Proposed Rule2026-10292
Medicaid Program; Medicaid Managed Care State Directed Payments and Medicaid Fee-for-Service Targeted Medicaid Practitioner Payments
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Published
May 22, 2026
Issuing agencies
Health and Human Services DepartmentCenters for Medicare & Medicaid Services
Abstract
This proposed rule describes alternatives to modify the limit on the total payment rate and other requirements for State directed payments in Medicaid managed care. We propose these changes based on our authority to interpret and implement section 1902(a)(4) of the Social Security Act (the Act) with respect to prepaid inpatient health plans and prepaid ambulatory health plans, and section 1903(m)(2)(A)(iii) of the Act, which require that contracts between States and managed care organizations to provide payments under a risk- based contract for services and associated administrative costs that are actuarially sound. This rule also proposes to set a limit for certain targeted Medicaid payments in Medicaid fee-for-service. We propose this change based on our authority to interpret and implement section 1902(a)(30)(A) of the Act with respect to certain targeted Medicaid payments which require that payments be consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area.
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<title>Federal Register, Volume 91 Issue 99 (Friday, May 22, 2026)</title>
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[Federal Register Volume 91, Number 99 (Friday, May 22, 2026)]
[Proposed Rules]
[Pages 30400-30466]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-10292]
[[Page 30399]]
Vol. 91
Friday,
No. 99
May 22, 2026
Part II
Department of Health and Human Services
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Centers for Medicare & Medicaid Services
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42 CFR Parts 438 and 447
Medicaid Program; Medicaid Managed Care State Directed Payments and
Medicaid Fee-for-Service Targeted Medicaid Practitioner Payments;
Proposed Rule
Federal Register / Vol. 91, No. 99 / Friday, May 22, 2026 / Proposed
Rules
[[Page 30400]]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 438 and 447
[CMS-2449-P]
RIN 0938-AV69
Medicaid Program; Medicaid Managed Care State Directed Payments
and Medicaid Fee-for-Service Targeted Medicaid Practitioner Payments
AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of
Health and Human Services (HHS).
ACTION: Proposed rule.
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SUMMARY: This proposed rule describes alternatives to modify the limit
on the total payment rate and other requirements for State directed
payments in Medicaid managed care. We propose these changes based on
our authority to interpret and implement section 1902(a)(4) of the
Social Security Act (the Act) with respect to prepaid inpatient health
plans and prepaid ambulatory health plans, and section
1903(m)(2)(A)(iii) of the Act, which require that contracts between
States and managed care organizations to provide payments under a risk-
based contract for services and associated administrative costs that
are actuarially sound. This rule also proposes to set a limit for
certain targeted Medicaid payments in Medicaid fee-for-service. We
propose this change based on our authority to interpret and implement
section 1902(a)(30)(A) of the Act with respect to certain targeted
Medicaid payments which require that payments be consistent with
efficiency, economy, and quality of care and are sufficient to enlist
enough providers so that care and services are available under the plan
at least to the extent that such care and services are available to the
general population in the geographic area.
DATES: To be assured consideration, comments must be received at one of
the addresses provided below, by July 21, 2026.
ADDRESSES: In commenting, please refer to file code CMS-2449-P.
Comments, including mass comment submissions, must be submitted in
one of the following three ways (please choose only one of the ways
listed):
1. Electronically. You may submit electronic comments on this
regulation to <a href="https://www.regulations.gov/docket/CMS-2026-1916">https://www.regulations.gov/docket/CMS-2026-1916</a>. Follow
the ``Submit a comment'' instructions.
2. By regular mail. You may mail written comments to the following
address ONLY: Centers for Medicare & Medicaid Services, Department of
Health and Human Services, Attention: CMS-2449-P, P.O. Box 8016,
Baltimore, MD 21244-8016.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
3. By express or overnight mail. You may send written comments to
the following address ONLY: Centers for Medicare & Medicaid Services,
Department of Health and Human Services, Attention: CMS-2449-P, Mail
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850. For
information on viewing public comments, see the beginning of the
SUPPLEMENTARY INFORMATION section.
FOR FURTHER INFORMATION CONTACT: John Giles, (410) 786-5545, Medicaid
Managed Care. Jocelyn Velez, (410) 786-2367, Medicaid Fee-for-Service
Payments.
SUPPLEMENTARY INFORMATION:
Inspection of Public Comments: All comments received before the
close of the comment period are available for viewing by the public,
including any personally identifiable or confidential business
information that is included in a comment. We post all comments
received before the close of the comment period on the following
website as soon as possible after they have been received: <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Follow the search instructions on that website to
view public comments. CMS will not post on <a href="http://Regulations.gov">Regulations.gov</a> public
comments that make threats to individuals or institutions or suggest
that the commenter will take actions to harm an individual. CMS
continues to encourage individuals not to submit duplicative comments.
We will post acceptable comments from multiple unique commenters even
if the content is identical or nearly identical to other comments.
Plain Language Summary: In accordance with 5 U.S.C. 553(b)(4), a
plain language summary of this proposed rule may be found at <a href="https://www.regulations.gov/">https://www.regulations.gov/</a>.
I. Background
Title XIX of the Social Security Act (the Act) established the
Medicaid program as a Federal-State partnership for the purpose of
providing and financing medical assistance to specified groups of
eligible individuals. States \1\ have considerable flexibility in
designing their programs but must abide by requirements specified in
the Federal Medicaid statute and regulations. Each State is responsible
for administering its Medicaid program in accordance with an approved
State plan, which specifies the scope of covered services, groups of
eligible individuals, payment methodologies, and all other information
necessary to assure the State plan describes a comprehensive and sound
structure for operating the Medicaid program, and ultimately, provides
a clear basis for claiming Federal matching funds.
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\1\ The use of the term ``State'' refers to all 50 states, the
District of Columbia and the territories unless otherwise noted.
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As of November 2025, the Medicaid program provided essential health
care coverage to more than 76 million \2\ individuals. In 2024,
Medicaid had annual outlays of more than $931.7 billion (total
computable).\3\ The program covers a broad array of health benefits and
services critical to many populations. For example, Medicaid pays for
approximately 41 percent of all births in the United States,\4\ is the
largest payer of long-term services and supports,\5\ and provides
health coverage for more than half of all children in the United
States.\6\
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\2\ November 2025 Medicaid and CHIP Enrollment Snapshot.
Accessed at <a href="https://www.medicaid.gov/resources-for-states/downloads/eligib-oper-and-enrol-snap-nov2025.pdf">https://www.medicaid.gov/resources-for-states/downloads/eligib-oper-and-enrol-snap-nov2025.pdf</a>.
\3\ CMS National Health Expenditure Fact Sheet. Accessed at
<a href="https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/nhe-fact-sheet">https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/nhe-fact-sheet</a>.
\4\ National Center for Health Statistics. Key Birth Statistics
(2024 Data.). Accessed at <a href="https://www.cdc.gov/nchs/nvss/births.htm">https://www.cdc.gov/nchs/nvss/births.htm</a>.
\5\ Colello, Kirsten J. Who Pays for Long-Term Services and
Supports? Congressional Research Service. Updated June 15, 2022.
Accessed at <a href="https://crsreports.congress.gov/product/pdf/IF/IF10343">https://crsreports.congress.gov/product/pdf/IF/IF10343</a>.
\6\ Desilver, D. What the data says about Medicaid. June 2025.
Pew Research Center. Accessed at https://www.pewresearch.org/short-
reads/2025/06/24/what-the-data-says-about-medicaid/
#:~:text=blind%20or%20disabled.-
,How%20many%20people%20have%20Medicaid%20coverage?,adult%20population
%20as%20of%20January.
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Depending on the State and its Medicaid program structure,
beneficiaries access their health care services using fee-for-service
(FFS) and/or managed care delivery systems. States also provide
services through demonstrations and waiver programs under both delivery
systems. In 2024, approximately 85 percent of Medicaid beneficiaries
were enrolled in managed care; \7\ the remaining individuals
[[Page 30401]]
received all or some services through FFS.
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\7\ <a href="https://data.medicaid.gov/dataset/79692ea5-21e1-56bf-8149-97d437120c4b?conditionsproperty=year&conditionsvalue=2024&conditionsoperator=%3D">https://data.medicaid.gov/dataset/79692ea5-21e1-56bf-8149-97d437120c4b?conditionsproperty=year&conditionsvalue=2024&conditionsoperator=%3D</a>.
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On June 6, 2025, President Trump signed a Presidential Memorandum
titled ``Eliminating Waste, Fraud, and Abuse in Medicaid'' \8\
(hereinafter referred to as ``the Presidential Memorandum''). This
memorandum directed the Secretary of Health and Human Services (the
Secretary) to eliminate fraud, waste, and abuse in Medicaid, including
by ensuring Medicaid payment rates are not higher than Medicare, to the
extent permitted by applicable law. The memorandum noted the
Administration's concerns that certain State financing arrangements
have, at times, been used to further waste, fraud, and abuse in
Medicaid. It also noted that State directed payment (SDPs) have grown
substantially in recent years, and that this trajectory threatens the
Federal Treasury and Medicaid's long-term stability. It also pointed to
distortions created by the incentives in arrangements in which provider
taxes or intergovernmental transfers (IGTs) are returned to the same
providers through Medicaid payments, thereby absolving States of their
obligation to share in the burden of financing the joint Federal and
State Medicaid program. When States are relieved of these financial
obligations through such arrangements, the memorandum stated that
States' incentives for prudent administration are reduced. The
memorandum noted that both seniors on Medicare and Medicaid recipients
deserve access to quality care in a system free from fraud, waste, and
abuse. We are concerned that increased Medicaid payments that are not
aligned with statutory objectives such as supporting access to care may
instead reward providers primarily on the basis of their ability to
supply the non-Federal share of their own payments, rather than on
advancing access to or quality of care for Medicaid beneficiaries.
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\8\ <a href="https://www.whitehouse.gov/presidential-actions/2025/06/eliminating-waste-fraud-and-abuse-in-medicaid/">https://www.whitehouse.gov/presidential-actions/2025/06/eliminating-waste-fraud-and-abuse-in-medicaid/</a>.
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On July 4, 2025, Public Law (Pub. L.) 119-21 was enacted (which CMS
refers to as the ``Working Families Tax Cut'' (WFTC) legislation).
Section 71116(a) of the WFTC legislation directed the Secretary to
revise Sec. 438.6(c)(2)(iii) to limit the total payment rate for
certain SDPs for inpatient hospital services, outpatient hospital
services, nursing facility services, or qualified practitioner services
at an academic medical center (AMC) (hereinafter referred to as the
``four services'') effective with the first rating period beginning on
or after the date of enactment, July 4, 2025. Section 71116(b) of the
WFTC legislation provides for the temporary grandfathering period for
certain SDPs and requires a phase down beginning with the first rating
period that starts on or after January 1, 2028.
To implement section 71116 of the WFTC legislation, the Secretary
instructed us to develop and release this proposed rule. To aid State
planning efforts until a final rule is issued, we issued a Dear
Colleague Letter on February 2, 2026 with preliminary guidance on how
we were interpreting certain provision in section 71116 of the WFTC
legislation.<SUP>9 10</SUP> We noted that the information was
preliminary in nature and final policies would depend on the contents
of the final rule. This letter also signaled that we were considering
proposing changes to the limit for the total payment rate for SDPs for
other services beyond the four services specified by section 71116 of
the WFTC legislation as part of our broader effort to align this
rulemaking with the Presidential Memorandum referenced in the letter.
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\9\ <a href="https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-letter-02022026.pdf">https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-letter-02022026.pdf</a>.
\10\ CMS initially issued a Dear Colleague Letter on September
9, 2025; however, this letter was rescinded and replaced on February
2, 2026.
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SDPs have become a significant part of the Medicaid program. When
designed and implemented with fiscal integrity, they can help States
implement provider payment initiatives and delivery system reform
efforts that further advance access to care and enhance quality of care
in Medicaid managed care. However, as we have seen over time, they can
also become vehicles for waste and abuse in the Medicaid program. For
example, when these SDPs are not designed to improve care for
beneficiaries and are instead designed to financially advantage a small
number of providers and disincentivize States from investing in their
own Medicaid programs by primarily relying on provider taxes or IGTs to
fund the non-Federal share, these arrangements may contribute to
inefficient or wasteful Medicaid spending. Through the issuance of the
February 2, 2026 Dear Colleague Letter providing preliminary guidance
on section 71116 of the WFTC legislation, and publication of the
Preserving Medicaid Funding for Vulnerable Populations-Closing a Health
Care-Related Tax Loophole Final Rule (91 FR 4794), we have taken steps
to address fiscal integrity concerns in Medicaid. Reforming SDP
requirements would allow CMS and States to refocus on the original
purpose of these arrangements, which is to permit States to direct
certain managed care plan expenditures \11\ within specified parameters
to improve access and ultimately, quality of beneficiary care. We
strongly believe that Medicaid beneficiaries deserve access to quality
care in a system free from fraud, waste, and abuse and that promotes
strong fiscal and program integrity.
