New CMS Proposed Rule Would Impose a Payment Limit on Additional State Directed Payments and Establish a Payment Limit for “Targeted” Medicaid Fee-for-Service Payments

On May 22, 2026, the Centers for Medicare & Medicaid Services (“CMS”) published a proposed rule regarding both Medicaid State directed payments (“SDPs”) and Medicaid fee-for-service reimbursement. The proposed rule is based on two distinct but reinforcing authorities: (i) section 71116 of H.R. 1 (a/k/a the “One Big Beautiful Bill Act”); and (ii) the Presidential Memorandum titled “Eliminating Waste, Fraud, and Abuse in Medicaid” (effective June 6, 2025).

The proposed rule would implement section 71116 by revising the SDP regulations for the four categories of SDPs addressed by the section: inpatient hospital services, outpatient hospital services, nursing facility services and qualified practitioner services at an academic medical center. For those covered SDPs, the rule would replace the prior Average Commercial Rate-based (“ACR”) ceiling with a new payment limit tied to Medicare or Medicaid State plan rates: 100% of the total published Medicare payment rate, for Medicaid expansion States; 110% of the total published Medicare payment rate, for non-Medicaid expansion States; and, where no applicable Medicare rate exists, the applicable Medicaid State plan or waiver rate (each individually, “Payment Limit”). The proposed rule would also implement section 71116’s “grandfathering” provisions.

Notably, the proposed rule also includes several provisions that go beyond section 71116. For example, CMS proposes extending the same Payment Limit framework beyond the four statutory service categories specified in section 71116 to include any Medicaid service that is covered under an SDP, beginning with the first rating period on or after January 1, 2029.

Separate from the SDP provisions, the proposed rule would also create a new fee-for-service targeted-payment framework, generally capping certain “targeted” Medicaid fee-for-service physician and provider payments at 100% of Medicare in expansion States and 110% in non-expansion States, subject to exceptions and transition rules. This proposal, if finalized by CMS, could be particularly impactful on IGT-funded supplemental payments for services provided by physicians and other practitioners (although such payments are often associated with physicians and other practitioners employed by or affiliated with State university teaching hospitals and academic medical centers, it is not uncommon for such payments to be made for services provided physicians and other practitioners employed by or affiliated with hospitals owned by local units of government).

The deadline for submitting comments to CMS regarding the proposed rule is July 21, 2026.

The following is a high-level summary of the proposed rule.

1. Proposed Amendments to Regulations Governing SDPs

A. Payment Limit for “Grandfathered State Directed Payments”

Under the proposed rule, the term “Grandfathered State directed payment” (“Grandfathered SDP”) means an SDP ‒ for inpatient hospital services, outpatient hospital services, nursing facility services or qualified practitioner services at academic medical centers ‒ that meets all of the following:

• Receives written prior approval from CMS.
• Is for a rating period that includes at least one business day between:
  • October 11, 2024, and July 3, 2025; or
  • July 5, 2025, and March 27, 2026.

• Was described in a completed preprint with an eligible rating period and documented total dollar amount that was submitted to CMS on or before July 4, 2025.

Grandfathered SDPs would be eligible to delay compliance with the Payment Limit established by section 71116 of H.R. 1. The following would be applicable to all Grandfathered SDPs:

• For each rating period beginning on or after July 4, 2025, and before January 1, 2028, the total payment rate for each service covered under the Grandfathered SDP must not exceed the ACR for such services.
• For each rating period beginning on or after July 4, 2025, and before January 1, 2028, renewals of or amendments to a Grandfathered SDP may not exceed the “Grandfathered Total Dollar Amount.”
  • The term “Grandfathered Total Dollar Amount” means the total dollar amount approved by CMS for a Grandfathered SDP. When preprint submissions of the same Grandfathered SDP for different rating periods meet the definition of a Grandfathered SDP, the highest total dollar amount approved by CMS is the Grandfathered Total Dollar Amount for that Grandfathered SDP.
• For each rating period beginning on or after January 1, 2028, the State must decrease 100% of the Grandfathered Total Dollar Amount by at least 10 percentage points annually, until the total payment rate for each service covered under the Grandfathered SDP satisfies the applicable Payment Limit.

B. Payment Limit for SDPs Other Than Grandfathered SDPs

1. For inpatient hospital services, outpatient hospital services, nursing facility services or qualified practitioner services at academic medical centers covered under an SDP that is not grandfathered:
   • On or after July 4, 2025, the total payment rate for each such service may not exceed the applicable Payment Limit.

