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CMS Proposed Medicaid Rules: Directed Payments (Pt 1)

Updated: May 9, 2023

Part I: State Directed Payment (“SDP”) Reforms

On May 3, 2023, the Centers for Medicare & Medicaid Services (“CMS”) published two proposed rules amending the regulations governing Medicaid managed care organizations at 42 C.F.R. Part 438. The proposed rules, Managed Care Access, Finance, and Quality, and Ensuring Access to Medicaid Services, aim to improve access to care and quality outcomes for managed care beneficiaries. This is the first of a series of blog posts outlining the proposals by CMS. Comments on the proposed rules are due by July 3, 2023.



Background of SDPs


In 2016, CMS finalized a new policy restricting states from directing payments from Medicaid managed care plans to network providers unless approved by CMS and meeting specified criteria. 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. This excludes supplemental payments that are not tied to specific services, which are being phased out from use in Medicaid managed care.


SDPs have increased in number and scope. Since 2016, CMS has reviewed more than 1,100 proposals, with 298 requests being submitted in calendar year 2022 alone. The U.S. Government Accountability Office has estimated that at least $20 billion in SDPs have been approved for payments to be made on or after July 1, 2021. By contrast, CMS estimates that it has approved nearly $48 billion of SDPs in total spending for the most recent rating period.


CMS has proposed major revisions to the prior rule at 42 C.F.R. section 438.6 to further the following goals: (1) access to high-quality care under Medicaid managed care SDP payment arrangements; (2) appropriate linkage between SDPs and Medicaid quality goals and objectives for providers receiving payments; and (3) appropriate fiscal and program integrity guardrails by CMS and States.


Proposed Changes to SDPs

  • Back Door to Limit Provider Fees: CMS proposes that each SDP must “[c]omply with all Federal legal requirements for the financing of the non-Federal share, including, but not limited to, 42 CFR 433, subpart B[,]” and “[e]nsure that each provider receiving payment under a State directed payment attests that it does not participate in any hold harmless arrangement with respect to any health care-related tax… in which the State or other unit of government imposing the tax provides for any direct or indirect offset, or waiver such that the provision of the payment, offset, or waiver directly or indirectly guarantees to hold the provider harmless for all or any portion of the tax amount, and ensures that such attestations are available upon CMS request[.]”

    • This proposal furthers a policy previously considered in the never-finalized Medicaid Fiscal Accountability Regulation. A general explanation of provider taxes/fees and a summary of that proposed rule is available here.

    • CMS again asserts that “[s]uch hold harmless arrangements include those that produce a reasonable expectation that taxpaying providers would be held harmless for all or a portion of their cost of a health care-related tax.” This furthers CMS’ position in its recent CMCS Bulletin essentially asserting the same standard for determining whether a “hold harmless” exists under 42 C.F.R. Part 433. This Bulletin is currently the subject of a challenge before a Texas federal court.

  • If adopted, CMS could use this provision to deny approval for SDPs, upon which many states rely to ensure appropriate funding for their Medicaid programs. This would be disastrous for state programs that have come to rely on provider fees to protect their general funds from increases in Medicaid spending.

  • Applicability to “Grey Area Payments”: CMS refers to situations in which a State mandates that a plan must pay a specified amount for a certain purpose, but does not direct individual payments to individual providers as “grey area payments.” CMS proposes to clarify that these grey area payments should be treated as SDPs, subject to the rules in 42 C.F.R. section 438.6.

  • Medicare Rates Exempted from Prior Approval Requirement: CMS proposes to authorize SDPs adopting a minimum fee schedule for providers using a total published Medicare payment rate that was in effect no more than 3 years prior to the start of the rating period if the minimum fee schedule is set at 100% of Medicare. Such a minimum fee schedule is not subject to the prior approval requirement.

  • Application to Non-Network Providers: In the 2016 rule, CMS defined directed payments only in the context of “network providers.” This meant that directed payments under 42 C.F.R. section 438.6 could not be made to non-network providers, but also that some states implemented programs requiring payments to emergency service providers under 42 U.S.C. section 1396u-2(b)(2)(D) rather than the authority under 42 C.F.R. section 438.6. CMS now proposes to remove the reference to “network” providers in the authority to direct payments based on minimum fee schedules, uniform dollar or percentage increases or maximum fee schedules. This confirms that States can direct payments of these types to non-network providers. It is at present unclear whether Medicaid managed care payments set under 42 U.S.C. section 1396u-2(b)(2)(D) to emergency service providers will be required to comply with the directed payment requirements.

