CMS on May 20 proposed a rule that would cap certain state Medicaid payments and align them more closely with Medicare rates.
The proposed rule would create new limits for Medicaid state-directed payments and certain fee-for-service payments to reduce Medicaid spending by more than $775 billion over 10 years, including $510 billion in federal savings, according to the agency.
“Medicaid was never meant to be a blank check — it was meant to be a lifeline — and lifelines only work when they’re strong, reliable and built to last,” CMS Administrator Mehmet Oz, MD, said in a news release. “Misaligned payment incentives and opaque financing arrangements are driving up costs without delivering better care. This rule restores balance by aligning Medicaid payments with Medicare standards, strengthening accountability and ensuring taxpayer dollars support patients, not payment schemes.”
Seven things to know:
1. The rule targets state-directed payments. State-directed payments are arrangements in which a state tells a managed care plan how to pay providers, rather than allowing the plan to negotiate rates on its own. CMS said states have used these arrangements to boost payments to a specific set of providers, typically those that can supply the non-federal share of Medicaid funding through provider taxes and intergovernmental transfers. The practice has allowed states to draw more federal dollars without equivalent state spending, according to the agency.
2. CMS wants to tie payment limits to Medicare rates. For rating periods beginning on or after July 4, 2025, CMS proposed capping certain state-directed payments for hospital, nursing facility and qualified practitioner services at academic medical centers at 100% of Medicare rates in expansion states and 110% of Medicare rates in nonexpansion states. If no comparable Medicare rate exists, payments would be capped at 100% of the Medicaid state plan-approved rate.
3. The limits would eventually apply more broadly. CMS proposed extending the payment rate limit to all state-directed payments for all services in all states, the District of Columbia and territories for rating periods beginning on or after Jan. 1, 2029.
4. Some existing payments could be temporarily grandfathered. The proposed rule includes a temporary grandfathering period for certain state-directed payments that meet specific criteria. CMS also proposed that the total dollar amount of a grandfathered payment arrangement be phased down by 10 percentage points annually, beginning with the first rating period on or after Jan. 1, 2028, until the payment limit is reached.
5. The agency says state directed payments have grown rapidly. CMS said use of state-directed payments has expanded from two states in 2016 to 41 states in fiscal 2025and accounts for more than one-quarter of all Medicaid managed care spending in fiscal 2025. Annual spending on the payments is projected to grow from $107 billion in fiscal 2024 to $296 billion by fiscal 2034 if left unchecked, according to the agency.
6. CMS aims to impose limits on certain fee-for-service payments. The agency plans to cap certain targeted Medicaid practitioner payments in fee-for-service programs at 100% of Medicare rates in expansion states and 110% in nonexpansion states. States with approved payments above the proposed limits would need to submit a state plan amendment to remove or update them no later than the first state fiscal year beginning on or after Jan. 1, 2029.
7. The rule follows CMS’ final rule intended to curb provider tax arrangements. CMS issued a final rule April 2 that ended states’ ability to use certain provider taxes to generate additional federal Medicaid matching funds, a financing mechanism the agency characterized as a Medicaid funding “loophole.” The rule bans states from imposing higher tax rates on Medicaid business than on non-Medicaid business and blocks indirect tax structures designed to bypass those limits. CMS said provider taxes generate more than $24 billion annually for state budgets, with one state bringing in more than $13 billion.
Click here to access the 192-page final rule.
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