2. For all other Medicaid services covered under an SDP:
   • On or after January 1, 2029, the total payment rate for each such service may not exceed the applicable Payment Limit. However:
     • Between July 9, 2024, and the first rating period beginning on or after January 1, 2029, a State must ensure that the total payment rate for each service “must be reasonable, appropriate, and attainable.” It is possible that, prior to January 1, 2029, CMS would use this “reasonable, appropriate, and attainable” standard to justify imposing payment rates below ACR for services covered under new SDPs, or renewed SDPs, with rating periods ending prior to January 1, 2029.

C. Other SDP-Related Issues

1. The “Total Published Medicare Payment Rate”:

For purposes of calculating the applicable Payment Limit for a service, such rate may include applicable Medicare payment adjustments, including but not limited to geographic and quality adjustments. The total published Medicare payment rate is inclusive of all components included in the rate developed by CMS for Medicare payment.

For providers reimbursed by Medicare on a cost basis, CMS proposes setting the applicable Payment Limit for a service on a cost basis through appropriate Medicare cost-allocation methodologies. CMS asks for stakeholder comments about the pros and cons of this approach, and whether alternatives should be considered.

2. Banning “Uniform Increase” Types of SDPs:

Under current SDP regulations, States may require Medicaid managed care plans to implement one of three different types of SDP methodologies: (i) uniform dollar or percentage increases; (ii) minimum fee schedules; or (iii) maximum fee schedules. Uniform increases are the most common type of SDP methodology.

CMS is concerned that States are electing a uniform increase methodology in order to ensure that specific providers or provider classes ‒ typically involving providers that can fund IGTs ‒ receive a pre-determined pool of payments, regardless of actual utilization and services delivered during the applicable rating period. CMS is also concerned that, going forward, uniform increases may result in providers receiving payments greater than allowed under the applicable Payment Limit.

Consequently, CMS proposes that, beginning with the first rating period on or after January 1, 2028, new uniform increase type SDPs and renewals of non-grandfathered uniform increase type SDPs would no longer be permitted. States would be left to choose between a minimum fee schedule or a maximum fee schedule. However, CMS also proposes to permit uniform increases in types of SDPs for Grandfathered SDPs, but only until the first rating period in which the applicable Payment Limit is reached (pursuant to the annual 10 percentage point reduction in the Grandfathered SDP’s Grandfathered Total Dollar Amount) for the Grandfathered SDP.

3. Temporary Use of Separate Payment Terms for Grandfathered SDPs:

Current SDP regulations prohibit the use of “separate payment terms” for SDPs for rating periods beginning on or after July 9, 2027. However, because CMS believes that separate payment terms offer a transparent and administratively feasible mechanism for monitoring Grandfathered SDPs, especially compliance with the Grandfathered Total Dollar Amount limitation, CMS proposes continuing the use of separate payment terms for Grandfathered SDPs until the applicable Payment Limit is reached (pursuant to the annual 10 percentage point reduction in the Grandfathered SDP’s Grandfathered Total Dollar Amount) for the Grandfathered SDP.

II. Proposed Amendment Establishing “Targeted Medicaid Payment Limit”

A. Background

CMS’s proposal to limit “targeted” fee-for-service Medicaid payments derives from CMS’s belief that such payments direct disproportionately large payments (often based on average commercial rates that are well in excess of Medicare rates) to narrowly defined groups of “practitioners” and “providers.” In the preamble to the proposed rule, CMS observes that these payments are concentrated among practitioners and providers with the means and ability to make IGTs ‒ or to have IGTs made on their behalf ‒ to fund the non-federal share of such targeted payments. CMS singles out fee-for-service payment methodologies that target physicians employed by or affiliated with State university teaching hospitals and academic medical centers.

B. “Practitioners” and “Providers”

The payment limit would apply to targeted payments for “practitioners” and “providers.” As proposed, “practitioner” would include physicians, dentists and other dental practitioners and other licensed practitioners (such as nurse practitioners, physician assistants and clinical nurse specialists).

The term “provider” would include providers such as ground emergency medical transportation providers, air ambulance providers, non-emergency medical transportation providers, clinics and certified community behavioral health clinics. “As such,” according to CMS, “the proposed limit applies to providers that are entities, which would also include an academic medical center that is part of a hospital . . .” Parenthetically, because fee-for-service payments for inpatient and outpatient services are subject to an “upper payment limit,” such payments would not be subject to the proposed rule’s payment limit (see below).