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\11\ Throughout this document, the use of the term ``managed
care plan'' includes MCOs, PIHPs, and PAHPs, and is only used when a
reference applies to all three arrangements. An explicit reference
is used if the provision applies to primary care case management
(PCCM) or PCCM entities.
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A. Medicaid Managed Care Delivery Systems
The volume of Medicaid beneficiaries enrolled in Medicaid managed
care has grown from 81 percent in 2016 to 85 percent in 2022.\12\
States may implement a Medicaid managed care delivery system using four
Federal authorities--sections 1915(a), 1915(b), 1932(a), and 1115(a) of
the Act; each is briefly described later in this section.
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\12\ CMCS Managed Care Enrollment Report. Accessed at <a href="https://www.medicaid.gov/medicaid/managed-care/enrollment-report">https://www.medicaid.gov/medicaid/managed-care/enrollment-report</a>.
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Under section 1915(a) of the Act, States can implement a voluntary
managed care program by executing a contract with organizations that
the State has procured using a competitive procurement process; we
review and approve these contracts in accordance with Sec. 438.3(a).
To require beneficiaries to enroll in a managed care program to receive
services, a State must obtain approval from us under two primary
authorities:
<bullet> Through a State plan amendment (SPA) that meets standards
set forth in section 1932(a) of the Act, States can implement a
mandatory managed care delivery system. This authority does not allow
States to require beneficiaries who are dually eligible for Medicare
and Medicaid (dually eligible beneficiaries), American Indians/Alaska
Natives (except as permitted in section 1932 (a)(2)(C) of the Act), or
children with special health care needs to enroll in an applicable
managed care program. State plans, once approved by us, remain in
effect until modified by the State, with our approval.
<bullet> Through a waiver under section 1915(b) of the Act, States
are permitted to require all Medicaid beneficiaries to enroll in a
managed care delivery system, including dually eligible beneficiaries,
American Indians/Alaska Natives, or children with special health care
needs. After our approval, a State
[[Page 30402]]
may operate a section 1915(b) waiver for a 2-year period before
requesting renewal for an additional 2-year period. Section 1915(b) of
the Act waivers may be approved for a 5-year initial period and renewed
for additional 5-year periods if they include individuals who are
dually eligible for Medicare and Medicaid.
<bullet> We may also authorize managed care programs as part of
demonstration projects under section 1115(a) of the Act that include
waivers permitting a State to require all Medicaid beneficiaries to
enroll in a managed care delivery system, including dually eligible
beneficiaries, American Indians/Alaska Natives, and children with
special health care needs. Under this authority, States may seek
additional flexibility to demonstrate and evaluate innovative policy
approaches for delivering Medicaid benefits, as well as the option to
provide services not typically covered by Medicaid. Such demonstrations
are approvable only if it is determined that the demonstration would
promote the objectives of the Medicaid statute and the demonstration is
subject to an independent evaluation.
With the exception of section 1915(a) of the Act, the authorities
discussed previously all permit States to operate their Medicaid
managed care programs without complying with the following standards of
the Medicaid statute outlined in section 1902 of the Act:
<bullet> Statewideness (section 1902(a)(1) of the Act): States may
implement a managed care delivery system in specific areas of the State
(generally counties/parishes) rather than the whole State.
<bullet> Comparability of Services (section 1902(a)(10)(B) of the
Act): States may provide different benefits to people enrolled in a
managed care delivery system.
<bullet> Freedom of Choice (section 1902(a)(23)(A) of the Act):
States may generally require individuals to receive their Medicaid
services only from a managed care plan's network of providers or
primary care provider, including through PCCMs and PCCM entities.
B. Relevant Medicaid Managed Care Rules
In the May 6, 2016 Federal Register (81 FR 27498), we published the
``Medicaid and Children's Health Insurance Program (CHIP) Programs;
Medicaid Managed Care, CHIP Delivered in Managed Care, and Revisions
Related to Third Party Liability'' final rule (hereinafter referred to
as ``the 2016 final rule'') that modernized the Medicaid and CHIP
managed care regulations to reflect changes in the use of managed care
delivery systems. The 2016 final rule aligned many of the rules
governing Medicaid and CHIP managed care with those of other major
sources of coverage; implemented applicable statutory provisions;
strengthened actuarial soundness payment provisions to promote the
accountability of managed care program rates; strengthened efforts to
reform delivery systems that serve Medicaid and CHIP beneficiaries; and
enhanced policies related to program integrity. The 2016 final rule
applied many of the Medicaid managed care rules to separate CHIP
programs, particularly in the areas of access, finance, and quality
through cross-references at subpart L of 42 CFR part 457 to 42 CFR part
438. States may administer CHIP programs that are separate CHIP
programs or as programs that are operated as an expansion of the
State's Medicaid program.
In the November 13, 2020 Federal Register (85 FR 72754), we
published the ``Medicaid Program; Medicaid and Children's Health
Insurance Program (CHIP) Managed Care'' final rule (hereinafter
referred to as the ``2020 final rule'') which streamlined the Medicaid
and CHIP managed care regulatory framework to relieve regulatory
burdens; support State flexibility and local leadership; and promote
transparency, flexibility, and innovation in the delivery of care. The
rule was intended to ensure that the regulatory framework was efficient
and feasible for States to implement in a cost-effective manner and
ensure that States can implement and operate Medicaid and CHIP managed
care programs without undue administrative burdens.
In the May 10, 2024 Federal Register (89 FR 41002), we published
the ``Medicaid Program; Medicaid and Children's Health Insurance
Program (CHIP) Managed Care Access, Finance, and Quality'' final rule
(hereafter referred to as the ``2024 final rule'') which established
new standards to help States improve their monitoring of access to care
and codified requirements for State use of in lieu of services and
settings. The final rule also enhanced quality, fiscal and program
integrity requirements for SDPs, addressed impermissible redistribution
arrangements related to SDPs, and added clarity to the requirements
related to medical loss ratio calculations. The 2024 final rule also
codified a limit to the total payment rate (often referred to as the
``total payment rate limit'') for certain types of SDPs at the average
commercial rate (ACR).
We note that SDPs authorized under Sec. 438.6(c) do not apply to
separate CHIP programs. SDPs can, however, be used in Medicaid programs
that include Title XXI-funded Medicaid expansion CHIP beneficiaries;
that is, programs in which a State receives Federal funding to expand
Medicaid eligibility to optional targeted low-income children that
meets the requirements of section 2103 of the Act. For purposes of this
document, references to ``Medicaid'' mean = States' programs operated
under Title XIX, including those that cover Medicaid expansion CHIP
populations, and do not include separate CHIP programs.
C. History of State Directed Payments
Section 1903(m)(2)(A)(iii) of the Act requires that contracts
between States and managed care organizations (MCOs) provide for
payments under a risk-based contract for services and associated
administrative costs to be actuarially sound. Under section 1902(a)(4)
of the Act, we also have authority to establish methods of
administration for Medicaid that are necessary for the proper and
efficient operation of the State plan. Under this authority in section
1902(a)(4) of the Act, we extended the requirement for actuarially
sound capitation rates to prepaid inpatient health plans (PIHPs) and
prepaid ambulatory health plans (PAHPs). The regulations addressing
actuarially sound capitation rates are set forth in Sec. 438.4 through
438.7, and require that such rates be projected to provide for all
reasonable, appropriate, and attainable costs required under the terms
of the contract and for the operation of the managed care plan during
the specified time period and for the population covered under the
terms of the contract.
In risk-based managed care programs, managed care plans have the
responsibility to manage the financial risk of the contract, and one of
the primary tools plans use is negotiating payment rates with
providers. Unless there are specific Federal statutory or regulatory
requirements or State contractual restrictions, the provider payment
rates and conditions for payment between risk-bearing managed care
plans and their network providers are subject to negotiation between
the parties and may reflect overall private market conditions, as
documented in a
[[Page 30403]]
network agreement. As long as managed care plans are meeting the
requirements for ensuring access to care and network adequacy, States
typically provide managed care plans latitude to develop a network of
providers to ensure appropriate access to covered services under the
contract for their enrollees and fulfill all of their contractual
obligations while managing financial risk.
Subject to certain exceptions, States are generally not permitted
to direct the expenditures of a Medicaid managed care plan under the
contract between the State and the plan, or to make payments to
providers for services covered under the contract between the State and
the plan (Sec. Sec. 438.6 and 438.60, respectively). However, there
are circumstances in which a State may believe that requiring managed
care plans to make specified payments to health care providers is an
important tool in furthering the State's overall Medicaid program goals
and objectives. For example, a State may direct managed care plan
expenditures to ensure that certain minimum payments are made to safety
net providers to ensure access to care, to enhance provider payment as
mandated by State legislative directives, or to make quality payments
to ensure providers are appropriately rewarded for meeting certain
program goals. Because this type of State direction reduces the plan's
ability to effectively manage costs, in the 2016 final rule, we
established specific exceptions to the general rule prohibiting States
from directing the expenditures of managed care plans under Sec.
438.6(c)(1)(i) through (iii). These exceptions came to be known as
SDPs.
The current regulations under Sec. 438.6(c) specify the parameters
for how and when States may direct the expenditures of their Medicaid
managed care plans and the associated requirements and prohibitions on
such arrangements. Permissible SDPs include directives that plans pay
certain providers who participate in value-based purchasing (VBP)
models, in multi-payer or Medicaid-specific delivery system reform or
performance improvement initiatives, or that managed care plans adhere
to certain fee schedule requirements for provider payment (for example,
minimum fee schedules, maximum fee schedules, and uniform dollar or
percentage increases). Among other requirements, Sec. 438.6(c)
requires SDPs to be based on the utilization and delivery of services
under the managed care contract and expected to advance at least one of
the goals and objectives in the State's managed care quality strategy.
All SDPs must be included in all applicable managed care
contract(s) and described in all applicable rate certification(s) as
noted under Sec. Sec. 438.6(c) and 438.7(b)(6), respectively. Further,
Sec. 438.6(c)(2)(i) requires that most SDPs be approved in writing by
us prior to implementation.\13\ To obtain our written prior approval,
States must submit a ``preprint'' \14\ to us to document how the SDP
complies with the Federal requirements outlined under Sec. 438.6(c).
States must obtain written approval of certain SDPs for us to approve
the corresponding Medicaid managed care contract(s) and rate
certifications(s).
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\13\ SDPs that use minimum fee schedules for providers that
provide a particular service under the contract using State plan
approved rates as defined in Sec. 438.6(a), or using a total
published Medicare payment rate that was in effect no more than 3
years prior to the start of the rating period are not subject to the
written prior approval requirement in Sec. 438.6(c)(2)(i); however,
they must comply with the requirements currently in Sec.
438.6(c)(2)(ii)(A) through (J) (other than the requirement for
written prior approval) and be appropriately documented in the
managed care contract(s) and rate certification(s).
\14\ The current version of the preprint is available online:
<a href="https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-4386c-preprint-template.pdf">https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-4386c-preprint-template.pdf</a>.
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Each SDP preprint submitted to us is reviewed by a Federal review
team to ensure the payments comply with the regulatory requirements
under Sec. 438.6(c) and other applicable laws. The Federal review team
may consist of subject matter experts from various components and
groups within CMS, which may include those representing managed care
policy and operations, quality, and/or actuarial science. Over time,
these reviews have expanded to include subject matter experts on
financing of the non-Federal share and demonstration authorities, when
needed. The CMS Federal review team works diligently to ensure a timely
review and that standard operating procedures are followed for a
consistent and thorough review of each preprint. Most preprints are
submitted for renewal on an annual basis; SDPs that are for VBP
arrangements, delivery system reform, or performance improvement
initiatives and that meet additional criteria in Sec. 438.6(c)(3)(i)
are eligible for multi-year approval. States also have the option to
submit preprint amendments when it is necessary to modify the payment
arrangement. We endeavor to complete the review of each SDP preprint
submission within 90 days; however, there is no regulatory requirement
that we approve or disapprove SDPs within a certain time period.
We issued guidance to States regarding SDPs on multiple occasions.
In November 2017, we published the initial preprint along with guidance
for States on the use of SDPs.\15\ In May 2020, we published guidance
on managed care flexibilities to respond to the COVID-19 public health
emergency (PHE), including how States could use SDPs in support of
their COVID-19 response efforts.\16\ In January 2021, we published
additional guidance for States to clarify existing policy, and also
issued a revised preprint that States must use for rating periods
beginning on or after July 1, 2021.\17\ The revised preprint \18\ is
more comprehensive compared to the initial preprint, and it is designed
to systematically collect the information that we identified as
necessary as part of our review of SDPs to ensure compliance with the
Federal regulatory requirements.\19\ This includes identification of
the estimated total dollar amount for the SDP, an analysis of total
provider payment rates for the class(es) of providers that the SDP is
targeting, and information about the sources of the non-Federal share
used to finance the SDP. In September 2025, we issued initial guidance
regarding section 71116 of the WFTC legislation \20\ and in the letter,
acknowledged that the guidance therein was preliminary in nature and
final policies would be implemented through a process of notice-and-
comment rulemaking. We also published additional guidance on SDP
quality evaluations \21\ in September, which detailed regulatory
requirements and recommended best practices for state design and
submission of SDP quality evaluation plans and findings.
