CMS clarifies budget reconciliation bill state-directed payments ahead of rulemaking

In what appears to be the first limitation applying to Medicaid state directed payments (SDPs), now widely used by states to help fund their Medicaid programs, the Centers for Medicare and Medicaid Services (CMS) issued guidance on September 9, 2025, preliminarily implementing Section 71116 of the budget reconciliation bill, known as the ‘One Big Beautiful Bill Act’ (OBBBA).

The CMS guidance clarifies which rating periods and SDP preprints will be considered grandfathered under the law. It also defines the terms “completed preprint” and “good faith effort” as they relate to the criteria for grandfathered preprints and begins to initiate limits to SDPs arguably beyond the expectations of the healthcare industry.

Background

Section 71116 of the OBBBA requires CMS to amend 42 CFR 438.6(c)(2)(iii), which governs SDPs, to lower the total payment rate limit for inpatient hospital services, outpatient hospital services, nursing facility services and qualified practitioner services. This provision was highly negotiated with industry stakeholders as most states heavily rely on SDPs to help fund their Medicaid programs. The change shifts payment away from ensuring providers can receive their Average Commercial Rate, instead limiting reimbursements to no more than 100 percent of the specified total Medicare payment rate for Medicaid expansion states, and to no more than 110 percent of the specified total published Medicare rate for non-expansion states.

Grandfathering criteria

Certain SDPs may be grandfathered if they meet the criteria laid out in the statute. CMS clarifies that the grandfathering period applies to SDPs in rating periods occurring 180 days before or after the effective date of Section 71116 of the OBBBA. Specifically, SDPs in rating periods that include any days from January 5, 2025, to July 3, 2025 or July 5, 2025, to December 31, 2025, would be grandfathered. CMS further clarifies that SDPs in state fiscal year (SFY) 2025, calendar year (CY) 2025 and SFY 2026 could be eligible for grandfathering, while those in SFY 2024, CY 2024, CY 2026 or SFY 2027 are not.

To determine whether a preprint qualifies for grandfathered status, it must meet one of five statutory criteria. These criteria hinge, in some cases, on whether the state has submitted a “completed preprint” and/or made a “good faith effort” to obtain CMS approval. Each criterion has its own deadline, which may be as early as May 1, 2025, or as late as July 4, 2025. According to the CMS guidance, a completed preprint consists of the preprint form and all required addendum in the relevant Excel workbook, fully completed, with information entered only in the designated fillable sections. The term “good faith effort” is interpreted to mean submission of a completed preprint.

Limits on grandfathered SDPs

While the phase-down for grandfathered SDPs applies to rating periods beginning on or after January 1, 2028, CMS has clarified in its guidance that the total dollar amount of a grandfathered SDP cannot increase before then. States may not raise this amount through any changes or revisions to the grandfathered SDP, including preprint revisions.

This provision may raise concerns among states, as it could limit the effectiveness of grandfathered SDPs by establishing an earlier cost cap than the states may have anticipated.

CMS notes that its website lists preprints that are grandfathered and meet the requirements. States that satisfy the grandfathering criteria will assess how the new interpretation of limiting costs to total costs impacts the effectiveness of their SDPs.

Recommendations for providers

Providers are encouraged to collaborate closely with their states on SDP preprints and to communicate proactively concerning any anticipated adverse impact this interpretation may have on the delivery of Medicaid services. In addition, providers should watch for the upcoming proposed regulation, which CMS has indicated is in the early stages of development.