CMS Proposes Major Changes to Medicaid Managed Care State Directed Payments and Medicaid Fee-For-Service Targeted Medicaid Practitioner Payments

States Face New Compliance Requirements, SDP Phase-Downs, and FFS Payment Limits Beginning in 2026–2029

Rule Overview

Published May 22, 2026

On May 20, 2026, the Centers for Medicare & Medicaid Services (CMS) released proposed rule CMS-2449-P (91 Fed. Reg. 30400) implementing Section 71116 of Public Law 119-21 — the legislation referred to internally by CMS as the “Working Families Tax Cut” (WFTC) Act, which is the same statute commonly referred to in industry as the “One Big Beautiful Bill Act” (OBBBA). The rule revises 42 CFR Part 438 governing Medicaid managed care state directed payments (SDPs) and adds a new 42 CFR § 447.381 that establishes a new payment limit on fee-for-service (FFS) targeted practitioner/provider payments). Comments are due July 21, 2026 (docket CMS-2026-1916 at regulations.gov). The following are key highlights of the proposed rule:

New Medicare-Based Payment Limit

The proposed rule replaces the existing average commercial rate (ACR) cap for SDPs subject to written prior approval with a new Medicare-based payment limit. The limit applies per service and per provider, not on a per-class basis as is currently allowed for SDPs, and not in the aggregate as Medicaid FFS upper payment limit (UPL) demonstrations historically have. Important features of the new limit include:

First rating period on/after July 4, 2025: The new per-service Medicare-based payment limit applies to non-grandfathered SDPs for the four services in the WFTC (inpatient hospital, outpatient hospital, nursing facility, and qualified practitioner at academic medical centers) in the 50 States and the District of Columbia (D.C.) based on 100 percent of the Medicare published rate for expansion states and 110 percent of the Medicare published rate for non-expansion states.
First rating period on/after January 1, 2029: Limits all SDPs (not just the four services) to the 100/110 percent of the Medicare published rate for all states, D.C., and the territories.
Defines applicability of the Medicare published rate as the provider and service specific rate published by Medicare, with some exceptions. The limits may not be applied in aggregate for the class. The Medicare rate would be inclusive of all rate reimbursement components. The limit is also applicable to value-based payments. This removes the allowability of a uniform add-on for SDPs, and limits options to a minimum or maximum fee schedule for rating periods after January 1, 2028 (with exception for grandfathered SDPs). The minimum or maximum fee schedule would now be limited to the published Medicare rates, no longer allowing the use of the state plan rates.
SDPs can use 100 percent of state plan rates (defined as base rates, not inclusive of supplementals) if no Medicare rate exists. Services for which Medicare reimburses based on cost (critical access hospitals, for example), states can use cost reports and Medicare cost allocation methodologies for Medicare cost-based payment rates for SDPs.

Grandfathered SDPs

WFTC Section 71116(b) provides a temporary grandfathering pathway for previously approved SDPs that exceed the new Medicare-based payment limit. Notable aspects of CMS’ proposed regulatory framework are:

Defines grandfathering eligibility as limited to SDPs for the four services that: (1) require written prior approval; (2) had a completed preprint submitted to CMS prior to July 4, 2025, with an eligible rating period AND a documented total dollar amount in Item 4 of the preprint; and (3) exceed the new payment limit.
First rating period on/after January 1, 2028: Phase-down of grandfathered SDPs must be at least 10 percentage points of the grandfathered total dollar amount reduced annually (non-compounding) until the Medicare-based payment limit is reached. Grandfathered limit cannot be increased.
Proposes an allowance for delayed compliance with separate payment terms, the use of uniform payment add-ons, and the prospective pre-print submission requirements for grandfathered directed payments until the grandfathered amount is phased down to comply with the Medicare published rate limit.

Additional SDPs Provisions

The proposed rule contains several other notable SDP provisions, including:

First rating period on/after July 9, 2026: Requires states to submit all SDP preprints prospectively (before the rating period start date) per § 438.6(c)(2)(viii). (With exception for grandfathered SDPs).
Clarifies that SDPs must be based only on the utilization and delivery of services furnished by a provider. States cannot condition provider participation in an SDP on paying any portion of an SDP to an entity other than the furnishing provider, including arrangements where providers pay a portion of SDP receipts to associations, consultants, or entities that collect provider taxes and redistribute SDP funds. CMS describes this as a clarification of “longstanding requirements.”
Clarifies that it is impermissible for a state to require that a portion of the SDP payments be allocated to the managed care plan for administrative activities associated with the SDP, as capitation rates already include a non-benefit component to cover reasonable administrative costs.
Proposes more stringent reporting requirements for SDP eligible providers, description of payment monitoring, and requirement of ACR compliance for grandfathered providers and total payment rate comparisons for phasing down of payments.
- ACR demonstration and total payment rate comparison using ACR for a grandfathered SDP must continue to be reported until the first rating period on or after January 1, 2029.
- For the first rating period on or after January 1, 2027, states must submit a total payment rate comparison certified by an actuary for services included in the grandfathered SDP expressed as a percentage of the total Medicare payment rate.
CMS did not propose a definition for provider classes, but is seeking comments on whether, and how to define provider classes. They are trying to avoid defining classes so narrowly that they are used merely to correlate with the source of the non-federal share.

Medicaid FFS Targeted Practitioner Payments

In this section of the proposed rule, CMS proposes new FFS payment limits at 42 CFR § 447.381. This represents the first federal regulatory ceiling on FFS targeted payments to Medicaid practitioners and certain provider types. Until now, FFS practitioner-level supplemental payments have been governed primarily by sub-regulatory guidance — including State Medicaid Director Letter (SMDL) #13-003 (March 18, 2013), the Qualified Practitioner Services UPL guidance and templates published by CMS — and by the general efficiency-and-economy mandate of section 1902(a)(30)(A) of the Social Security Act. The proposed § 447.381 codifies a federal upper limit at the practitioner or provider level for the first time and effectively eliminates the ACR methodology that has served as the threshold for many Medicaid supplemental payment programs in FFS. Key elements of the proposed requirements include:

For the first state fiscal year that begins on or after January 1, 2029, created section § 447.381 to also limit FFS targeted payments to the 100/110 percent of the Medicare published rate (with exceptions) for participating practitioners/providers not already subject to a standard upper payment limit requirement (e.g. ground emergency medical transportation, non-emergency medical transportation, physicians, dentists, clinics). This is applicable to state plan and waiver payments.
Applies only to targeted Medicaid payments — payments to a subset of practitioners or providers furnishing the service. FFS payments that are uniform statewide, or uniform within a county, parish, borough, or other municipality referenced under a state plan payment methodology, fall outside § 447.381(c) under the scope exclusion at § 447.381(b)(1).
Exceptions include narrow circumstances, where a reasonable Medicare equivalent rate does not exist, and for payments reconciled to actual incurred cost. Both require CMS-requested supporting documentation. (Note: CMS did request comment on an alternative approach to use 200 percent of the total FFS base payments authorized in the state plan if a Medicare equivalent doesn’t exist or payments are reconciled to costs).
Effective Date Example: A state with a July 1 fiscal year start would need to amend its state plan so that the new payment limit is in effect no later than the start of state fiscal year (SFY) 2030 (July 1, 2029) – the first SFY that begins on or after January 1, 2029. The State would use the CY 2029 Medicare PPS rate (effective January 1, 2029) as the 100/110 percent benchmark for SFY 2030, because the SFY 2030 begins during CY 2029.

Effective Date	Action
First rating period on/after July 4, 2025	New Medicare-based payment limit applies to non-grandfathered SDPs for the four services (inpatient, outpatient, nursing facility, and qualified practitioner at academic medical centers) in the 50 States and D.C. The limit is based on 100 or 110 percent (expansion vs non-expansion) of the Medicare published rates at a provider- and service-specific level, and not in aggregate.
First rating period on/after July 9, 2026	States must submit all SDP preprints prospectively (before the rating period start date) per § 438.6(c)(2)(viii), with an exception for grandfathered SDPs.
First rating period on/after January 1, 2027	States must submit a total payment rate comparison certified by an actuary for services included in the grandfathered SDP expressed as a percentage of the total Medicare payment rate, to be submitted annually, per § 438.6(c)(2)(iii)(D).
First rating period on/after January 1, 2028	Phase-down of grandfathered SDPs begins: At least 10 percentage points of the grandfathered total dollar amount must be reduced annually (non-compounding) until the Medicare-based payment limit is reached. Uniform increase SDPs no longer permitted, with an exception for grandfathered SDPs in phase down.
First rating period on/after January 1, 2029 (SDPs) First State fiscal year that begins on/after January 1, 2029 (SPAs)	Medicare-based payment limit extends to ALL SDPs, ALL services, ALL States, D.C., and the territories. FFS targeted payment limit (§ 447.381) (with exceptions) also takes full effect; SPAs effective date no later than the State fiscal year that begins on or after January 1, 2029. Medicare rate benchmark must be the rate effective for the federal fiscal year (FFY) or calendar year (CY), as applicable, that corresponds to the state plan rate year (the first state year that begins during the FFY or CY in which the Medicare payment rate is in effect). This also applies to 1115 and 1915 waivers but it is unclear the date it would be effective for those waivers.