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\15\ <a href="https://www.medicaid.gov/sites/default/files/federal-policy-guidance/downloads/cib11022017.pdf">https://www.medicaid.gov/sites/default/files/federal-policy-guidance/downloads/cib11022017.pdf</a>.
\16\ <a href="https://www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/cib051420.pdf">https://www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/cib051420.pdf</a>.
\17\ <a href="https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/smd21001.pdf">https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/smd21001.pdf</a>.
\18\ CMS ID No: 10398, OMB No: 0938-1148, #52.
\19\ <a href="https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-4386c-preprint-template.pdf">https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-4386c-preprint-template.pdf</a>.
\20\ <a href="https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-ltr-09092025.pdf">https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-ltr-09092025.pdf</a>.
\21\ <a href="https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/cib09102025.pdf">https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/cib09102025.pdf</a>.
\22\ The number of preprints includes initial preprint
submissions, renewals and amendments.
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Since Sec. 438.6(c) was finalized in the 2016 final rule, States
have requested approval for an increasing number of SDPs. The scope,
size, and complexity of the SDP arrangements submitted by States for
approval has also grown steadily and quickly as illustrated by Table
1.\22\
[[Page 30404]]
[GRAPHIC] [TIFF OMITTED] TP22MY26.000
SDPs also represent a notable amount of State and Federal spending.
Based on an analysis of all SDP preprints by our Office of the Actuary
(OACT), we estimate that absent any changes to existing regulations and
before accounting for the impact of the WFTC legislation, SDP spending
is projected to be $97.8 billion in fiscal year (FY) 2024 (total
computable) and projected to increase to approximately $124.3 billion
(total computable) for FY 2025 and $144.6 billion for FY 2026. As total
dollars flowing through SDPs have increased significantly even since
publication of the 2024 final rule, we have grown increasingly
concerned that additional fiscal guardrails are warranted. The proposed
changes in this proposed rule are intended to ensure responsible fiscal
stewardship of the Medicaid program, as required by section 71116 of
the WFTC legislation and consistent with the Presidential Memo.
D. Historical SDP Payment Rate Limits
In the 2016 final rule, Sec. 438.6(c)(2) specified that SDPs must
be developed in accordance with Sec. 438.4, and related actuarial
standards specified in Sec. Sec. 438.5, 438.7, and 438.8. Under the
definition in Sec. 438.4, actuarially sound capitation rates are
``projected to provide for all reasonable, appropriate, and attainable
costs that are required under the terms of the contract and for the
operation of the MCO, PIHP, or PAHP for the time period and the
population covered under the terms of the contract . . .'' Consistent
with this definition in Sec. 438.4, we noted in the State Medicaid
Director Letter (SMDL) #21-001 published on January 8, 2021 that we
require States to demonstrate that SDPs result in provider payment
rates that are reasonable, appropriate, and attainable as part of the
preprint review process.\23\
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\23\ <a href="https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/smd21001.pdf">https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/smd21001.pdf</a>.
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In applying these standards during early SDP reviews, we
encountered situations where the absence of a clear quantitative limit
on the total payment rate, such as a requirement that rates be no
greater than Medicare rates or no greater than the ACR created
uncertainty during the CMS review process. In late 2017, we received an
SDP preprint to raise inpatient hospital payment rates such that the
total payment rate exceeded 100 percent of the comparable Medicare
rates, but the payments would remain below the ACR for that service and
provider class in that State. We had concerns about whether the payment
rates were still reasonable, appropriate, and attainable for purposes
of our approval of the SDP as being consistent with the regulatory
requirement at the time that all SDPs must be developed in accordance
with Sec. 438.4 and the standards specified in Sec. 438.5. At the
time, we realized that approving an SDP that exceeded 100 percent of
Medicare payment rates would be precedent setting for CMS.
As we noted in the 2024 final rule, Medicare is a significant payer
in the health insurance market, and Medicare reimbursement is a
standardized benchmark used in the industry. Medicare reimbursement is
also a benchmark used in Medicaid FFS, including the Upper Payment
Limits (UPLs) that apply to classes of institutional providers, such as
inpatient and outpatient hospitals, nursing facilities, and
intermediate care facilities for individuals with intellectual
disabilities (ICFs/IID), that are based on a reasonable estimate of the
amount that Medicare would pay for Medicaid services. The UPLs apply an
aggregate payment ceiling based on an estimate of how much Medicare
would have paid in total for the Medicaid services as a mechanism for
determining economy and efficiency of payment for State plan services
while allowing for facility-specific payments.
Generally, for inpatient and outpatient services, these FFS UPL
requirements apply to three classes of facilities based on ownership
status: (1) State government-owned or operated; (2) non-State
government-owned or operated; and (3) private owned and operated.
Hospitals within a class can be paid different amounts and facility-
specific total payment rates can vary, sometimes widely, so long as in
the aggregate, the total amount that Medicaid FFS paid across the class
is no more than what Medicare would have paid to those providers for
those services.
When originally considering the Medicaid FFS UPL methodologies, we
had concerns that applying the same standards for the total payment
rate under SDPs to three classes based on ownership status, would not
be appropriate for implementing the SDP requirements. We stated in the
2024 final rule, that Sec. 438.6(c)(2)(ii)(B) provides States with
broader flexibility than what is required for FFS UPLs in defining the
provider class for which States can implement SDPs. This flexibility
has proven important for States to target their efforts to achieve
their stated policy goals tied to their managed care quality strategy.
For example, we have approved SDPs where States proposed and
implemented SDPs that applied to provider classes defined as all
providers that are certified to serve as a Patient-Centered Medical
Home (PCMH) and therefore, provide increased care coordination compared
to providers that are not certified as PCMHs. Not all providers
providing a particular service in Medicaid managed care programs must
be included in an SDP. Under Sec. 438.6(c)(2)(ii)(B), States are
required to direct expenditures
[[Page 30405]]
equally, using the same terms of performance, for a class of providers
furnishing services under the contract; however, they are not required
to direct expenditures equally using the same terms of performance for
all providers providing services under the contract. As we noted in the
2024 final rule, we could face challenges applying a similar UPL
standard across provider classes under an SDP without some alignment
between State defined classes and the FFS UPL framework.
In 2018, we ultimately interpreted Sec. 438.6(c)(2)(i) to allow
total payment rates in an SDP up to the ACR and required that States
demonstrate, through a total payment rate comparison to the ACR, that
total payment rates under the SDP would not exceed the ACR. We
formalized this process in the revised preprint published in January
2021 and described it in the accompanying SMDL. Although we have
collected this information for each SDP submitted for written prior
approval, we historically requested the impact not only of the SDP
under review, but any other payments made by the managed care plan (for
example, other SDPs or pass-through payments) to any providers included
in the provider class specified by the State for the same rating
period.
When a State has not demonstrated that the total payment rate for
each service and provider class included in each SDP arrangement is at
or below either the Medicare or Medicaid FFS rate (when Medicare does
not cover the service), we have generally requested documentation from
the State to demonstrate that the total payment rate(s) that exceeds
the Medicare or the Medicaid FFS rate do not exceed the ACR for the
service and provider class. We have worked with States to collect
documentation on the total payment rate, which has evolved over time.
With the growth of SDPs, oversight entities released reports
focused on SDPs. In a December 2020 report,\24\ the Government
Accountability Office (GAO) raised concerns that States' reliance on
provider taxes and local government funds used for IGTs effectively
shifted responsibility for a larger portion of Medicaid payments to the
Federal government and away from States. The Medicaid and CHIP Payment
and Access Commission's (MACPAC) June 2022 Report to Congress on
Medicaid and CHIP \25\ recommended that CMS improve monitoring,
oversight and transparency of SDPs. In December 2023,\26\ GAO echoed
similar concerns regarding SDP transparency and weak fiscal guardrails
in the absence of codified SDP payment limits. We published the 2024
final rule to address these concerns, among other goals.
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\24\ U.S. Government Accountability Office, ``CMS Needs More
Information on States' Financing and Payment Arrangements to Improve
Oversight,'' December 7, 2020, available at <a href="https://www.gao.gov/assets/gao-21-98.pdf">https://www.gao.gov/assets/gao-21-98.pdf</a>.
\25\ Medicaid and CHIP Payment and Access Commission, ``Report
to Congress on Medicaid and CHIP,'' June 2022, available at <a href="https://www.macpac.gov/wp-content/uploads/2022/06/MACPAC_June2022-WEB-Full-Booklet_FINAL-508-1.pdf">https://www.macpac.gov/wp-content/uploads/2022/06/MACPAC_June2022-WEB-Full-Booklet_FINAL-508-1.pdf</a>.
\26\ U.S. Government Accountability Office, ``Medicaid Managed
Care: Rapid Spending Growth in State Directed Payments Needs
Enhanced Oversight and Transparency,'' December 14, 2023, available
at <a href="https://www.gao.gov/assets/gao-24-106202.pdf">https://www.gao.gov/assets/gao-24-106202.pdf</a>.
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The 2024 final rule codified the standard in Sec.
438.6(c)(2)(ii)(I) that each SDP must ensure that the total payment
rate for each service, and each provider class included in the SDP must
be reasonable, appropriate, and attainable and, upon request from us,
the State must provide documentation demonstrating the total payment
rate for each service and provider class. We also finalized Sec.
438.6(a) to define ``total payment rate'' as the aggregate for each
managed care program of: (1) the average payment rate paid by all MCOs,
PIHPs, or PAHPs to all providers included in the specified provider
class for each service identified in the SDP; (2) the effect of the SDP
on the average rate paid to providers included in the specified
provider class for the same service for which the State is seeking
written prior approval; (3) the effect of any and all other SDPs on the
average rate paid to providers included in the specified provider class
for the same service for which the State is seeking written prior
approval; and (4) the effect of any and all allowable pass-through
payments, as defined in Sec. 438.6(a), to be paid to any and all
providers in the provider class specified in the SDP for which the
State is seeking written prior approval on the average rate paid to
providers in the specified provider class. Under this definition,
although the total payment rate is collected for each SDP, the
information provided for each SDP must account for the effects of all
payments from the managed care plan (for example, other SDPs or pass-
through payments) to any providers included in the provider class
specified by the State for the same rating period.
Although this proposed rule does not propose any provisions that
pertain to Medicaid Disproportionate Share Hospital (DSH) payments, we
nevertheless want to use this opportunity to remind States about the
interaction between SDPs and DSH. Under the statutory hospital-specific
limits found in section 1923(g) of the Act, a hospital's DSH payments
may not exceed the costs incurred by that hospital in furnishing
inpatient and outpatient hospital services during the year to certain
Medicaid beneficiaries and the uninsured, less payments received under
Title XIX of the Act (other than section 1923 of the Act) and payments
by uninsured patients. The 2008 Disproportionate Share Hospital
Payments final rule (73 FR 77904) stated that Medicaid managed care
payments are part of the calculation and reporting requirements for
DSH. For purposes of Medicaid DSH, the 2008 final rule, defined
``Medicaid MCO payments'' as ``payments from MCOs to hospitals for
inpatient and outpatient services provided to Medicaid managed care
enrollees'' (73 FR 77920). In the 2016 final rule (81 FR 27498), we
established SDPs, which we later characterized as payments made by the
State directly to providers or at the direction of the State managed
care plan for plan-covered services.\27\ As such, SDPs paid to a
hospital for inpatient or outpatient hospital services, when made in
accordance with Sec. 438.6(c), are regarded as payments for Medicaid
services, and must be offset from costs when a State calculates the
hospital-specific DSH limit.
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\27\ SMDL #21-001, Additional Guidance on State Directed
Payments in Medicaid Managed Care, January 8, 2021.
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The 2024 final rule also finalized Sec. 438.6(c)(2)(i), which
excludes SDPs that set a minimum fee schedule using Medicaid State plan
approved rates for a particular service (specified in Sec.
438.6(c)(1)(iii)(A)) from the written prior approval requirement. An
SDP that sets a minimum fee schedule at exactly 100 percent of the
total published Medicare payment rate that was in effect no more than 3
years prior to the start of the applicable rating period for a
particular service (specified in Sec. 438.6(c)(1)(iii)(B)) also does
not require written prior approval by us, as specified in Sec.
438.6(c)(2)(i). We believe that both specific payment rates meet the
requirement for reasonable, appropriate, and attainable total payment
rates because we have reviewed and determined these payment rates to be
appropriate under the applicable statute and implementing regulations
for Medicare and Medicaid, respectively. However, for other SDP
arrangements, we believed at the time of rulemaking that additional
analysis and consideration was necessary to ensure that the payment
rates directed by the
[[Page 30406]]
State meet the standard of reasonable, appropriate, and attainable.
