On September 9, the Centers for Medicare & Medicaid Services (CMS) sent states a “Dear Colleague” letter providing preliminary guidance related to the grandfathering of state directed payments (SDPs) under H.R. 1, known as the One Big Beautiful Bill Act. The letter acts as preliminary guidance for states until CMS can promulgate a final rule; ultimately, the policies outlined in a final rule will govern.
Starting with rating periods beginning on or after January 1, 2028, the law requires SDPs for certain services to gradually be reduced from the average commercial rate (ACR) to 100% of the total published Medicare payment rate for expansion states or 110% for non-expansion states.
The law also provides for certain SDPs to be temporarily grandfathered until the phase down begins in 2028. CMS’s letter outlines (1) the criteria for deciding if and which SDPs are grandfathered and (2) which amount in the SDP is grandfathered (e.g., the total dollar amount or the payment rate).
1. Which SDPs are grandfathered?
According to CMS’s letter, SDPs eligible for grandfathering are those for rating periods occurring in State Fiscal Year (SFY) 2025, Calendar Year (CY) 2025, and SFY 2026 that were 1) approved by CMS before May 1, 2025, or 2) for which a completed preprint was submitted to CMS prior to July 4, 2025.
The letter clarifies that to qualify for grandfathering, the rating period must include any days from January 5, 2025 through July 3, 2025 or July 5, 2025, through December 31, 2025. CMS also notes that, if more than one preprint would qualify for grandfathering (e.g., SFY 2025 and SFY 2026), CMS will allow for grandfathering of the preprint with the higher total payment amount.
CMS also indicates that, for preprints currently under review by CMS, it will provide preliminary feedback in its approval letters on whether the “preprint is likely eligible for the grandfathering period.” The agency also noted that preprints approved prior to September 9, 2025 that have a SFY 2025, CY 2026, or SFY 2026 rating period are also preliminarily grandfathered.
2. What amount is grandfathered?
For SDPs that are “preliminarily grandfathered” per CMS’s guidance, CMS notes that the total dollar amount of the directed payment cannot increase in periods prior to the 2028 phase down. Importantly, CMS clarified that this total dollar amount is the amount specified in response to Item 4 of the grandfathered preprint.
If you have questions about how this guidance and the provisions of H.R. 1 may affect your state directed payment programs, please reach out to any Eyman Partners attorney to discuss.