Potential Comments/Questions

Below are some considerations/questions that states may have regarding the proposed rule:

Can CMS clarify how the per-service interpretation is consistent with the WFTC language of utilizing the total payment rate for service? Most existing Medicaid FFS UPLs are aggregate measures; the statute does not unambiguously require per-service application. An aggregate method would be more consistent with existing practices and allow for flexibility to focus on state program goals, such as access to care.
How does the new § 447.381 framework interact with longstanding FFS payment methodologies approved under §1902(a)(30)(A), particularly for payments that fall outside the scope of the new limit? Will CMS continue to approve non-targeted FFS payment methodologies, including base rate increase, uniform statewide supplemental payments, and uniform geographic-region payments under 447.381(b)(1) that use ACR-based methodologies or that result in payment levels above the Medicare-based percentages specified in 447.381(c)(1) and (2)? States request guidance on transition expectations and continued availability of historically approved payment approaches.
What happens to a grandfathered SDP whose underlying provider class changes during the grandfathering period (e.g., a hospital closes, a new academic medical center is built)?
Per-service compliance is operationally complex. How will States ensure that, in real time, no single provider exceeds the Medicare rate on any single service? This effectively requires one of these options: (1) automated claims-system edits in managed care plans, which the state does not own; (2) a robust retrospective data reconciliation regime with state systems; or (3) treating any SDP design that risks exceeding the limit as off the table.
How will per-service compliance with the published Medicare payment rate be addressed for provider types whose Medicaid covered services differ from the covered services under the published Medicare rate? Specific CMS guidance will be necessary to ensure compliance and approvability of SDPs.
What is the documentation expectation for the new § 438.6(c)(8)(ii)(A) NPI list and per-service rate basis? For an SDP covering thousands of providers and hundreds of HCPCS/CPT/MS-DRG codes, this will be a significant administrative undertaking on every preprint submission.
How are value-based payment SDPs (population-based payment, performance-based payment) to be reconciled to a per-service limit? CMS’proposed validation methodology requirement is conceptually clear, but actuaries and state staff will need detailed sub-regulatory guidance on what acceptable validation looks like.
Compliance mechanism for waiver-authorized targeted FFS payments is not addressed. The rule’s compliance trigger and “state plan rate year” concept are built around state plan amendments and annual SFY cycles, but § 1915(c) HCBS waivers operate on five-year renewal cycles and § 1115(a) demonstrations typically have five-year terms.
CMS’ lead idea — defining “provider class” by reference to state plan provider groupings — could constrain legitimate quality-based or delivery-system-reform-based class definitions that states have used. States will want to preserve flexibility while addressing the single-provider class concern.

Myers and Stauffer Can Help

We recommend that states schedule a working session within the next 30 days to:

Inventory all currently approved SDPs and determine grandfathering eligibility (preprint completeness, rating period coverage, completion date, exceedance of new payment limit).
Model the financial impact under each of the two CMS scenarios (low and high) using the State’s actual current SDP and supplemental payment data.
Identify all SDPs that will require redesign by January 1, 2028, and January 1, 2029.
Inventory FFS targeted rate and supplemental payment programs subject to § 447.381 and the SPA and Waiver changes required by the first SFY beginning on/after January 1, 2029.
Identify any third-party redistribution, grey area, or rate-development directive arrangements that may need to be unwound.
Draft and submit comments addressing the specific solicitations CMS made — particularly on phase-down baseline, provider class definition, VBP SDP validation, and continued ACR demonstration duration.

Need more information?

Established in 1977, Myers and Stauffer is a nationally based certified public accounting (CPA) firm. Since then, we have worked exclusively with local, state, and federal public health and human service agencies to help them accomplish their most critical goals for the nation’s most vulnerable people.

We have assisted state and federal agencies with complex financial, performance, compliance, and reimbursement issues for decades. We help our clients develop and implement SDP programs for various provider types, and we assist with calculating supplemental payments and UPL demonstrations.

We also help states identify federal revenue enhancement opportunities and develop provider payment strategies. This includes approaches and methodologies for calculating and administering provider payments, as well as the funding mechanisms and compliance requirements that accompany such programs. For more information, reach out to one of our subject matter experts below.

Dan Brendel Principal	Tim Guerrant, CPA Member	Tara Clark, CPA Member	Bob Hicks, CPA Member