To codify a payment limit for the service types that represented
the largest proportion of SDP spending, the 2024 final rule also
finalized Sec. 438.6(c)(2)(iii) to establish a limit of 100 percent of
the ACR for the total payment rate for each SDP for which written prior
approval is required for inpatient hospital services, outpatient
hospital service, nursing facility services, and qualified practitioner
services at an AMC. In addition to this limit, we established specific
standards for the data and documentation requirements necessary to
demonstrate compliance with this limit. The 2024 final rule also
finalized a definition of the ACR in Sec. 438.6(a) to mean the average
rate paid for services by the highest claiming third-party payers for
specific services as measured by claims volume. Furthermore, we stated
throughout the 2024 final rule that we were establishing a regulatory
limit at 100 percent of the ACR for the total payment rate for each SDP
for which written prior approval is required for these four service
types, and would continue to use the ACR as the fiscal benchmark by
which we would evaluate whether all SDP total payment rates are
reasonable, appropriate, and attainable as specified in Sec.
438.6(c)(2)(ii)(I) (89 FR 41065).
Beginning with the first rating period beginning on or after July
9, 2024, States were required to demonstrate compliance with these
regulatory requirements, for SDPs for one or more of the four services
by submitting both a total payment rate comparison using the ACR (that
is, Table 2 in the currently published preprint) and an ACR
demonstration that meets all of the requirements outlined under Sec.
438.6(c)(2)(iii)(A). We require that the total payment rate comparison
specified in Sec. 438.6(c)(2)(iii)(B) be updated with each preprint
renewal submission or amendment while the ACR demonstration must be
updated at least once every 3 years thereafter, as specified in Sec.
438.6(c)(2)(iii)(C). Operationally, this aligns with our historical
practices but the data standards and regulatory definition of the ACR
further refine the requirements for the commercial data to be used to
demonstrate compliance with the ACR-based payment limit.
Both the volume of SDP preprints being submitted by States for
approval and the total dollars flowing through SDPs have grown quickly
since Sec. 438.6(c) was established in the 2016 final rule. The number
of States utilizing SDPs has increased from two States in 2016 to 41
States, in 2024. Currently, 83 percent of States with risk-based
managed care delivery systems utilize SDPs. In 2024, over 80 percent of
SDP preprint submissions were for hospitals, including inpatient and
outpatient hospital services. Table 2 illustrates SDP total computable
spending (Federal and non-Federal share) by service type from 2021
through 2024.
[GRAPHIC] [TIFF OMITTED] TP22MY26.001
SDPs account for a significant portion of managed care spending;
they are estimated to be 26.4 percent of the total Medicaid managed
care spending in FY 2025 and 28.1 percent by FY 2034, without any
changes to the existing regulations.\28\ The recent estimates for SDP
spending developed by OACT project total computable spending to
increase from $107.3 billion in FY 2024 to $295.9 billion in FY 2034
under current SDP regulatory requirements.
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\28\ Based on CMS' Office of the Actuary (OACT) estimates as of
March 2026.
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Through our review process of SDP preprints since publication of
the 2024 final rule in May 2024, we have become increasingly concerned
with the growth in the percentage of total Medicaid managed care
expenditures made through SDPs. The source of the non-Federal share
also plays an important role in our concerns regarding SDPs that
utilize an ACR payment rate. The significant increase in SDP spending
since the 2024 final rule has demonstrated that States are increasingly
relying on SDPs as a mechanism for increasing Federal funding for their
Medicaid programs, including those where the non-Federal share is
funded via IGTs and provider taxes, in other words, by the providers
themselves rather than the State. See section II.A. of this proposed
rule for discussion on SDPs and the source of the non-Federal share. As
SDP spending continues to increase and given the total payment rate
limit for certain SDPs mandated in section 71116 of the WFTC
legislation, we believe it is appropriate to propose additional
regulatory requirements with respect to the totality of provider
payment rates under SDPs to ensure proper fiscal and programmatic
oversight in Medicaid managed care programs. These proposed changes
would also be consistent with the Presidential Memorandum issued on
June 6, 2025.
We are issuing this proposed rule, including the requirements that
implement section 71116(a) of the WFTC legislation, based on our
authority to interpret and implement section 1903(m)(2)(A)(iii) of the
Act, which requires contracts between States and MCOs to provide
payment under a risk-based contract for services and associated
administrative costs that are
[[Page 30407]]
actuarially sound, and our authority under section 1902(a)(4) of the
Act to establish methods of administration for Medicaid that are
necessary for the proper and efficient operation of the State plan. As
explained in the 2016 final rule, regulation of SDPs is necessary to
ensure that Medicaid managed care plans have sufficient discretion to
manage the risk of covering the benefits specified in their contracts,
which is integral to ensuring that capitation rates are actuarially
sound as defined at Sec. 438.4 (81 FR 27582). We have historically
relied on section 1902(a)(4) of the Act to extend PIHPs and PAHPs the
same requirements adopted in section 1903(m)(2)(A)(iii) of the Act for
MCOs related to actuarially sound capitation rates.
E. Fee-for-Service Supplemental Payments
Section 1902(a)(30)(A) of the Act requires States to ``assure that
payments are consistent with efficiency, economy, and quality of care
and are sufficient to enlist enough providers so that care and services
are available under the plan at least to the extent that such care and
services are available to the general population in the geographic
area.'' States are responsible for developing FFS rates to pay
providers for furnishing health care services to beneficiaries who
receive covered services through the FFS delivery system. In
recognition of the States' front-line responsibility, the statute
affords States considerable flexibility by not prescribing any
particular rate-setting approach or method for most Medicaid services,
but instead allows States to develop their own approaches unique to
their local circumstances so long as they are consistent with
applicable statutory requirements and provide the public and interested
parties an opportunity to comment and offer input (84 FR 63723).
Generally, a State that operates its Medicaid program using a FFS
delivery system establishes a Medicaid State plan that comprehensively
describes the nature and scope of a State's Medicaid program and
assures conformity with Title XIX of the Act, to serve as a basis for
Federal financial participation (FFP). The Medicaid State plan includes
a description of the payments the State will make to enrolled Medicaid
providers, which are generally comprised of base and supplemental
payments. We have previously discussed base and supplemental payments
in SMDL #21-006 \29\ and a proposed rule (84 FR 62722). In that SMDL,
we described base payments as State payment methodologies that
typically provide for a standard payment to all Medicaid providers on a
per claim basis for services rendered to a Medicaid beneficiary in a
FFS environment, including any payment adjustments, add-ons, or other
additional payments made to a provider that can be attributed to
services identifiable as having been provided to an individual
beneficiary. Operationally, in a FFS delivery system, base payments are
generally predetermined rates that States pay providers for specific
services according to their Medicaid fee schedule. We note that per the
Ensuring Access to Medicaid Services final rule, these fee schedules
must be publicly available by July 1, 2026 (89 FR 40550).
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\29\ <a href="https://www.medicaid.gov/federal-policy-guidance/downloads/smd21006.pdf">https://www.medicaid.gov/federal-policy-guidance/downloads/smd21006.pdf</a>.
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Supplemental payments are defined in section 1903(bb)(2) of the Act
generally as payments made to providers that are in addition to the
base payment the provider receives. Supplemental payments are generally
understood to mean amounts other than the previously described base
payment amount, and as such, may include payment for additional costs
associated with Medicaid services. Because the term supplemental
payments may refer to different types of payments in different
contexts, within this proposed rule, we use the term supplemental
payments when discussing payments that are in addition to base
payments. However, we have not included this term in the specific
provisions proposed later in this rule to ensure clarity of our
intended scope and impact. We further note that while supplemental
payments may seem like the FFS equivalent of managed care SDPs, and can
serve similar functions, they should be viewed as separate concepts and
discussions in this rulemaking and its proposed policies. We have
endeavored to keep these discussions distinct to aid in ensuring a
reader can fully understand the proposals for a particular delivery
system.
For a number of years, States have been making FFS supplemental
payments under the Medicaid State plan that are targeted to certain
practitioners, such as physicians, dentists, emergency and non-
emergency medical transportation providers (for example, ground
emergency medical transportation (GEMT) providers, air emergency
transportation providers, and non-emergency medical transportation
(NEMT) providers) and other licensed professionals. We generally
utilize the term provider when referring to an entity, such as a
transportation provider or Certified Community Behavioral Health Clinic
(CCBHC) provider, and the term practitioner when referring to an
individual, such as a physician. Because our current guidance \30\ for
ACR payments uses the term practitioner broadly to include physicians
and transportation providers, we have generally maintained that
terminology in this rule. However, as discussed later in this proposed
rule, some providers, such as transportation providers, are also
included in the scope of this rule.
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\30\ <a href="https://www.medicaid.gov/medicaid/financial-management/downloads/upl-guidnce-qualified-practitioner-services-2022.pdf">https://www.medicaid.gov/medicaid/financial-management/downloads/upl-guidnce-qualified-practitioner-services-2022.pdf</a>.
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Most commonly for physicians and dentists, States have targeted
supplemental payments to practitioners affiliated with and furnishing
services in AMCs and safety net hospitals. For transportation providers
and other licensed professionals, States often have targeted
supplemental payments to State or non-State government owned or
operated entities, such as a county fire station, that fund the non-
Federal share of the supplemental payment with an IGT. For these
payments, States have used what is commonly described as an ACR
calculation to establish an upper limit for these practitioner
supplemental payments. The ACR is the average rate paid by commercial
third-party payers for specific medical service codes (usually current
procedural terminology (CPT) codes) to practitioners or providers,
which is multiplied in the ACR calculation by the Medicaid claims for
each code to establish an upper limit for these supplemental payments.
For FFS supplemental payments, States can also calculate the Medicare
equivalent of the ACR, discussed in more detail later.
We first approved ACR-based supplemental payments for physician
services in the early 2000s. Since then, States have proposed and
received our approval for supplemental payments calculated using the
ACR for physicians, dentists, providers of medical transportation, and
other practitioners under State plan authority. Like all FFS payments
made under State plan authority, ACR-based supplemental payments are
subject to section 1902(a)(30)(A) of the Act, which requires payments
to be consistent with efficiency, economy, and quality of care, and
sufficient to enlist enough providers. We interpret section
1902(a)(30)(A) of the Act as requiring a balanced approach to Medicaid
rate-setting and we encourage States to use appropriate information and
program experience to develop rates to meet all of the statute's
requirements. Further, we expect States to document that
[[Page 30408]]
Medicaid rates are economic and efficient when the State submits
changes to payment methodologies through a SPA. To support States
proposing supplemental payments calculated using the ACR, we previously
issued sub-regulatory guidance regarding three payment methodologies
generally utilized for payments made to physicians and practitioners--
(1) payment up to the Medicare Physician Fee Schedule (MPFS) rate; (2)
calculation of the ACR; and (3) calculation of the Medicare equivalent
of the ACR (calculating the average payment amount allowed by
commercial payers as a percentage of Medicare to determine an upper
limit).\31\
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\31\ <a href="https://www.medicaid.gov/medicaid/downloads/upl-instructions-qualified-practitioner-services-replacement-new.pdf">https://www.medicaid.gov/medicaid/downloads/upl-instructions-qualified-practitioner-services-replacement-new.pdf</a>.
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For States that propose a supplemental payment up to the MPFS rate,
the State Plan must comprehensively describe the payment methodology
the State uses to calculate the supplemental payment in accordance with
Sec. 430.10. This includes, but is not limited to, the percentage (for
example, 100 percent) of the MPFS the State will pay, the version (for
example, the January 2025 fee schedule) of the MPFS the State will
implement, whether the State will apply geographic practice cost
indexes (GPCIs) that reflect geographic cost differences as defined by
Medicare, and which site of service rate (facility or non-facility) the
State will utilize. CMS verifies this information is included in SPAs
proposing supplemental payments up to the MPFS rate.
For States that propose a supplemental payment and opt to calculate
an ACR or Medicare equivalent of the ACR, States must calculate and
submit a UPL demonstration of the proposed supplemental payment for
compliance with section 1902(a)(30)(A) of the Act, in addition to
comprehensively describing in the State Plan the payment methodology
the State uses to calculate the supplemental payment in accordance with
Sec. 430.10. For States that calculate an ACR, CMS expects States to
recalculate the UPL annually and submit this demonstration to CMS for
review. For States that calculate the Medicare equivalent of the ACR,
States are expected to recalculate at least every 3 years and submit
this demonstration to CMS for review.
When States propose to utilize an ACR methodology (payment up to
the ACR or Medicare equivalent of the ACR) to target payments to
physicians or other practitioners, States submit data to CMS from each
practitioner's top (generally five) commercial payers and provide an
explanation of the data that was extracted from the practitioners'
accounts receivable systems. The State compares the Medicaid payment
for each billing code directly to either: (1) the average payment
amount allowed by commercial payers for the same services, or (2) the
Medicare equivalent of the commercial payers' average payment amount
for the same services. The submitted ACR calculation includes data from
each of the practitioners, group practices, or hospital-based
practitioner groups eligible to receive the supplemental payment.
