On Friday, May 22, 2026, the Centers for Medicare & Medicaid Services (“CMS”) published its notice of rulemaking on limits on Medicaid managed care state directed payments (“SDPs”) and imposing limits on Medicaid fee-for-service targeted payments, with comments due July 21, 2026.  Almost immediately, multiple summaries were released on the substance of the rule.  Athene Law, LLP, has reviewed and analyzed the proposed rulemaking for a few more days to be able to provide our unique insight based on our years of working in this area.

TLDR: What does this proposed rulemaking propose to do?

Remind me again, what’s a state directed payment?

To preserve the concept of the actuarially sound capitation rate to Medicaid managed care plans, CMS has long restricted states from supplementing the capitation rates by paying providers directly for services once delegated to managed care plans.  However, some states continue to seek to instruct the way in which managed care plans pay providers, whether by specifying value-based methodologies or minimum or maximum fee schedules.  The regulation at 42 C.F.R. section 438.6 provides the authority for states to do so, while establishing the requirements applicable to each methodology.  This has been an area of continued regulatory evolution since its inception in 2017.

The forms of currently permitted SDPs are: (1) value-based purchasing, such as pay for performance or bundled payment arrangements; (2) delivery system reform or performance improvement initiatives; and (3) required payments based on minimum fee schedules, uniform dollar or percentage increases or maximum fee schedules.

I thought Congress already limited state directed payments through H.R. 1 last year. Why is CMS proposing a new rulemaking?

Section 71116 of H.R. 1 directed CMS to adopt regulations implementing a new ceiling on certain SDPs, specifically for inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at an academic medical center, at 100% of the Medicare rate for expansion states and 110% of the Medicare rate for non-expansion states.  CMS introduced guidance on September 9, 2025, which it later rescinded and re-issued on February 2, 2026, as to the implementation of section 71116 of H.R. 1.  In the most recent guidance, CMS indicated that it would issue proposed regulations to make changes to total payment rates beyond the reductions required by section 71116 of H.R. 1, which presumably is this proposed rulemaking.

CMS has also taken this opportunity to propose regulations that would broaden the scope of what was enacted in H.R. 1.

How are grandfathered SDPs treated?

CMS proposes to define grandfathered SDPs are SDPs associated with specified provider types (inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at an academic medical center) that: (1) received prior written approval; (2) with a written approval that covered at least one business day between October 11, 2024, and July 3, 2025 or July 5, 2025, and March 27, 2026; (2) was described in a completed blueprint that was submitted to CMS before July 4, 2025; and (4) exceeds the proposed Medicare limit.

The total dollar amount of these SDPs will be reduced by 10% each year until the SDP comes within the applicable Medicare cap.  The proposed rule suggests that the calculation of the 10% would be based on the total amount of the grandfathered SDP amount and will remain the same dollar amount reduction, even though the aggregate amount of the SDP will shrink over time.

How are non-grandfathered SDPs treated?

The proposed rulemaking would prohibit non-grandfathered SDPs for inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at an academic medical center to be approved unless they cap with the applicable Medicare cap.

As currently proposed, SDPs for services other than inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at an academic medical center must comply with the applicable Medicare cap for the first rating period on or after January 1, 2029.

Are the Medicare caps likely to be applied per service or in the aggregate like upper payment limits?

SDP payment limits will be applied per service by provider, inclusive of all adjustments like geographic and quality add-ons or modifiers.  CMS is not proposing an aggregate cap, meaning the caps would be uniformly applied across a class of providers.

What exceptions apply to the Medicare rate cap on SDPs?

In the absence of a Medicare rate, CMS would instead set the limit at 100% of the State plan rate, the State plan waiver rate, or use cost-based methodologies validated through cost reports.  CMS intends to provide further guidance on how rates based on cost-based methodologies will be calculated.

What is a “targeted” fee-for-service payment?

CMS intends to impose rate caps set at 100% of the Medicare rate for expansion states and 110% of the Medicare rate for non-expansion states on total fee-for-service payments if a state uses “targeted” fee-for-service payments.  These proposed caps would apply to when a state establishes a differential payment rate (in whole or in part) “targeted to a subsect of participating practitioners or providers furnishing the applicable Medicaid-covered services.”  We note that CMS distinguishes that different providers may furnish the same Medicaid-covered service: “in instances where different practitioners within a benefit category (for example, a nurse practitioner and a pharmacist under the other licensed practitioner benefit) are paid differently for the same service, when the payment differential is tied to provider qualifications, the payment is not considered targeted and the limit would not apply.”

This limit does not apply if:

• The State provides for a uniform payment methodology for “all Medicaid practitioners or providers furnishing the applicable Medicaid-covered services within the State, or within a geographic region of the State.”

• The provider’s payment is already subject to an upper payment limit or other payment requirements (e.g., FQHC or RHC prospective payment system rates).

• There is no reasonable Medicare payment rate or payments are reconciled to a provider’s actual, incurred cost; in either of these situations, the state must be prepared to submit an explanation and supporting documentation to CMS that the resulting payment is consistent with Section 30(A).

Like with SDPs, this cap would apply on a provider and service-specific basis, not in the aggregate.

Why is CMS seeking to regulate “targeted” payments?

CMS is expressing concern that certain targeted payments are established based on whether the provider is able to contribute for the state share associated with the targeted payment.

What are potential implications for providers of this proposed rulemaking, if adopted as final?

The potential implications of this proposed rulemaking are still uncertain.  CMS has requested additional comments and may incorporate some comments into the final rule.  Historically, CMS final rules have sometimes differed in significant ways from the original proposals; at other times, such as with the Medicaid Fiscal Accountability Rule, CMS has decided not to finalize its proposals.

For example, programs that rely on uniform rate increases likely would need to transition if the final rulemaking eliminates uniform rate increases as a form of SDPs.  Grandfathered SDPs for inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at an academic medical center may need to be phased down, consistent with H.R. 1.  However, hospital services and other services subject to UPLs will not be impacted by the proposed rule on targeted fee-for-service payments in its current form.

California’s ambulance rates may give rise to classification as targeted fee-for-service payments given the significant disparity between public rates (proposed $1,636 per transport) and private rates (approximately $339.00 per transport with a possible $141.83 increase as a result of Proposition 35).  If adopted, this proposal would potentially require the reduction of Medi-Cal rates to public ambulances, which potentially exceed Medicare rates by as much as threefold.  Private ambulance rates with Proposition 35 add-ons are in the same order of magnitude as Medicare rates and likely would be minimally impacted.

These potential implications are still uncertain.  However, we continue working with local stakeholders to assess the potential impact of this proposal and any final rulemaking that arises from this proposal.

What does CMS specifically request comments on?

CMS specifically requests that commenters submit their input on the following topics:

• How to apply Medicare‑based limits

• How to validate value-based payment SDPs

• How long ACR monitoring should continue

• How to structure the phase‑down

• Whether to allow separate payment terms

• How to define provider classes

• How to standardize total payment rate calculations

• How to handle services with no Medicare equivalent

• How to manage geographic variation

• How to operationalize bundled payment crosswalks

• Applicability dates and transition timing

We will continue to monitor updates on this proposed rulemaking and other major Medicaid policies. Stakeholders may wish to consider providing input to CMS on this rulemaking.  For more information on the current CMS proposals and their impact on healthcare entities, please contact Felicia Sze or Kyle Brierly.