  • Proposed Limits on SDPs:

    • With respect to fee-for-service payments, CMS imposes an “upper payment limit” with respect to inpatient hospital services, outpatient hospital services, nursing facility services, institutes for mental disease services, clinic services, intermediate care facility for individuals with intellectual disabilities services, psychiatric residential treatment facility services, and qualified practitioner services (for targeted supplemental payments). CMS uses these rules to apply a limit, set at the amount that Medicare would have paid for the services, to the payments to a class of providers (state government owned or operated, non-state government owned or operated, or privately-owned and operated).

    • We have heard that for some programs, CMS has sought to impose “upper payment limit”-type limits to payments to classes of providers that are not subject to the fee-for-service upper payment limit. This appears to be inconsistent with the applicable regulations, although the rates are required to be consistent with efficiency, economy, quality of care and access.

    • In the proposal, CMS confirms that all SDPs must be established at a rate that is “reasonable, appropriate and attainable.”

    • CMS further proposes that the total payment rate, including SDPs and passthrough payments, for inpatient hospital services, outpatient hospital services, nursing facility services, or qualified practitioner services at an academic medical center be limited to the “average commercial rate.” The average commercial rate (“ACR”) will be service-specific from the state, but not ownership-specific like the upper payment limit, and must rely on data no older than three years old. The ACR must include any cost-sharing and deductibles, but exclude: (i) payments to federally qualified health centers and rural health clinics, (ii) payments from non-commercial payers, such as Medicare; and (iii) payments for services carved out of the plan’s Medicaid managed care contract.

    • This analysis would have to be included with the initial request for approval and updated once every 3 years thereafter.

    • CMS is exploring alternatives to this proposed limitation on SDPs, including the application of the Medicare rate instead of ACR. At the same time, CMS has reserved its ability to apply such a limitation to other provider types in the future.

  • Statewide Limits on SDPs:

    • The proposed rule would impose requirements on states that receive required approvals for SDPs to calculate a “cost percentage” for SDPs, which in broad strokes would be the portion of capitation payments attributable to SDPs divided by the actual total capitation payments on an annual basis. Such calculation must be certified by an actuary.

    • CMS is inviting comment on a proposal to limit states’ cost percentage. CMS has thrown out a cost percentage limit of 10 to 25 percent for SDPs. It has also considered a proposal to impose a limit on total SDP expenditures as a portion of the total costs for each Medicaid managed care program, rather than for just one SDP. Another proposal would be to set a limit to the cost percentage only for inpatient hospital services, outpatient hospital services, nursing facility services, and qualified practitioner services at academic medical center. This would be a significant change to the operation of these programs, so interested parties should consider submitting comment on this issue.

  • Double Down that SDPs Must be Based on Present Utilization: Historically, Medicaid managed care supplemental payments have often been based on historical utilization, reducing uncertainty by providers, plans and states in implementing those payments. CMS has gradually moved directed payments from being based on historical utilization to utilization concurrent to the rating period. In this new proposed rule, CMS would confirm that SDPs must condition payment only on the utilization and delivery of services during the rating period. It would consider a state requirement that plans make interim payments be made based on utilization and delivery of services outside the rating period and later reconcile those interim payments based on current utilization to be impermissible.

  • Changes to Value-Based SDP Models: CMS further proposes new rules for value-based purchasing, delivery system reform, or performance improvement initiatives.

    • Value-based performance SDPs would: (1) not be able to be conditioned on administrative activities; (2) be required to use a common set of performance measures across all of the payers and providers; (3) be required to define and use a performance measurement period that does not exceed the length of the rating period and that does not precede the start of the rating period by more than 12 months; (4) be required to include all payments in the rate certification for the rating period in which payment is delivered; (5) be required to identify baseline statistics on all metrics used to measure performance; and (6) be required to use measurable performance statistics.

    • Population-based or condition-based SDPs would be required to: (1) be conditioned upon the delivery by the provider of one or more specified Medicaid covered service(s) during a rating period or the attribution of a covered enrollee to a provider for treatment for the rating period (if the latter, be based on an attribution methodology no later than 3 years old and meeting other requirements); (2) replace the negotiated rate between the plan and providers for the Medicaid covered service(s) with no other payment permitted from the plan to the provider for the same services included in the population or condition-based payment; and (3) include at least one metric in the evaluation plan that measures performance at the provider class level, which is set to demonstrate improvement over baseline.