We issued SMDL #13-003 on March 18, 2013 to reaffirm mutual
obligations and accountability on the part of the State and Federal
governments for the integrity of the Medicaid program and the
development, application, and improvement of program safeguards
necessary to ensure proper and appropriate use of both Federal and
State dollars.\32\ In SMDL #13-003, we stated our expectation that
States submit annual UPL demonstrations for targeted physician \33\
supplemental payments beginning in 2014. Beginning in 2019, and
modified in 2022, States began submitting UPL demonstrations using the
OMB-approved templates for Qualified Practitioner Services. In 2021, we
issued guidance for Medicaid Qualified Practitioner Services to support
States in developing their UPL demonstrations for demonstrating
compliance with section 1902(a)(30)(A) of the Act.\34\ We revised this
guidance to align with the most current UPL template for Qualified
Practitioner Services in 2022.\35\ Apart from this information provided
in guidance, our regulations have been silent regarding payment limits
for these types of providers.
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\32\ <a href="https://www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/SMD-13-003-02.pdf">https://www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/SMD-13-003-02.pdf</a>. Note that in this SMDL,
we used the terminology ``physician,'' but have since adopted the
terminology ``practitioner'' for the relevant supplemental payments,
as they can apply to individuals that may not be physicians, such as
other licensed practitioners.
\33\ We initially referred to physicians specifically but later
expanded to ``practitioners'' to account for the practitioners other
than physicians that provide professional services.
\34\ See <a href="https://www.medicaid.gov/medicaid/financial-management/downloads/upl-instructions-qualified-practitioner-services-06012021.pdf">https://www.medicaid.gov/medicaid/financial-management/downloads/upl-instructions-qualified-practitioner-services-06012021.pdf</a> and also <a href="https://www.medicaid.gov/medicaid/downloads/upl-guidance-qualified-practitioner-services-replacement-new.pdf">https://www.medicaid.gov/medicaid/downloads/upl-guidance-qualified-practitioner-services-replacement-new.pdf</a>.
\35\ <a href="https://www.medicaid.gov/medicaid/financial-management/downloads/upl-guidnce-qualified-practitioner-services-2022.pdf">https://www.medicaid.gov/medicaid/financial-management/downloads/upl-guidnce-qualified-practitioner-services-2022.pdf</a>.
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In 2019, we issued a proposed rule with many financial provisions,
one of which proposed to limit these types of supplemental payments (84
FR 63722),\36\ which would have implemented a UPL regulation like those
that already existed for other payments. We proposed this change based
on concerns that States were making practitioner payments that were not
economic and efficient, consistent with section 1902(a)(30)(A) of the
Act, and that they presented an oversight risk because they were based
on proprietary commercial payment data and thus not readily verifiable
or auditable. The 2019 proposed rule was much broader in scope in terms
of the number of financial and payment topics than this proposed rule.
While the entirety of the 2019 proposed rule was subsequently withdrawn
in January 2021, we indicated at the time that the withdrawal action
did not limit our prerogative to make new regulatory proposals in the
areas addressed by the withdrawn proposed rule, including new proposals
that may be substantially identical or similar to those described
therein (86 FR 5105).
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\36\ <a href="https://www.federalregister.gov/documents/2019/11/18/2019-24763/medicaid-program-medicaid-fiscal-accountability-regulation">https://www.federalregister.gov/documents/2019/11/18/2019-24763/medicaid-program-medicaid-fiscal-accountability-regulation</a>.
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The Consolidated Appropriations Act, 2021 (CAA) was enacted on
December 27, 2020.\37\ It established a number of new requirements for
State Medicaid programs, including the addition of section 1903(bb) of
the Act to specify new reporting requirements for supplemental
payments. We issued guidance in SMDL #21-006, ``New Supplemental
Payment Reporting and Medicaid Disproportionate Share Hospital
Requirements under the Consolidated Appropriations Act, 2021,'' \38\ to
address the new requirements, and since 2022, we have received more
detailed supplemental payment data from States reported in the CMS-64.
Table 3 shows the total reported supplemental payments since this
requirement was implemented for physicians, other licensed
practitioners (OLP), and GEMT.
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\37\ Public Law 116-260.
\38\ <a href="https://www.medicaid.gov/federal-policy-guidance/downloads/smd21006.pdf">https://www.medicaid.gov/federal-policy-guidance/downloads/smd21006.pdf</a>.
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[[Page 30409]]
[GRAPHIC] [TIFF OMITTED] TP22MY26.002
As reported on the Form CMS-64 data (the quarterly Medicaid
statement of expenditures), States claimed approximately $2.63 billion
(total computable) in expenditures for supplemental payments (including
ACR-based payments but excluding DSH and any Medicare UPL payments)
made to physicians, other licensed practitioners, and ground emergency
medical transportation providers for FFY 2024. Over 60 percent of total
supplemental payments ($1.6 billion total computable) were made to just
1,975 physicians or physician practices across 24 States that make
supplemental payments to physicians. Currently approved ACR-based
supplemental payments in States using the Medicare equivalent of the
ACR average 207 percent of the Medicare rate for physicians and 153
percent for other licensed practitioners (for example, dentists and
GEMT providers). While an outlier, one State currently pays ACR-based
supplemental payments at 530 percent of Medicare equivalent of the ACR
for physicians. Based on our analysis of State expenditure data, as
further discussed in section II.B of this proposed rule, these targeted
payments present clear oversight risks to Federal taxpayer dollars for
which CMS is a financial steward. We recognize this is an opportune
time to consider changes to our policies to address a similar problem
across both delivery systems, FFS and managed care, in light of the
changes made to SDPs by section 71116 of the WFTC legislation.
II. Provisions of the Proposed Regulations
We intend that if any provision in this proposed rule, if
finalized, is held to be invalid or unenforceable by its terms, or as
applied to any person or circumstance, or stayed pending further agency
action, it shall be severable from the final rule (if and once
finalized) and not affect the remainder thereof or the application of
the provision to other persons not similarly situated or to other,
dissimilar circumstances. This notice proposes provisions that are
meant to and would operate independently of each other, even if each
serves the same general purpose or policy goal. Where a provision is
necessarily dependent on another, the context generally makes that
clear (such as by a cross-reference to apply the same standards or
requirements).
A. State Directed Payments in Medicaid Managed Care (Sec. 438.6)
Since publication of the 2024 final rule, we have received over 400
SDP preprint submissions from 41 States. Some of these submissions
represent brand new SDPs or renewals of existing SDPs for which the
total dollar amount attributable to the SDP has increased
significantly. Many of these proposed SDPs bring provider payment rates
up to 100 percent of the ACR or, in some cases, in excess of 100
percent.\39\ Recent State SDP submissions include:
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\39\ These examples include preprints submitted by States to CMS
but do not necessarily represent approved SDPs; CMS does not approve
SDPs that exceed 100 percent of the ACR.
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<bullet> A new $3.2 billion SDP for all inpatient and outpatient
hospital services within the State that directs managed care plans to
make an 186 percent uniform increase payment to bring average provider
payments up to 100 percent of the ACR.
<bullet> A $13 billion renewal SDP for inpatient and outpatient
hospital services provided at all private hospitals in the State that
would require managed care plans to make uniform dollar increase
payments up to $5,146 per hospital service. This is the highest dollar
amount SDP CMS has received to date and represents an 80 percent
increase in the total SDP dollar amount requested compared to the prior
rating period.
<bullet> A new $1.3 billion SDP for physician services that would
require managed care plans to make uniform percentage increases of up
to 634 percent per physician service to bring average payments up to
142 percent of the ACR.
<bullet> One State submitted 16 new SDPs for hospital services and
qualified practitioner services at AMCs, each limited to a single
hospital, totaling nearly $1.5 billion across the 16 SDPs. Each SDP
would require different uniform increases that would bring each
hospital up to between 27 percent and 100 percent of the ACR. Based on
information submitted in the preprints, the SDPs appear to be designed
to reward providers that finance the non-Federal share, rather than to
meet the goals and objectives of the State's Medicaid program,
including improving access to care, and enhancing quality of care in
Medicaid managed care.
The 2024 final rule included projections that under the new
regulatory requirements, including the ACR limit for certain services,
SDP spending would increase to $74.9 billion in FY 2024 and up to
$115.1 billion in FY 2028. However, more recent estimates developed by
OACT based on SDP submissions approved through December 2024, project
SDP spending to increase to $97.8 billion in FY 2024 and $246 billion
in FY 2034 under current SDP regulatory requirements. These updated
estimates indicate a substantial increase from the projections in the
2024 final rule and underscore the need to consider additional fiscal
integrity protections to promote the long-term sustainability of the
Medicaid program. The source of the non-Federal share also plays an
important role in our concerns regarding SDPs that utilize an ACR
payment rate. The significant increase in SDP spending since the 2024
final rule suggests that States are increasingly relying on SDPs as a
mechanism for increasing Federal funding for their Medicaid programs,
including those funded via IGTs and provider taxes without commensurate
State general fund contributions toward the non-Federal share.
SDPs that result in total provider payment rates up to the ACR are
most frequently funded by provider taxes and IGTs from local government
sources or State university teaching hospitals and generally include
only providers that have the ability to fund the non-Federal share of
the ACR payments. It appears that, in some instances, these types of
SDPs are often primarily developed
[[Page 30410]]
based on the amount of available funding from providers rather than to
drive improvements in access to or quality of care for beneficiaries or
to achieve other, similar programmatic goals. For SDPs that were
projected to exceed 100 percent of Medicare up to 100 percent of the
ACR, States financed the underlying non-Federal share as follows: 39.8
percent were funded in part or wholly by IGTs (but not provider taxes),
26.9 percent were funded in part or wholly with provider taxes (but not
IGTs), and 14.2 percent were funded in part or wholly by both IGTs and
provider taxes. In total, 80.8 percent of SDPs that exceeded Medicare
payment rates, including those up to the ACR, were funded in part or
wholly via IGTs and/or provider taxes. \40\ When these IGTs or provider
taxes are used, the State Medicaid agency does not contribute general
funds for the non-Federal share of the associated payments because the
funding comes from separate governmental entities (in the case of IGTs)
or providers.
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\40\ This is based on an analysis conducted in June 2025 of 402
SDPs approved by CMS between January 1, 2022 and December 31, 2024
where the total payment rate was projected to exceed Medicare
payment rates or up to the ACR. The analysis excludes (1) COVID-19
expedited reviews and (2) SDP arrangements related to HCBS covered
by section 9817 of the American Rescue Plan Act of 2021 and (3) SDPs
where the State projected the total payment rate to be less than or
equal to Medicare and (4) that total payment rate was not compared
to the Medicare or ACR.
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States have multiple methods to generate the non-Federal share
(also known as the State share) to finance their Medicaid programs,
including IGTs and health care-related taxes. These sources, while
generally permissible, present the need for greater scrutiny, because
the State is oftentimes collecting money to fund the non-Federal share
for SDPs from the same entities that then receive those payments,
resulting in higher provider payment rates than they would have
received if they had not contributed funding via IGTs or provider
taxes. We have taken recent steps to address impermissible arrangements
related to financing sources but recognize the importance of examining
the nature of the payments the State makes under these structures. SDPs
and supplemental payments that reflect these financing patterns can
result in payment levels that are not clearly aligned with Medicaid
utilization, quality, health outcomes, or other program goals. These
payments in turn drive significant Medicaid spending increases without
a clear connection to quality or outcomes for Medicaid beneficiaries.
Further, when the funds to support the non-Federal share of increased
payments originate from the same providers that receive enhanced
payments, the resulting spending increases raise fiscal integrity
concerns for the Medicaid program and increase the burden on the
Federal treasury and taxpayers.
In the 2023 proposed rule, we considered a total payment rate limit
at 100 percent of the total published Medicare payment rate instead of
the ACR, noting that Medicare payment rates are a standardized
benchmark used in the healthcare industry (88 FR 28124). Compared to
proprietary commercial data, Medicare payment rate data may be more
easily verified and audited because Medicare payment rates are
published yearly and available to the public. We also acknowledged that
setting the limit at Medicare would serve to limit the growth in
Medicaid managed care spending relative to an ACR limit. Many of the
public comments received on the 2023 proposed rule supported an SDP
payment limit at the total published Medicare payment rate, citing
payment transparency, payment comparability among the largest public
payers in the nation, and concerns that a limit at the ACR could
accelerate Federal Medicaid spending. We also received comments
supportive of an SDP total payment limit at the ACR for four services.
These commenters noted concerns with finalizing a limit lower than the
ACR, asserting that would reduce the ability of managed care plans to
compete with commercial plans for providers to participate in their
networks and could result in a reduction of access, particularly for
States that already have SDPs at ACR (89 FR 41066). In the 2024 final
rule, we finalized the limit on the total payment rate at no greater
than 100 percent of the ACR and reminded States that they are not
required to utilize SDPs and that there are separate regulatory
requirements that require States that contract with a managed care plan
to deliver Medicaid services to address network adequacy and access to
care, regardless of the use of SDPs (89 FR 41066).
