On May 20, 2026, CMS issued a proposed rule that, if finalized, would significantly change the way Medicaid state-directed payments (SDPs) are structured. The rule implements provisions from the One Big Beautiful Bill Act (OB3) related to SDPs, which executives cited as their greatest concern about the bill in our Mindsets 2026 Healthcare Executive Leadership Report. The rule also introduces broader policy changes that extend well beyond the OB3 statutory requirements.
Collectively, these updates represent a fundamental shift in supplemental payment policy that places tighter constraints on reimbursement levels, increases federal oversight, and reduces states’ flexibility in financing Medicaid payments. For healthcare providers, the proposal points to a more standardized but more restrictive reimbursement environment in the years ahead.
Below, we explore critical takeaways from the proposed rule that healthcare executives should understand.
Medicaid SDPs Would Be Capped at the Medicare Rate
The proposed rule aligns SDP levels with Medicare reimbursement, representing a shift from the current environment, in which many SDPs are tied to the average commercial rate for a given service.
CMS defines the Medicare cap based on payment methodology for each setting/service. This includes all relevant adjustments, such as geographic factors and quality-related components. In expansion states, the cap would be 100% of Medicare rates, and in non-expansion states, the cap would be 110% of the Medicare rate for non-grandfathered SDPs. Grandfathered SDPs would continue at their current payment levels until the state plan year that begins on or after January 1, 2028. Then, the SDP would be reduced by 10 percentage points annually, calculated off the preprint amount, until it meets the new Medicare-based limits.
These changes establish both a clearer ceiling on allowable payments and a structured process for bringing existing arrangements into alignment. For providers whose SDPs are based on higher commercial rates, this signals increasing downward pressure on Medicaid reimbursement over time.
SDP Policy Changes Extend Beyond OB3 Statutory Requirements
While OB3 only requires a reduction in SDPs for hospital inpatient/outpatient, nursing facilities, and academic practitioners, CMS proposes applying similar limits across all SDPs beginning in state plan year 2029. This would expand the policy to encompass a wider range of providers and services, including physician services, behavioral health, and community-based care.
This broader application reflects CMS’ perspective that limiting the policy to a subset of services could encourage states to redirect funding to areas not explicitly covered by the statute. By extending the framework across the program, CMS aims to reduce opportunities to shift payments between categories to preserve higher reimbursement levels. For healthcare organizations, this means the rule would affect a broader range of provider types if finalized as proposed.
The Financial Impact of Medicaid SDP Changes Is Larger Than Expected
CMS estimates that the proposed rule, combined with statutory changes, could reduce state and federal Medicaid spending by $775 billion over a decade.
Notably, this estimate exceeds earlier Congressional Budget Office (CBO) projections of a $149 billion impact on federal spending over 10 years when it “scored” OB3. Through 2034, the comparable window for the CBO score, CMS projects federal Medicaid spending will be reduced by $430 billion. This reflects CMS’ broader interpretation of the statute and expansion of the policy to SDPs not specifically affected by the legislation. While CMS does not quantify provider-level effects, the magnitude of projected savings signals a significant reduction in managed care SDPs across the healthcare system.
Limits Would Extend to Fee-for-Service Supplemental Payments
The proposal also introduces similar constraints for supplemental payments made under fee-for-service (FFS) delivery systems. Beginning on or after January 1, 2029, FFS supplemental payments would be capped at 100% of the Medicare rate in expansion states or 110% of the Medicare rate in non-expansion states. The cap would be based on the total published Medicare rate for the applicable service and applied to total payments at the provider level. By applying consistent Medicare-based benchmarks across both managed care and FFS models, CMS seeks to prevent states from maintaining higher payment levels by shifting funding between delivery systems.
“Uniform Increase” SDP Approaches Would Be Phased Out
CMS proposes eliminating payment methodologies that apply uniform increases across all providers, such as fixed percentage or dollar-based add-ons, beginning with ratings periods that start on or after January 1, 2028. Instead, CMS would require SDPs to be more targeted and aligned with program objectives. CMS proposes allowing uniform increase SDPs for grandfathered programs until the rating period when the payment limit is reached.
CMS Allows for Greater Use of Defined Fee Schedules
CMS proposes that states would have the option to implement minimum or maximum fee schedules, provided those rates remain within the overall payment limits. These schedules could establish both a baseline level of reimbursement and an upper boundary for payments, creating a more standardized framework within managed care arrangements. Although this approach offers some structural clarity, it does not offset the broader impact of reduced payment ceilings. Instead, it reflects a shift toward rate-based payment methodologies.
Oversight & Administrative Requirements Will Intensify
The rule introduces new expectations around transparency, documentation, and compliance. States would need to provide detailed reporting on payment methodologies, provider participation, and alignment with Medicare-equivalent benchmarks.
For providers, this likely would require enhanced financial tracking, more robust data capabilities, and increased readiness for audits and validation processes. The administrative burden associated with SDPs is expected to rise as oversight mechanisms become more rigorous.
Long-Standing Financing Mechanisms Are Under Pressure
Although the proposed rule would not directly ban provider taxes or intergovernmental transfers (IGTs), CMS explicitly links the rule to other OB3 provisions that constrain these financing tools. By lowering allowable payments and tying them to both Medicare-based caps and preprint-constrained spending levels, the rule reduces the economic return on these arrangements. This may fundamentally reshape how states and providers collaborate to finance Medicaid supplemental payments.
How Can Healthcare Executives Prepare for Medicaid SDP Changes?
The SDP proposed rule represents a structural reset of Medicaid supplemental payment policy. Two defining features—Medicare-based payment limits and funding benchmarks tied to existing SDP arrangements—establish a more transparent but significantly more constrained reimbursement framework.
In the near term, healthcare leaders will need to incorporate these changes into financial planning, including modeling reimbursement under Medicare-aligned scenarios and reassessing the sustainability of current funding streams.
Over the longer term, the cumulative effect of reduced supplemental payments is likely to compress margins, particularly for safety-net providers. This pressure may also extend indirectly to physician compensation models, as hospitals reassess subsidy structures and alignment strategies in response to declining funding.
To navigate this environment, organizations will need to focus on strategic growth opportunities, financial discipline, and regulatory excellence to help preserve and maximize available reimbursement.
How Forvis Mazars Can Help With Medicaid SDP Changes
Our professionals at Forvis Mazars are committed to helping healthcare organizations understand and adapt to the impact of evolving federal policies and congressional legislation that may affect their reimbursement and financial standing. If you have questions about upcoming policy changes and how they may affect your organization, please reach out to a professional on our team.