On September 9, 2025, the Centers for Medicare & Medicaid Services (CMS) issued preliminary guidance to states on implementing new federal payment limits for state-directed payments (SDPs) in Medicaid managed care. SDPs enable states to direct Medicaid managed care organizations (MCOs) and other managed care entities to pay higher reimbursement rates to some provider organization types to support quality-of-care improvements and value-based payment reforms, according to the CMS guidance and to earlier guidance issued in January 2021. For federal fiscal year (FFY) 2025, SDP expenditures are projected at $124.3 billion, and at $144.6 billion for FFY 2026, according to the guidance.

The four service types the guidance initially applies to are inpatient and outpatient hospital services, nursing facility services, and qualified practitioner services at an academic medical center. CMS is working on a notice of proposed rulemaking that may include changes to the total payment rate limit for SDPs beyond the initial four service types, according to the guidance notice.

The new limits on SDPs were established by the federal funding bill, House Resolution 1 (HR 1, also called the One Big Beautiful Bill Act), which was signed on July 4, 2025. For rating periods beginning on or after July 4, 2025, the guidance stated that SDPs for the four named services cannot exceed 100% of Medicare rates in Medicaid expansion states, or 110% of Medicare rates in non-expansion states. The CMS guidance noted that some SDPs submitted or approved before July 4, 2025, may qualify for temporary grandfathering until the January 1, 2028, rating period. For an SDP to qualify for grandfathering, the guidance outlined the following criteria:

• For all SDPs, except those for rural hospitals, the state must have received or made a good-faith effort to receive CMS approval before May 1, 2025.  
• For rural hospital SDPs, three criteria apply: the state must have submitted a plan for approval to CMS before July 4, 2025, or must have previously received or made a good-faith effort to receive CMS approval before July 4, 2025. For any pending SDP preprints 
• CMS will provide preliminary feedback on whether an SDP is likely eligible for the grandfathering period as part of its standard adjudication letters. 

SDPs permit states to implement contractual Medicaid managed care arrangements that direct the contracted payer to reimburse some provider types at a specific rate for certain services. SDPs are applicable to managed care organizations, prepaid ambulatory health plans, and prepaid inpatient health plans.

More information about SDPs is posted at State Directed Payments (accessed October 2, 2025).

For more information, contact: Office of Communications, U.S. Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244; 202-690-6145; Email: StateDirectedPayment@cms.hhs.gov; Website: https://www.cms.gov/

November 2025     00US25EUA0044