  • SDP Submission Requirements:

    • For SDPs that require prior approval, CMS proposes numerous new requirements. First, the State must include a written evaluation plan with its submission for approval. That evaluation plan must include: (1) identification of at least two metrics that will be used to measure the effectiveness of the SDP in advancing at least one of the quality goals and strategies, which must be specific to the SDP and include at least one quantitative measure with a numerator and denominator used to monitor performance at a point in time or track performance over time of provider service delivery, quality of care, or outcomes (a “performance measure”); (2) include baseline statistics on all metrics; (3) include performance targets for all metrics; and (4) include a commitment to submit an evaluation report if the final SDP cost percentage exceeds 1.5 percent.

    • For SDPs that require prior approval that have a final SDP cost percentage greater than 1.5 percent, the State would be required to complete and submit an evaluation report using the evaluation plan submitted with the request for approval. The evaluation report must: (1) include all the elements outlined in the evaluation report; (2) include the three most recent and complete years of annual results for each metric; and (3) be published on a state website. Such an evaluation report would be required to be submitted no later than 2 years after the conclusion of the 3-year evaluation period.

    • Requests for prior approval would be required to be submitted no later than: (1) 90 days before the end of the rating period for any SDP that begins at least 90 days before the end of the rating period; (2) before the end of the rating period for any SDP that begins less than 90 days before the end of the rating period; or (3) for multi-rating period SDPs, prior to the applicable deadline for the first rating period.

    • States would be required to request approval amendments if they seek to change any SDPs after approval by CMS.

    • The proposed rule also includes timeframes for approvals of SDPs.

    • Lastly, states would be required to submit, on an annual basis, reports to CMS, specifying the total dollars expended by each plan for SDPs, including amounts paid to individual providers. Such reporting is due 180 days after each rating period, once CMS has released reporting instructions.

  • Continued Connection between SDPs and Quality Goals: CMS is proposing that all SDPs, including those not subject to prior approval requirements, be subject to an evaluation plan that measures the degree to which each SDP advances at least one of the goals and objectives in the state quality plan, and results in achievement of the stated goals and objectives in the State’s evaluation plan. This is in addition to the quality standards required to be included in a State’s request for approval and evaluation report, discussed above.

  • Plan Rate Certifications: CMS has proposed rules essentially codifying its current practice for two methods of incorporating SDPs into a State’s actuarial rates to plans. Such rates must be developed in accordance with accepted actuarial practices. The first is a separate payment term method, by which a state establishes a finite and predetermined pool of funding that is paid by the State to the plan(s) separately and in addition to the capitation payments for a specific SDP. The second is the inclusion of SDPs through adjustments to base capitation rates. Given the technical nature of these calculations, individuals seeking additional detail should review proposed 42 C.F.R. section 438.6(c)(6) and (c)(7).

  • Contract terms: The proposed rule reinforces the current requirement that SDPs be specified in state managed care contracts with plans. CMS proposes specific contract terms, including the SDP start and, if applicable, end date, a description of the eligible provider class and eligibility requirements, and a description of the SDP, as specified in more detail in proposed 42 C.F.R. section 438.6(c)(5)(iii). The State must include terms governing SDPs in plan contracts no later than 120 days after the start date of the SDP for which the State has obtained approval or 120 days after CMS has issued written approval, whichever is later.

  • Appeals: CMS has proposed the establishment of an appeal process by the Departmental Appeals Board to review disapprovals of any SDPs in proposed 42 C.F.R. section 430.3(d).

This proposed rulemaking reflects a significant shift in policy to further restrict the ability of states to fund and direct Medicaid payments through managed care. There are numerous areas for which CMS explicitly requests additional input, which interested parties should provide given the far-reaching implications of this proposed rule. Stakeholders in state Medicaid programs, including healthcare providers, would be well-advised to carefully review this proposed rulemaking for potential impacts. Comments will be accepted at regulations.gov until 5 p.m. on July 3, 2023.


For more information on the proposed Medicaid regulations or state directed payments, please contact Felicia Y Sze.


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