Dive Brief:
- The Trump administration proposed a rule Wednesday that would restrict some financial mechanisms used to increase payment to providers in the safety-net insurance program Medicaid.
- The rule codifies cuts to state-directed payments already outlined in the GOP’s “One Big Beautiful Bill” — but takes the restrictions a step further, adding rate caps to other types of supplemental payments as well.
- The Trump administration said the rule if finalized will prevent fraud and waste in Medicaid and save the federal government $510 billion. Hospitals, which will lose out on Medicaid dollars under the funding constraints, said they welcome fiscal integrity in Medicaid but that the policies risk limiting access to care.
Dive Insight:
Republicans in Washington have honed in on Medicaid state-directed payments as an avenue to cut government spending and dig out what they say is fraud, waste and abuse in the safety-net insurance program.
State-directed payments allow states to funnel higher payments to providers in Medicaid managed care programs. States fund the programs through various mechanisms, like taxes on providers, that allow them to increase their Medicaid revenue. Higher Medicaid revenue then draws in more money from the federal government, since Washington is required to match at least half of state’s Medicaid spending.
Providers have argued that the funding mechanisms make up for inadequate base payment rates, and that restricting them would force some hospitals and doctor’s offices out of business.
However, critics say the payments unfairly inflate federal taxpayer’s share of Medicaid spending.
State-directed payments have grown out of control, the Trump administration said in a press release about the proposed rule.
Since the arrangements were created in 2016, the number of states using them has grown from two to 41, according to the CMS. Meanwhile, state-directed payments are projected to almost triple between 2024 and 2034, from $107 billion to $296 billion.
Now, the Trump administration is implementing new limits on directed payments passed as part of the “Big Beautiful Bill” last summer, part of the law’s almost $1 trillion in cuts from the safety-net program.
Specifically, regulators are proposing to restrict directed payment rates at 100% of Medicare rates for states that have expanded Medicaid to a greater share of their low-income residents, and at 110% for non-expansion states.
Previously, states could set the payments higher by tying them to more generous commercial rates.
The rate restrictions would apply only to new state-directed payments for inpatient and outpatient hospital services, nursing facility services and certain services at academic medical centers initially. However, they would expand to all services for payment periods beginning in 2029.
Existing state-directed payment arrangements could be eligible for a temporary grandfathering period, where their rates wouldn’t be phased down until 2028, in line with the GOP law.
Starting that year, rates for those arrangements would be phrased down by 10 percentage points annually, until they reach Medicare levels.
The CMS also proposed eliminating state-directed payment arrangements that allow set rate increases beginning in 2028, with an exception for grandfathered programs.
Additionally, the CMS proposed to apply similar limits to targeted payments to providers in Medicaid fee-for-service, a policy not included in the Big Beautiful Bill. The proposed limits, which would go into effect in 2029, would apply to payments not already subject to an existing limit, and represent another potential cut to providers’ Medicaid funding in the coming few years.
Hospitals in particular will be affected by the state-directed payment restrictions. Around half of overall spending in the arrangements go to hospitals in a given year, according to a recent analysis from J.P. Morgan, and they provide a notable financial boost for operators.
Supplemental payments are expected to account for 4% to 10% of revenue for HCA Healthcare, Tenet and Universal Health Services this year, J.P. Morgan said.
In a statement, powerful hospital lobby the American Hospital Association said that, while it shares CMS’ goal of “ensuring the fiscal integrity of the Medicaid program,” changes to the state-directed payments could have “very real consequences” for access to care.
“Projected reductions in funding for essential health care services will not only limit access to care for Medicaid patients,” said Ashley Thompson, the AHA’s senior vice president for public policy analysis and development. “When hospitals and providers are forced to reduce services — or even close entirely — everyone in a community is impacted.”
Though the Trump administration has moved to tamp down on state-directed payments, the CMS has continued to approve new requests for the arrangements since the Big Beautiful Bill was passed last July, sending hundreds of millions of dollars in extra funds to providers. That includes the highly-anticipated Florida state-directed payments, which regulators approved last month after delays.
The public can submit comments on the proposed rule for 60 days after it’s published in the Federal Register. The final rule is set to be published later this year.