On July 4, 2025, President Trump signed the WFTC legislation into
law. Section 71116 of the WFTC legislation directed the Secretary to
reduce the total payment rate limit for certain SDPs for inpatient
hospital services, outpatient hospital services, nursing facility
services, or qualified practitioner services at an AMC. Section 71116
of the WFTC legislation also included a provision allowing a temporary
grandfathering period for certain SDPs until the rating period
beginning on or after January 1, 2028, at which point such SDPs would
be required to gradually transition down to the new payment limit. Our
proposals in this rule seek to implement these provisions and, if
finalized, could slow the growth of SDP spending in the future.
1. Payment Limit for SDPs (Sec. 438.6 (a), 438.6(c)(2)(ii)(I) and
438.6(c)(8))
The WFTC legislation and the Presidential Memorandum reflect what
our experience reviewing SDPs since the 2024 final rule has
demonstrated: the total published Medicare payment rate or the Medicaid
State Plan rate are reasonable payment limits for SDPs compared to the
ACR. The WFTC legislation and the Presidential Memorandum are
consistent with concerns we have identified through our experience
reviewing SDPs since the 2024 final rule, including that an SDP total
payment rate limit of 100 percent of the ACR can contribute to
substantial growth in SDP expenditures. The current payment limit
framework may also contribute to financing arrangements that raise
fiscal integrity concerns and reduce incentives for shared State
funding responsibility. Using Medicare or Medicaid State plan rates as
the payment limit for SDPs would bring consistency and predictability
and could help moderate the growth of SDP expenditures while providing
States flexibility to pursue provider payment initiatives and delivery
system reform efforts that further advance access to care and enhance
quality of care in Medicaid managed care.
Medicare payment rates are developed under Title XVIII of the Act
and there are annual rulemakings associated with Medicare payment for
benefits available under Medicare Parts A and B in the Medicare FFS
program. Medicare payment rates are consistently and rigorously
developed and vetted by us and are subject to public notice and comment
periods. In our experience, many managed care plans use Medicare FFS
rates as a benchmark as part of their provider payment negotiations.
They are the only complete and reliable set of provider payment rates
published annually and are freely and easily accessible to CMS,
providers, States, managed care plans, interested oversight bodies, and
the general public. Additionally, published Medicare payment rates are
often utilized in the Medicare managed care delivery system. For
example, section 1852(a)(2) of the Act provides that Medicare
[[Page 30411]]
Advantage \41\ plans pay out-of-network providers at least the amount
payable under Medicare FFS for benefits available under Medicare Parts
A and B, taking into account cost sharing and permitted balance
billing.
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\41\ Medicare+Choice is the former name for Medicare Advantage,
as it was renamed by the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003.
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There is precedent for Medicaid alignment with Medicare payment
rates. Medicaid FFS delivery systems currently use Medicare payment
rates for the majority of regulatory UPLs (for further discussion of
the existing UPLs that use Medicare in FFS programs, see section II.B.1
of this proposed rule). In the 2024 final rule under Sec.
438.6(c)(2)(i), we removed the requirement for our written prior
approval for SDPs that use a minimum fee schedule at 100 percent of the
total published Medicare payment rate in effect no more than 3 years
prior to the start of the rating period. We did this to acknowledge
that total published Medicare payment rates met our regulatory standard
requiring all SDPs to result in provider payments that are reasonable,
appropriate, and attainable. We believe that the total published
Medicare payment rate or State plan approved rate represent a
reasonable payment limit for Medicaid services when a State is
directing payment via a SDP.
The proposed limits to Medicaid managed care expenditures in this
proposed rule would only apply when providers receive payments through
SDPs (that is, when States opt to direct Medicaid managed care
expenditures as permitted under Sec. 438.6(c)). Absent SDPs, Medicaid
managed care plans may continue to negotiate provider payment rates
that exceed this payment limit when necessary to ensure a sufficient
provider network. We remind States that under Sec. 438.6(c)(1), States
are not permitted to direct managed care plan expenditures in any way,
outside of the permissible regulatory options outlined in Sec.
438.6(b) through (d) or as specified in statute; we are not proposing
any revisions to this provision. To curtail the growth in Medicaid
managed care spending as a result of SDPs, implement the mandate in the
WFTC legislation, protect the fiscal integrity and future of the
Medicaid program, and promote transparency, we propose revisions to
Sec. 438.6(a) and (c) as outlined in the next paragraph.
a. Regulatory Revisions Required by WFTC Legislation
Section 71116(a) of the WFTC legislation requires the Secretary to
revise Sec. 438.6(c)(2)(iii) to enact a new total payment rate limit
with respect to a payment described in that section for all 50 States
and DC, although it does not apply to the U.S. territories. Sections
71116(b) and (c) of the WFTC legislation establish transition and
applicability rules for certain payments and States. This would
establish a new regulatory limit for SDPs that require written prior
approval and include any of the four services specified in Sec.
438.6(c)(2)(iii).\42\ Section 71116(a) of the WFTC legislation also
specifies that this new payment limit is to be applicable to services
furnished during a rating period \43\ beginning on or after the date of
enactment of the WFTC legislation (July 4, 2025), unless the SDP is
eligible for a temporary grandfathering period (see section II.A.2. of
this proposed rule). The total payment rate limit specified in section
71116(a) of the WFTC legislation for SDPs that include any of the four
services is 100 percent of the total published Medicare payment rate
for an expansion State, or 110 percent of the total published Medicare
payment rate for a non-expansion State with respect to a payment made
for a service furnished during an applicable rating period. In the
absence of a total published Medicare payment rate for the Medicaid
covered service, section 71116(a) of the WFTC legislation specifies
that the total payment rate is limited to the payment rate under the
Medicaid State plan (or under a waiver of such plan). We propose to
codify these provisions in Sec. 438.6(a) and (c).
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\42\ Each service type is defined at Sec. 438.6(a).
\43\ ``Rating period'' is defined at Sec. 438.2 as a period of
12 months selected by the State for which the actuarially sound
capitation rates are developed and documented in the rate
certification submitted to CMS as required by Sec. 438.7(a).
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b. Regulatory Revisions for Other SDPs, Services and Territories
Section 1903(m)(2)(A) of the Act requires contracts between States
and MCOs to provide payment under a risk-based contract for services
and associated administrative costs that are actuarially sound. Under
risk-based managed care arrangements with States, Medicaid managed care
plans have the responsibility to negotiate payment rates with
providers. Subject to certain exceptions, States are not permitted to
direct the expenditures of a Medicaid managed care plan under the
contract between the State and the plan or to make direct payments to
providers for services covered under the contract between the State and
the plan (Sec. Sec. 438.6 and 438.60, respectively). However, there
are circumstances under which requiring managed care plans to make
specified payments to health care providers is an important tool in
furthering the State's overall Medicaid program goals and objectives.
While this type of State direction reduces the plan's ability to
effectively manage costs, it can be an important tool for States. In
the 2016 final rule, we established specific exceptions to the general
rule prohibiting States from directing the expenditures of MCOs, PIHPs
and PAHPs in Sec. 438.6(c)(1)(i) through (iii). These exceptions came
to be known as State directed payments (SDPs). When SDPs are utilized,
States are required to ensure that the capitation rates, inclusive of
SDPs, under the risk-based contract for services covered under that
contract and the associated administrative costs are actuarially sound.
We use our authority under section 1902(a)(4) of the Act to apply the
same requirements to contracts between States and PIHPs or PAHPs. Under
our authority to interpret and implement sections 1902(a)(4) and
1903(m)(2)(A)(iii) of the Act we propose to extend these provisions and
the payment limit to all SDPs and in all States, DC and the U.S.
Territories. Our proposals are explained in greater detail further in
this section.
a. Definitions
First, we address the existing definition of ``total published
Medicare payment rate'' in Sec. 438.6(a) which section 71116(d)(4) of
the WFTC legislation adopts by reference. While the phrase ``specified
total published Medicare payment rate'' is used in section 71116(a) of
the WFTC legislation, we believe this phrase aligns with the existing
definition of the total published Medicare payment rate to mean amounts
calculated as payment for specific services that have been developed
under title XVIII Part A and Part B of the Act. Since the regulatory
definition already includes the word ``specific'' and we have always
interpreted it to mean the exact total published Medicare payment rate
for a specific service furnished to a Medicaid managed care enrollee,
we do not believe it is necessary to revise our existing definition of
``total published Medicare payment rate.'' We therefore interpret the
existing definition to apply wherever section 71116 of the WFTC
legislation uses the phrase ``specified total published Medicare
payment rate.''
[[Page 30412]]
In the absence of a total published Medicare payment rate for a
Medicaid covered service, section 71116(a)(1) and (2) of the WFTC
legislation specifies that the payment rate for each of the four
service types is limited to the ``payment rate under the Medicaid State
plan (or under a waiver of such plan).'' We believe that our existing
definition of ``State plan approved rates'' under Sec. 438.6(a) is
aligned definitionally with ``payment rate under the Medicaid State
plan.'' We have always interpreted the definition of State plan rates
to include rates that are approved via a waiver of the State plan, such
as through a waiver under section 1915(c) of the Act (see, for example,
81 FR 27537). As specified in Sec. 438.6(a), State plan approved rates
do not include supplemental payments, which are defined under Sec.
438.6(a) as amounts paid in addition to State plan approved rates. We
are proposing to revise the definition of ``State plan approved rates''
at Sec. 438.6(a) to strike the phrase ``CMS approved'' and amend the
latter part of the sentence to read ``described under rate
methodologies in the Medicaid State plan approved by CMS before the
start of the rating period.'' We believe this revision is necessary to
address timing misalignment between the SPA approval process and the
prospective nature of risk-based managed care. States are permitted to
submit SPAs at any time during a State fiscal quarter which can then be
approved by us for an effective date retroactive to the start of the
quarter. The SPA review process is also lengthy and sometimes takes
years to reach a conclusion. In an FFS delivery system, the State may
choose to make payments under a submitted SPA prior to approval,\44\
or, once the SPA is approved retroactive to the start of the State
fiscal quarter in which it was submitted the State may make retroactive
payments to FFS providers to account for the payment differential for
services rendered when the SPA was retroactively in effect.
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\44\ If the SPA is ultimately not approved, the State risks
disallowance of the related FFP.
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In a managed care environment if a State directs their plans to pay
providers a minimum fee schedule SDP using State plan approved rates,
the State's actuaries will develop the capitation rates based on the
State plan approved rates in effect for the applicable rating period,
consistent with the actuarial soundness and prospective rate
development requirements in Sec. Sec. 438.4 and 438.7. If a SPA is not
approved until the managed care rating period is underway or completed
and the State wishes to direct plans to implement those updated payment
rates via an SDP retroactive to the effective date of the approved SPA,
they must submit both contract amendments and rate certifications to
effectuate those changes. We have observed that these types of
retroactive revisions to SDPs can create inconsistencies between
certified capitation rates and actual plan payment obligations, lead to
inaccurate implementation, cause uncertainty for providers, and hamper
post payment validation efforts. We believe that requiring States to
use the State plan rates approved before the start of the rating period
would be consistent with prospective rate-setting processes and would
add stability and predictability to SDPs. This change does not alter
SPA approval authority under title XIX of the Act, but instead
specifies how approved State plan rates may be implemented as a minimum
fee schedule SDP and used for prospective capitation rate development
in managed care.
For SDPs that require written prior approval and include any of the
four service types specified in section 71116(a) of the WFTC
legislation in the 50 States and DC, the WFTC legislation requires
different SDP payment limits depending on whether the State has
implemented Medicaid expansion, specified in section 71116(a)(1) of the
WFTC legislation as a State that provides coverage to all individuals
described in section 1902(a)(10)(A)(i)(VIII) of the Act (42 U.S.C.
1396a(a)(10)(A)(i)(VIII)) that is equivalent to minimum essential
coverage (as described in section 5000A(f)(1)(A) of the Internal
Revenue Code of 1986 and determined in accordance with standards
prescribed by the Secretary in regulations) under the State plan (or
waiver of such plan) of such State under title XIX of such Act. In
section 71116(a)(1) of the WFTC legislation, the total payment rate
limit is 100 percent of the total published Medicare payment rate for
States that meet this definition of ``Expansion State.'' Section
71116(a)(2) of the WFTC legislation cross-references section
71116(a)(1) to specify that in the case of a State other than a State
described in section 71116(a)(1) of the WFTC legislation, the total
payment rate limit is 110 percent of the total published Medicare
payment rate. We propose to add the term ``Expansion State'' to Sec.
438.6(a) and propose a streamlined version of the definition in section
71116(a)(1) of the WFTC legislation to mean a State that provides
medical assistance to all individuals described in section
1902(a)(10)(A)(i)(VIII) of the Act under a State plan under title XIX
of such Act or under a waiver of such plan that provides minimum
essential coverage as defined in section 5000A(f)(1)(A) of the Internal
Revenue Code of 1986. We propose to also add the term ``Non-Expansion
State'' that would mean a State that does not meet the definition of
``Expansion State.''
