CMS Proposes Sweeping Caps on Medicaid State Directed Payments, Targeting $775 Billion in Savings

A new proposed rule from HHS and CMS would align Medicaid reimbursement rates with Medicare standards, restricting state payment arrangements that have driven costs well above federal benchmarks.

WASHINGTON, May 20, 2026 – The U.S. Department of Health and Human Services (HHS), through the Centers for Medicare & Medicaid Services (CMS), has proposed a significant overhaul of Medicaid payment structures, targeting state-directed payment arrangements that federal officials say have inflated costs and undermined program integrity.

Background: Why CMS Is Acting Now

On June 6, 2025, President Trump signed a Presidential Memorandum titled “Eliminating Waste, Fraud, and Abuse in Medicaid,” directing HHS to ensure Medicaid payment rates are not higher than Medicare, to the extent permitted by applicable law. The memorandum cited concerns that state-directed payments had grown substantially in recent years, threatening the federal Treasury and Medicaid’s long-term stability. Beckers Hospital Review

CMS formally released the proposed rule on May 20, 2026, implementing provisions of Section 71116 of the Working Families Tax Cut legislation, which sets new limits on state-directed payment rates and introduces grandfathering and phase-down policies for existing arrangements. Kaufmanhall

What Are State Directed Payments?

A State Directed Payment (SDP) is an arrangement in which the state directs the health plan on how to reimburse providers rather than allowing the plan to negotiate payment. States have often used these arrangements to increase payments toward a limited set of providers. When SDPs are not designed to improve care for beneficiaries and instead financially advantage a small number of providers, they may contribute to inefficient or wasteful Medicaid spending.

Key Provisions of the Proposed Rule

If finalized, the proposed rule would generate an estimated $775 billion in total savings over 10 years, including $510 billion in federal savings.
The rule introduces payment caps tied to Medicare rates. New SDPs would be limited to 100% of Medicare rates in Medicaid expansion states and 110% of Medicare rates in non-expansion states, applied on a per-service basis rather than in aggregate.
The proposed rule also expands the application of the modified limit to all SDPs and all service types. It sets a limit for certain targeted Medicaid payments in fee-for-service settings. Public comments on the proposed rule are due by July 21, 2026.

Targeted Fee-for-Service Payments Also Affected

CMS proposes to align the total payment rate for targeted practitioner and provider services in Medicaid fee-for-service with the same Medicare-based limits. Exceptions would apply to services without a comparable Medicare equivalent, such as many personal care services, and to payment methodologies reconciled to actual provider costs.

The provisions of Section 71116 apply to all 50 states and the District of Columbia, with CMS acknowledging that policies will be finalized through notice and comment rulemaking. CMS

What This Means for Healthcare Organizations

The proposed rule signals a fundamental shift in how Medicaid reimbursement is structured across the country. For providers, particularly hospitals, academic medical centers, and practitioners who have relied on state-directed payments above Medicare levels, the rule could significantly reduce future reimbursement.
Healthcare organizations should closely monitor the comment period closing July 21, 2026, and assess how the Medicare-based payment caps would affect their Medicaid revenue mix. Revenue cycle teams will need to prepare for potential reimbursement reductions and tighter billing compliance requirements as the rule moves toward finalization.

Sources: CMS Fact Sheet, Federal Register, HFMA