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What the proposal does
The proposed rule, released May 20, carries out section 71116 of last year’s budget law. It would cap state directed payments for inpatient and outpatient hospital services, nursing facility services and qualified practitioner services at academic medical centers at 100% of the Medicare rate in Medicaid expansion states and 110% in non-expansion states, for rating periods beginning on or after July 4, 2025. Where no Medicare rate exists, the limit is 100% of the state plan rate. The cap would be applied claim by claim, with no exceptions outside grandfathering.
CMS would also extend the cap to all directed payments, for all services in all states, starting with rating periods on or after Jan. 1, 2029. Grandfathered arrangements would shrink by 10 percentage points a year beginning Jan. 1, 2028. Uniform rate increase arrangements would end in 2028, with a limited exception for grandfathered cases. Similar limits would apply to targeted fee-for-service practitioner payments.
The scale
CMS estimates more than $775 billion in savings over 10 years, $510 billion of it federal. Directed payments have spread from two states in 2016 to 41, made up more than a quarter of Medicaid managed care spending in fiscal 2025 and were projected to grow from $107 billion in fiscal 2024 to $296 billion by 2034 without changes. The proposal follows an April 2 final rule that ended certain provider tax arrangements.
What CFOs should model now
- Dependence. Quantify how much Medicaid revenue comes from directed payments and what those payments equal as a percentage of Medicare.
- The glide path. Build year-by-year scenarios for grandfathered amounts falling 10 points a year from 2028 and for the 2029 expansion to all services.
- Financing links. Map which of your state’s directed payments are funded by provider taxes or intergovernmental transfers, since the April provider tax rule touches the same dollars.
- Covenants and ratings. Test debt covenants and days cash on hand under the lower scenarios, and brief rating agencies early.
- Comments. Work with your state hospital association on comments, especially on grandfathering criteria and transition timing.
Archive entry for May 20, 2026, added Nov. 11, 2026.
Sources
- CMS moves to rein in misused Medicaid dollars, reward quality care (CMS, May 20, 2026)
- Medicaid managed care state directed payments and fee-for-service targeted practitioner payments proposed rule fact sheet (CMS, May 20, 2026)
- CMS to cap state Medicaid payments to save $775B: 7 things to know (Becker’s Hospital Review, May 20, 2026)