving these situations.

No Increases Allowed Until 2028

States are prohibited from increasing the total dollar amount of grandfathered SDPs—the “expected spend”—until January 1, 2028. This restriction limits flexibility for states to expand their programs and may require that they reassess their SDP strategies. For example, using percentage-based calculations tied to average commercial rates, will no longer capture year-to-year growth because of utilization or acuity changes.

10 Percent Phasedown Unaddressed

CMS has yet to provide official guidance on the 10 percent phasedown of SDPs. Stakeholders remain in a holding pattern, awaiting a forthcoming proposed rule that will clarify how reductions will be calculated.

What It Means for States and Healthcare Organizations

SDPs have become a critical tool for states to stabilize provider networks through increased Medicaid reimbursement. This authority will be significantly limited, and states will need to reduce many existing programs. Medicaid enrollment losses resulting from other Medicaid policy changes, such as work requirements and minimum semiannual redetermination, will likely compound the strain on provider payments.

Providers and states need to start planning for these losses in revenue now. Strategic planning for SDP sustainability and close monitoring of upcoming CMS rulemaking is essential.

While the guidance imposes constraints, it also opens the door for policy innovation. For example, some states may use this moment to reform Medicaid financing, streamline supplemental payments, and reconfigure provider incentives to better reflect quality and access, advancing value-based care goals and achieving total cost of care savings through efficiency and aligned incentives.

Connect with Us

HMA is uniquely positioned to support states, MCOs, and providers as they navigate the evolving landscape of Medicaid SDPs. Our team includes former state Medicaid directors, actuaries, and policy strategists with deep expertise in designing sustainable financing arrangements and guiding public engagement processes. We bring robust modeling capabilities to clients seeking to assess the financial impact of CMS’s new restrictions, including the 10 percent phasedown and interactions with provider tax limitations. Our experts are actively engaged with CMS and understand how to translate federal guidance into actionable strategies that align with state goals and operational realities.

Whether revising preprint submissions, evaluating quality frameworks, or rethinking provider incentives, HMA delivers the technical and policy insight needed to move forward with confidence.

For questions about the federal guidance and considerations for your organization, contact Greg Uszak.

From Uncertainty to Strategy: Leading Through Healthcare Change

The Health Management Associates (HMA) National Conference is just days away—taking place October 14‒16, 2025, in New Orleans. With major changes underway across Medicare, Medicaid, and the Affordable Care Act Marketplace programs, this year’s event offers a timely and essential space to understand evolving issues and their potential impact on healthcare organizations.

This will be HMA’s 8^th National Conference, and it arrives as the healthcare landscape is undergoing rapid transformation. Healthcare organizations across government, health plans, provider systems, philanthropy, and community-based organizations are grappling with new funding realities, policy directions, and operational challenges. The conference is designed to help attendees anticipate, adapt, and lead through this transformative time.

What’s Inside the Program

Keynote & Plenaries

• Former Arkansas Gov. Asa Hutchinson will deliver the keynote address, The Policy and Politics of Making America Healthy, offering a candid perspective on health improvement strategies in polarized times.
• Plenary sessions will explore publicly financed health coverage, payment reforms, behavioral health innovation, and population health strategies.

Expert-Led Workshops

• Throughout the day attendees will dive into hot topics like Medicare Advantage risk adjustment and STAR ratings, the Rural Health Transformation Program, digital health acceleration, Medicaid work requirements, and community strategies to build systems that work for underserved communities.
• Confirmed speakers include Stuart Archer, Chief Executive Officer, Oceans Healthcare; Liz Fowler, Senior Adviser, HMA, and former Deputy Administrator and Director of the Center for Medicare and Medicaid Innovation, Centers for Medicare & Medicaid Services; Jeremy Klemanski, MBA, President and Chief Executive Officer, Gateway Foundation; Mary C. Mayhew, President and Chief Executive Officer, Florida Hospital Association; Lynnette Rhodes, Chief Health Policy Officer, Georgia Department of Community Health; and Matt Yancey, Deputy Commissioner, Tennessee Department of Mental Health.

Coffee Conversations & Collaborations

• We will break down these issues even further during intimate, expert-facilitated roundtables offering candid problem-solving and practical takeaways.

Why HMA? Why Now?

To say we’re navigating a moment of profound change in healthcare isn’t an understatement. The HMA National Conference content and networking meets the moment with nearly 300 attendees from almost 200 organizations. Online registration is open through October 10, 2025.

Please contact Andrea Maresca with questions about grabbing one of the remaining spots.

ACO Foundations: Four Pillars for Successful Risk Management In Value-Based Contracts

Wakely, an HMA Company, has released a new white paper ACO Foundations: Four Pillars for Successful Risk Management In Value-Based Contracts. The white paper outlines four foundational pillars for successful risk management in value-based contracts that ACOs must address to achieve sustainable performance: Underwriting and Contracting, Risk Adjustment, Medical Economic Reporting, and In-Year Forecasting. Wakely supports a range of providers who take risk in Medicare Advantage (MA) and other government and commercial insurance programs. Learn More