CMS issues guidance on Medicaid state-directed payment limits

The Trump administration is moving forward with tighter oversight of Medicaid state-directed payments.

CMS issued preliminary guidance on Sept. 9 on implementing the new limits tied to the One Big Beautiful Bill Act, offering states additional time to prepare before a final rule is released.

Under the guidance, state-directed payments for inpatient and outpatient hospital services, nursing facilities, and qualified practitioners at academic medical centers cannot exceed 100% of Medicare rates in expansion states or 110% of Medicare rates in non-expansion states beginning with rating periods on or after July 4, 2025. Programs approved before that date may qualify for a temporary grandfather period through Jan. 1, 2028, followed by phased reductions until they meet the new limits.

HHS Secretary Robert F. Kennedy, Jr. said the changes will hold states accountable for “skirting their responsibilities” and relying on federal dollars. President Trump has criticized state-directed payments as a “gimmick” that allows states to tax providers and recycle those funds to unlock additional federal contributions.

The guidance follows the administration’s broader push to reverse a Medicaid payment flexibility introduced during President Trump’s first term in 2018. That policy allowed states greater leeway in setting reimbursement rates through supplemental programs, and it quickly became a vital financial tool for hospitals serving high volumes of Medicaid patients. Adoption has grown rapidly, from 10 states in 2017 to 40 in 2024, with projected disbursements exceeding $110 billion annually, according to MACPAC.

Hospital groups, including America’s Essential Hospitals, have warned that eliminating or scaling back these programs could destabilize providers already operating on thin margins. 

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