On May 22, the Centers for Medicare and Medicaid Services (CMS) published its long-awaited notice of proposed rulemaking (SDP Proposed Rule) to implement the state directed payment (SDP) provisions enacted last summer in the Working Families Tax Cut Legislation (H.R. 1). In doing so, CMS proposes to apply expansively a policy of limiting Medicaid payments to a Medicare-based limit that is significantly less flexible than even traditional fee-for-service limits. The SDP Proposed Rule would cut federal SDP spending by more than 3 times the amount contemplated by Congress ($515 billion through 2035 compared to $149 billion in H.R.1). It also would make significant reductions to teaching professional and other targeted practitioner and provider supplemental payments in state Medicaid fee-for-service (FFS) programs.
In many cases, CMS justifies the expansive SDP restrictions and new limits on FFS payments as necessary to limit states’ use of intergovernmental transfers (IGTs) and provider taxes to finance payments. CMS also cites to a Presidential Memorandum issued in June 2025, directing the agency to “eliminate waste, fraud, and abuse in Medicaid” by ensuring Medicaid payments do not exceed what Medicare pays. Raising concerns about wasteful Medicaid spending, CMS notes that states are setting payment amounts and targeting payments to providers only on the basis of the providers’ ability to finance the non-federal share of the payments. Without directly regulating sources of non-federal share funding, the SDP Proposed Rule would effectively limit states’ use of provider taxes and IGTs to enhance provider payments.
In one piece of good news for providers with existing SDPs, CMS proposes to allow programs that are grandfathered under H.R. 1 to continue to use “separate payment terms” and propose SDP amendments retroactively during the grandfathering period. These provisions will apply after the end of the grandfathering phase down and to all SDPs that are not grandfathered.
Eyman Partners has prepared a summary of key provisions of the SDP Proposed Rule and how they compare to H.R. 1 and current regulations, as well as full version of the revised regulations and a timeline of the effective dates of various provisions. For a copy of the summary, please reach out to us at lhubbard@eymanlaw.com.
Many critical technical questions remain and impact will vary based on the details of your state and programs. Comments are due July 21, 2026. If you have questions about the SDP Proposed Rule and how it may impact you, please reach out to any Eyman Partners attorney.