Section 71116(d)(3) of the WFTC legislation defines ``State'' to
mean 1 of the 50 States or DC We have historically not differentiated
between the 50 States, DC, or U.S. territories with regards to the
regulatory requirements for SDPs. The Presidential Memorandum also did
not differentiate or distinguish between States, DC, or U.S.
territories. We believe it is prudent and necessary for the fiscal
integrity of the Medicaid program that we apply the payment limit to
all States, DC, and the territories, as we have historically done.
Therefore, we propose to add the term ``State'' to Sec. 438.6(a) to
mean, as used in Sec. 438.6(c)(8)(ii) only and only until the first
rating period beginning on or after January 1, 2029, the Single State
agency of one of the 50 States or DC We also propose that the
definition of ``State'' would, at other times and for other purposes in
this section, unless otherwise specified, have the meaning given the
term in Sec. 438.2 of this part. This would have the effect of
imposing the payment limit on SDPs for the U.S. territories with the
first rating period on or after January 1, 2029, while retaining the
applicability of all other SDP requirements to a State as defined in
Sec. 438.2, including the U.S. territories, before that date. See
section II.A.1.B. of this proposed rule for discussion of proposed
payment limits and applicability dates.
To streamline the regulatory text under Sec. 438.6 and reduce
redundancies, we propose to add the term ``Payment limit'' to Sec.
438.6(a) as 100 percent of the total published Medicare payment rate
for an Expansion State, 110 percent of the total published Medicare
payment rate for a Non-Expansion State, and 100 percent of the State
plan approved rate when there is no total published Medicare payment
rate for the covered service. This definition would align with the SDP
payment limits delineated in section 71116(a) of the WFTC legislation.
We propose that the Medicare payment limit would differ for Expansion
and Non-Expansion States as is required under section 71116(a) of the
WFTC legislation for the 50 States and DC for SDPs that include any of
the four services and require written prior approval. Section
71116(a)(1) and (2) of the WFTC legislation also provides that, in the
absence of specified total published Medicare payment rate, the
[[Page 30413]]
applicable payment rate is the payment rate under a Medicaid State plan
(or under a waiver of such plan). Because the statute refers to ``the
payment rate under a Medicaid State plan'' and does not modify that
phrase to specify an applicable percentage for either an Expansion
State or a Non-Expansion State, we interpret section 71116(a)(1) and
(2) of the WFTC legislation to require that the exact rate(s) approved
under the Medicaid State plan serve as the payment limit in the absence
of a total published Medicare payment rate for a covered service,
regardless of whether the State is an Expansion State or a Non-
Expansion State.\45\ We believe this approach is appropriate and
reasonable because State plan approved rates are reviewed and approved
through the State plan amendment process, which includes State-specific
review of each submission, as discussed further in this section of the
rule.
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\45\ If Congress had intended instead to specify an alternative
rate of 110 percent of the payment rate under the Medicaid State
plan in the case of a Non-Expansion State, this could have been
done, for example, by specifying ``(or, in the absence of a total
published Medicare payment rate, of the payment rate under a
Medicaid State plan (or under a waiver of such plan))'' in section
71116(a)(2) of the WFTC legislation.
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Proposed FFS Medicare payment rates under Medicare Parts A and B
are typically published via an annual notice of proposed rulemaking in
late spring and summer, are subject to an open comment period, and then
published in a final rule in fall or winter of each year. The effective
date of the total published Medicare payment rates varies by fee
schedule but is typically tied to either the calendar year (CY) or
Federal fiscal year (FFY). Table 4 outlines selected Medicare FFS
payment systems through which these payment rates are established, and
the periodicity of rule publication. The table is not inclusive of all
total published Medicare payment rates.
[GRAPHIC] [TIFF OMITTED] TP22MY26.003
While States may choose to implement SDPs, including those that do
not require prior approval, in alignment with the most recently
released total published Medicare payment rate(s), during the period
those rates are in effect, States are reminded that they are required
to comply with existing requirements for SDP submission and contract
documentation. Beginning with rating periods starting on or after July
9, 2026, States are required to comply with Sec. 438.6(c)(2)(viii) and
submit all SDP preprints prospectively; that is, before the start date
of the applicable SDP arrangement. This provision is intended to
facilitate more timely and accurate implementation of SDPs by managed
care plans by ensuring that they have ample notice of each SDP they are
being directed to implement. We noted in the 2024 final rule that
requiring States to submit preprints in advance of the start date of
the arrangement (89 FR 41054) and document them in plan contracts
within 120 days of the SDP start date \47\ would ensure efficient
administration of contract and rate certification reviews (89 FR 41101
through 41102). This approach is also better aligned with the
prospective nature of risk-based managed care. In addition, under Sec.
438.7(c)(6), States are required to submit the rate certification or
retroactive adjustment to capitation rates resulting from an SDP no
later than 120 days after the start date of the SDP.\48\ States are
required to meet all of these requirements when implementing any SDP,
including when they seek to align an SDP, the associated contracts and
certified capitation rates with updates to the total published Medicare
payment rates that also serve as the basis of the applicable payment
limit. This is especially important for periodic updates to Medicare
fee schedules that are misaligned with States' rating periods for
Medicaid managed care programs.
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\46\ https://www.congress.gov/crs-product/
R46797#:~:text=%22The%20Secretary%20shall%20provide%20for,subsection%
20for%20that%20fiscal%20year.%22.
\47\ Finalized in Sec. 438.6(c)(5)(v) beginning with the first
rating period on or after July 9, 2028.
\48\ States are required to comply with all of relevant
regulatory requirements in Sec. 438.7(c), including the
requirements at Sec. Sec. 438.7(c)(2) and 438.7(c)(5). These
provisions outline the requirements for retroactive adjustments to
the capitation rates.
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We specifically propose to apply the payment limit to each service
included under an SDP as section 71116(a) of the WFTC legislation
references ``the payment rate for such service'' when addressing the
applicability of the payment limit. We also believe that this
interpretation is aligned with the Presidential Memorandum which
directs the Secretary to ensure ``Medicaid payments rates are not
higher than Medicare . . .'' We interpret the term ``payment rate(s)''
in both the WFTC legislation and the Presidential Memorandum to mean
the specific payment rate for a service furnished by a provider. Under
our proposed definition of ``Payment limit'' in Sec. 438.6(a), the
total published Medicare payment rate would therefore serve as the
basis of the payment limit for each service rendered to a Medicaid
managed care enrollee when that service is included in an SDP. The SDP
payment limit would not be calculated at an aggregate level, using a
UPL-like approach that mirrors what is done to implement many existing
payment limits in Medicaid FFS. Rather, the payment limit would be
calculated at a service or discharge specific level, whether it be at
the HCPCS code level or for Medicare Severity Diagnosis-Related Groups
(MS-DRGs) as is used for Medicare IPPS. Neither section 71116 of the
WFTC legislation nor the Presidential Memorandum references aggregate
Medicare-equivalent payments or a UPL methodology. Therefore, we
propose to implement the limit on a per service or per discharge basis.
We acknowledge that the ``total published Medicare payment rate''
as defined in Sec. 438.6(a), may include applicable Medicare payment
adjustments, including but not limited to geographic and quality
adjustments. As discussed in the 2024 final rule (89 FR 41049), the
total published Medicare payment rate is inclusive of all components
included in the rate
[[Page 30414]]
developed by CMS for Medicare payment. In addition to the Medicare
payment final rules, we also publish web pricers or fee schedules \49\
for all total published Medicare payment rates and offer free,
executable code for those web pricers.\50\ We would expect States to
use these Medicare tools, which are validated and inclusive of all the
necessary Medicare components and adjustments that comprise the total
published Medicare payment rate, when determining the applicable
payment limit for payments to providers under an SDP.
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\49\ For example, the Medicare Physician Fee Schedule can be
found online: <a href="https://www.cms.gov/medicare/physician-fee-schedule/search/overview">https://www.cms.gov/medicare/physician-fee-schedule/search/overview</a>.
\50\ <a href="https://www.cms.gov/pricersourcecodesoftware">https://www.cms.gov/pricersourcecodesoftware</a>.
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While the vast majority of Medicare services are paid based on
prospectively published payment rates, several hospital types are
exempt from prospective payment systems, some providers are instead
paid using a cost-based payment methodology.\51\ Medicare providers
that are reimbursed by Medicare on a cost-basis include critical access
hospitals (CAHs), certain cancer hospitals, and freestanding children's
hospitals. Hospital payment rates determined using a cost-based
methodology are not published nor are they subject to review and public
comment. Hospitals reimbursed by Medicare on a cost basis are required
to submit cost reports to CMS using Medicare approved cost reporting
principles during the cost reporting period.\52\ Medicare contractors
validate these cost reports and the providers are generally paid for
the proportion of allowable costs attributed to Medicare FFS
beneficiaries.\53\ Typically, these providers receive interim payments
based on estimated costs that are then reconciled to actual costs after
the end of the cost reporting period.\54\ This retrospective approach
for annual cost reports poses operational and policy concerns for
determining compliance with the applicable payment limit for SDPs under
section 71116 of the WFTC legislation. In a Medicaid managed care
delivery system, actuarially sound capitation rates are determined
prospectively, and beginning with rating periods starting on or after
July 9, 2026, States must submit SDP preprints to CMS prospectively
under Sec. 438.6(c)(2)(viii). The prospective nature of risk-based
managed care makes it difficult to impose and monitor a per service SDP
payment limit when the SDP payment limit for a provider is tied to a
retrospective cost report.
---------------------------------------------------------------------------
\51\ Sec. 412.23.
\52\ Sec. 413.24.
\53\ Sec. 413.50.
\54\ Sec. 413.60.
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For providers paid under a cost-based methodology in Medicare, we
believe it would be appropriate to consider the cost-based payment
approach for applicable providers as the total published Medicare
payment rate for the purpose of the SDP payment limit. However, we
would need to publish specific instructions on allowable cost-reporting
and cost allocation methodologies specific to Medicaid managed care. We
could modify existing cost reporting instructions in Medicaid FFS that
are based on Medicare cost reporting principles, for example
disproportionate share hospital (DSH) cost reporting,\55\ for this
purpose and as part of our proposal under Sec. 438.6(c)(9) to publish
guidance as needed. Due to the prospective nature of risk based managed
care, we propose to use the most recent and complete Medicare cost
report, which would be submitted to us to validate, for the purpose of
establishing the prospective SDP payment limit on a per service or
discharge basis, including through appropriate cost allocation
methodologies to derive service-level payment amounts. We believe this
approach would ease administrative burden while still allowing States
and these providers the flexibility to mirror the applicable Medicare
payment approach.
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\55\ <a href="https://www.medicaid.gov/medicaid/downloads/general_dsh_audit_reporting_protocol.pdf">https://www.medicaid.gov/medicaid/downloads/general_dsh_audit_reporting_protocol.pdf</a>.
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In a scenario where a provider submitted a cost report for a cost
reporting period ending in 2027, we would expect that report be
submitted to us in alignment with the submission timing requirements at
Sec. 413.24(f)(2)(i) and, when applicable, as part of proposed Sec.
438.6(c)(8)(ii)(C) and (iii)(C), which would require States to submit
any additional documentation requested by CMS to demonstrate compliance
with the payment limit. This cost report would serve as the basis for
the total published Medicare payment rate and therefore, the applicable
payment limit for a State with an SDP for a rating period starting on
July 1, 2028. We propose that the provider specific cost report would
be submitted to CMS, when applicable, to fulfill the proposed
regulatory requirements under Sec. 438.6(c)(8)(ii)(A) and (iii)(A)
that the State submit ``the total published Medicare payment rate or
State plan approved rate (when no total published Medicare payment rate
exists for the covered service) that serves as the basis of the payment
limit for each service covered under the State directed payment.'' We
believe this proposal is only appropriate in limited cases in which a
provider covered under an SDP is not paid by Medicare and therefore
does not utilize the Medicare PPS, fee schedule or cost report, and
there is no total published Medicare payment rate. In this limited case
only, we propose that the payment limit for the applicable SDP would be
the applicable State plan approved rate.
As an alternative, we considered whether to revise the definition
of total published Medicare payment rate to specifically exclude cost-
based Medicare reimbursement methodologies. We considered this
alternative because, while the cost-based Medicare reimbursement
methodologies are publicly available, the provider specific
reimbursement rates resulting from the application of these
methodologies to the providers' cost reports are generally not publicly
available, and may not meet the definition of a total published
Medicare payment rate. If we finalized this option, the payment limit
for providers paid by Medicare on a cost basis would default to the
State plan approved rate. Another alternative we considered was
requiring the State to use only total published Medicare payment rates
that undergo the rule making process (for example, the Medicare IPPS
rate or Medicare PFS rate) as the basis for the total published
Medicare payment rate and therefore, the payment limit for all
providers. This alternative would apply to providers reimbursed by
Medicare on a cost basis, and the State would be required to use the
equivalent total published Medicare payment rate for those providers as
the basis for the SDP payment limit. This approach would ensure that
all total published Medicare payment rates that serve as the basis for
an SDP payment limit are transparent and prospectively established. We
ultimately did not propose either of these alternatives because based
on discussions and information provided by States and providers we
understand that in many instances, the Medicare payment rate or State
plan approved rate may be significantly lower than what these providers
would be paid under a cost-based methodology.