C. “Targeted” Fee-for-Service Medicaid Payments

Pursuant to the proposed rule, Medicaid fee-for-service payments that are “targeted” refer to any payment that a State directs to a specific practitioner or provider type, or group of practitioners or providers furnishing Medicaid-covered services ‒ but such payment is not available to all practitioners or providers furnishing the same Medicaid-covered services under the State plan. According to CMS, a State may target payments in various ways, including: (i) developing a fee schedule specifically for certain practitioners or providers that exceeds the fee schedules available to others; (ii) creating qualifications or eligibility requirements that target certain practitioners or providers that can receive a supplemental payment; and (iii) creating a quality incentive payment or value-based payment that targets certain practitioners or providers and excludes other similar practitioners or providers from participation or from receiving the incentive or value-based payment. CMS makes clear that Medicaid Disproportionate Share Hospital payments will not be considered “targeted” payments.

D. The Payment Limit

The proposed rule would limit the total Medicaid fee-for-service payment that a State may make for a targeted payment, base and supplemental combined, at 100% of the applicable Medicare rate (for Medicaid expansion States) and 110% of the applicable Medicare rate (for non-expansion States). The payment limit would be applied on a per-service basis. The applicable Medicare rate would generally be drawn from the Medicare Physician Fee Schedule or Ambulance Fee Schedule.

The foregoing notwithstanding, for Medicaid payment rates subject to a statutory requirement for a particular payment rate or methodology, the payment limit may not be less than the required Medicaid payment rate or the rate calculated under the required methodology. In addition, the payment limit would not apply if:

1. There is no reasonable Medicare equivalent payment rate;
2. Payments are reconciled to a practitioner’s or provider’s actual, incurred cost; or
3. The payments are already subject to a payment limit under 42 C.F.R. § 447.271 (upper payment limit based on customary charges for inpatient hospital services); 42 C.F.R. § 447.272 (upper payment limit for inpatient services furnished by hospitals, nursing facilities, ICFs/IID and IMDs); 42 C.F.R. § 447.321 (upper payment limit for outpatient services furnished by hospitals and clinics); 42 C.F.R. § 447.325 (upper payment limit for other inpatient and outpatient facility services, including psychiatric residential treatment facilities); 42 U.S.C. § 1396b(i)(7) (upper payment limit for clinical diagnostic laboratory tests); or 42 U.S.C. § 1396b(i)(27) (upper payment limit for DME, prosthetics, orthotics and supplies).

E. Geographic Region Can Take a Payment Out of “Targeted” Status

As proposed, the payment limit described above would not apply where a State’s fee-for-service payment methodology specified in its State plan is uniform for all participating practitioners or providers statewide, or uniform within a county, parish, borough or other municipality ‒ provided that the county, parish, borough or other municipality is referenced in the payment methodology specified in the State plan.

However, this region boundary requirement is strict. CMS makes clear that a State cannot define a “special purpose district” solely for rate-setting purposes, and cannot use a pre-existing non-political district (CMS specifically calls out special taxing districts as an example), unless that district shares the same boundaries as a county, parish, borough or municipality. A rate that is uniform within a State-defined geographic region whose boundaries do not align with a county, parish, borough or other municipality would be treated as effectively targeting a limited number of practitioners or providers and, in CMS’s words, “would be presumed to not be economic and efficient.”

F. The State Plan and Transition Period

CMS proposes that a State plan specify that targeted fee-for-service payments are subject to the above-described payment limits. For an existing State plan that currently authorizes targeted payments exceeding the payment limit (and to which no exception applies), the proposed rule would require that the State plan be brought into compliance with an effective date no later than the start of the first State fiscal year that begins on or after January 1, 2029.

III. Practical Takeaways

Managed care stakeholders should be aware that the proposed rule would apply payment limits to SDPs covering Medicaid services beyond the four service categories expressly addressed by section 71116 of H.R. 1. States, plans and participating providers should identify which existing SDPs qualify as grandfathered, confirm the approved total dollar amounts and rating periods supporting that status and model the phase-down that would begin in 2028. They should also evaluate how banning “uniform increase” types of SDPs,  for new and renewed non-grandfathered SDPs beginning in 2028, would impact their SDP-related plans and financial projections.

Providers that rely on fee-for-service Medicaid payments should begin inventorying which payment streams could be viewed as “targeted” under CMS’s proposed framework and testing those payments against the applicable Medicare benchmark. In practical terms, State university teaching hospitals and academic medical centers, other governmental hospitals and others that benefit from narrowly drawn physician or provider payment methodologies, should assess whether the arrangement fits within an exception, whether the payment can be restructured to apply more broadly and what operational or budget impact would follow if the State must revise its State plan by the first State fiscal year beginning on or after January 1, 2029.

If you have any questions or would like additional information on these topics, please contact:

• Tim Kennedy at (317) 977-1436 or tkennedy@hallrender.com;
• Camilla Moreno Jimenez at (317) 429-3679 or cjimenez@hallrender.com; or
• Your primary Hall Render contact.

Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.