We request public comment on the proposed approaches and the
alternatives considered, and any additional considerations or
mechanisms for determining compliance with the applicable payment limit
for providers paid outside of the published Medicare fee schedules or
Medicare PPS.
[[Page 30415]]
In the absence of a total published Medicare payment rate for a
Medicaid covered service included in an SDP, we propose a definition of
payment limit under Sec. 438.6(a) to specify that 100 percent of the
State plan approved rate would be the payment limit for each service
under an SDP. This is required under section 71116(a) of the WFTC
legislation for the four service types, for the 50 States and DC, and
we propose to apply this limit to all services covered under SDPs, for
all States including DC and the Territories, when there is no total
published Medicare payment rate under Sec. 438.6(c)(8)(iii).
Although an increasing number of benefits are now covered under
Medicare Parts A and B, such as opioid use disorder treatment and
marriage and family counseling, many Medicaid benefits continue to lack
a corresponding total published Medicare payment rate. Generally,
Medicaid covers a broader array of services than Medicare and
commercial payers, such as some treatments for mental health and
substance use disorder, and long-term services and supports, including
HCBS. As such, for some of these Medicaid services, there is no
comparable payment rate under Medicare.
In those situations, consistent with section 71116 of the WFTC
legislation, we believe that using State plan approved rates that have
undergone the SPA review process provides the most appropriate
benchmark for the payment limit in the absence of a Medicare payment
rate. Compared to proprietary, non-standard, or non-existent commercial
payment data (as could be relevant to SDPs in the Territories where
there may be very low commercial health insurance penetration or for
services other than the four services addressed in section 71116 of the
WFTC legislation), using State plan approved rates would provide
greater transparency, consistency, and validity to support the basis of
a payment limit when States opt to direct managed care expenditures via
an SDP. The SPA review process is a statutorily defined process that we
believe would reduce ambiguity and provide operational ease for States
and CMS in terms of implementing a payment limit for SDPs when there is
no total published Medicare payment rate for the covered service. The
State plan review and approval process ensures that Medicaid State plan
approved FFS rates are consistent with efficiency, economy, and quality
of care and are sufficient to enlist enough providers so that care and
services are available under the plan, at least to the extent that such
care and services are available to the general population in the
geographic area, as required under section 1902(a)(30) of the Act.
We also consider provider payment rates reviewed and approved by us
as part of a section 1115 demonstration waiver or a waiver of the State
plan (for example, a section 1915(c) waiver) to meet the definition of
State plan approved rates for purposes of establishing the payment
limit. Such rates would serve as the basis for the Payment limit when
there is no total published Medicare payment rate for the covered
service. Although these provider payment rates are not reviewed through
the SPA process, they undergo a similarly rigorous review by our staff
before they are approved as part of the broader demonstration or waiver
authority. This circumstance most commonly arises with health related
social needs (HRSN) services and HCBS, which are generally not benefits
covered by the Medicare program and in some instances, only available
in the Medicaid program via a section 1115 demonstration or other
waiver authority. We believe this review process is robust and similar
to the SPA review because both the underlying benefits and provider
payment rates are subject to CMS review and approval, including to
ensure consistency with section 1902(a)(30)(A) of the Act.
b. Payments Limits
To effectuate the proposed payment limit in Sec. 438.6(a), we
propose to revise Sec. 438.6(c)(2)(ii)(I) and revise Sec.
438.6(c)(8). First, we propose to replace the existing SDP standard at
Sec. 438.6(c)(2)(ii)(I) with new text that would require that all SDPs
not exceed the payment limit set forth in revised Sec. 438.6(c)(8). We
also propose to revise existing paragraph (c)(8) as (c)(9) and add an
introductory phrase ``For rating periods beginning'' to revised
paragraph (c)(8); revise paragraph (c)(8)(i) to specify the
applicability date for the requirements proposed in paragraphs
(c)(8)(i)(A) and (B); and to incorporate the existing text from
paragraph (c)(2)(ii)(I) into paragraphs (8)(i)(A) and (B). We believe
these revisions would improve readability and make the applicability
date clear. These proposed changes would maintain the existing
regulatory requirements for SDPs that do not require written prior
approval and ensure that such SDPs would not be subject to the proposed
payment limit until the additional limits proposed in Sec.
438.6(c)(8)(iii) are finalized.
Next, we propose to revise paragraph (c)(8)(ii) to require that
States not exceed the payment limit for each inpatient hospital
service, outpatient hospital service, qualified practitioner service at
an academic medical center, or a nursing facility service covered under
an SDP described in Sec. 438.6(c)(2)(i), for services furnished during
a rating period beginning on or after July 4, 2025. As described in
this section, we propose to define ``State'' at Sec. 438.6(a), solely
for the purposes of Sec. 438.6(c)(8)(ii) and only until the first
rating period beginning on or after January 1, 2029, to mean one of the
50 States or DC For other purposes and time periods, ``State'' would
also include the Territories. This proposal would apply the payment
limits set forth under section 71116 the WFTC legislation to SDPs for
the four services that require written prior approval. Under proposed
Sec. 438.6(c)(8)(ii), any SDP that requires written prior approval for
one or more of the four services and that does not meet the definition
of a grandfathered SDP would be subject to the payment limit beginning
with the first rating period beginning on or after July 4, 2025. For
example, a State that submitted a new SDP for hospital inpatient and
outpatient services for a CY 2027 rating period would be subject to the
payment limits beginning with that rating period because the SDP would
not meet the definition of a grandfathered SDP. (See section II.A.2. of
this proposed rule for discussion on grandfathered SDPs.)
We also propose to apply the payment limit, which differs for
Expansion and Non-Expansion States to all services covered under SDPs
via proposed Sec. 438.6(c)(8)(iii). We believe that imposing the same
payment limit on all SDPs would be a reasonable and appropriate
approach to improve the fiscal integrity of the Medicaid program and
would align with the directive in the Presidential Memorandum that
Medicaid payment rates not exceed Medicare payment rates. Using
consistent benchmarks for evaluating the proposed payment limits for
all services within SDPs would help ensure that States do not engage in
cost shifting, such as attempting to increase payments to providers for
services other than the four services specified in section 71116 of the
WFTC legislation to offset the loss of revenue reductions resulting
from the payment limit on the four services. For example, hospitals
could seek to mitigate the impact of the payment limit by consolidating
with other healthcare provider entities, such as independent provider
practices and clinics, and by shifting certain services from an
outpatient hospital setting to a clinic setting, where SDP payments
[[Page 30416]]
would not be subject to the payment limit established in section 71116
of the WFTC legislation. Cost shifting practices of this nature are
counter to our goal of greater fiscal integrity within the Medicaid
program and could be used to obscure fraud, waste and abuse. We are
also proposing Sec. 438.6(c)(8)(iii) to extend the proposed payment
limit to all services covered under SDPs in the U.S. territories as our
fiscal integrity concerns noted above apply to all 50 States, DC, and
U.S. territories.
To provide States sufficient time to redesign SDPs, work with
interested parties and legislative bodies, and engage in technical
consultation with CMS, we propose to apply the payment limit to all
SDPs in the 50 States, DC, and the Territories effective with the first
rating period beginning on or after January 1, 2029. We considered
earlier effective dates, such as the first rating period beginning
after the effective date of the final rule or, on or after January 1,
2027 or January 1, 2028, which could reduce incentives for cost
shifting, and reduced SDP expenditures more expeditiously. However, we
do not believe that those earlier effective dates would provide States
sufficient time to complete the operational, technical, and
administrative steps necessary to implement the proposed payment limit.
We also considered whether a phase down period was necessary, as is
required for grandfathered SDPs under section 71116 of the WFTC
legislation. However, we do not believe that requiring a phase down
period is necessary for these SDPs given the less complicated design
most States have used in SDPs for services other than the four services
specified in section 71116 of the WFTC legislation. SDPs for services
other than the four specified in WFTC legislation also represent a
significantly lower amount of Medicaid expenditures and we believe that
a prospective compliance date with the payment limit already allows
States sufficient time to transition and initiate their own phase down
of implicated SDPs, if desired. We remind States that, regardless of
the use of SDPs, Medicaid managed care capitation rates are subject to
actuarial soundness requirements and States must comply with all
regulatory requirements including network adequacy standards, and CMS
contract oversight. These requirements ensure beneficiary access to
providers and services, separate and apart from SDPs which are always
optional for States.
We propose to prospectively apply, through new paragraph
(c)(8)(iii), the same payment limits specified in section 71116 of the
WFTC legislation to all services, all States, and all SDPs, applicable
with the first rating period beginning on or after January 1, 2029.
This proposal would apply the Payment limit defined at Sec. 438.6(a)
to the U.S. territories, to SDPs that do not require written prior
approval under paragraph (c)(1)(i), and to all other services covered
under SDPs.
These proposals to impose payment limits aligned with but in excess
of the requirements of section 71116 of the WFTC legislation are based
on our authority to interpret and implement section 1903(m)(2)(A)(iii)
of the Act, which requires contracts between States and MCOs to provide
prospective payment under a risk-based contract for services and
associated administrative costs that are actuarially sound and our
authority under section 1902(a)(4) of the Act to establish methods of
administration for Medicaid that are necessary for the proper and
efficient operation of the State plan. These proposals would be
extended to PIHPs and PAHPs through regulations based on our authority
under section 1902(a)(4) of the Act. As noted in the 2016 final rule,
regulation of SDPs is necessary to ensure that Medicaid managed care
plans retain sufficient discretion to manage the financial risk
associated with providing the benefits covered under their contracts,
which is integral to ensuring that capitation rates are actuarially
sound as defined in Sec. 438.4 (81 FR 27582).
c. Payment Limit Monitoring and Compliance
To assess and monitor State compliance with the new payment limit,
we propose in new Sec. 438.6(c)(8)(ii)(A)(1) to require States to
submit, for our review: a list of all providers eligible for the SDP
and their National Provider Identifiers (NPIs), the total published
Medicare payment rate or State plan approved rate (only when no total
published Medicare payment rate exists for the covered service) that
serves as the basis of the payment limit for each service covered under
the SDP. We also propose in Sec. 438.6(c)(8)(ii)(A)(2) that States
would be required to provide a detailed description of how the State
would ensure that payment to each provider for each furnished service
would not exceed the payment limit. With these proposals, States would
be aware of the payment limits and have a plan in place to ensure
compliance. We would expect States to provide detailed information
about the processes, systems, technology or other controls they would
utilize to ensure that each payment under the SDP does not exceed the
payment limit.
In addition, under proposed Sec. 438.6(c)(8)(ii)(C), we would have
authority to request additional documentation from States to assess
compliance with the payment limit. We believe that this documentation
would allow us to fully understand how a State would verify regulatory
compliance and allow us or other oversight bodies to engage in robust
post-implementation monitoring and oversight. For example, we or
another oversight body could utilize the submitted NPI list to extract
relevant Transformed Medicaid Statistical Information System (T-MSIS)
data for each provider eligible for an SDP during a specific rating
period, and then compare the actual paid amount in T-MSIS to the total
published Medicare payment rate or State plan approved rate (only when
no total published Medicare payment rate exists for the covered
service) that serves as the basis of the payment limit for each service
covered under the SDP to determine if payment for each service covered
under an SDP has complied with the applicable payment limit.
For States implementing VBP SDPs as permitted under paragraphs
(c)(1)(i) and (ii), we propose Sec. 438.6(c)(8)(ii)(B) to require
States to provide a detailed validation methodology to ensure that
payments from VBP SDPs do not exceed the payment limit on a per service
basis. For example, a State that opts to implement a population-based
payment SDP under Sec. 438.6(c)(2)(vi)(C) would be expected to
reconcile prospective population-based payments to actual utilization
occurring during the rating period to verify that the payment limit was
not exceeded on a per service basis. States implementing performance-
based payments under Sec. 438.6(c)(2)(vi)(B) would need to account for
the base payments paid to providers \56\ and ensure through a detailed
validation methodology that the per service payment limit was not
exceeded. Providers that already receive base payments (that is,
negotiated rates) from managed care plans that exceed the payment limit
would not be eligible to receive additional SDP payments that would
result in the per service payment limit being exceeded. We believe a
validation methodology would be necessary for VBP SDPs specifically
because there is greater risk of unintentionally exceeding the payment
limit given how VBP SDP models are developed under Sec.
438.6(c)(2)(vi)(C).
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\56\ We use the term ``base payments'' to mean the rates the
MCO, PIHP, or PAHP negotiated with the providers. This is consistent
with language used in the definition of ``uniform increase'' at
Sec. 438.6(a).
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[[Page 30417]]
We considered several alternative proposals because we recognize
that a per service payment limit may pose operational and logistical
complexities, particularly in the context of population and condition-
based SDP arrangements. VBP SDPs have been important tools for States
to improve the value of and quality of care furnished to Medicaid
managed care enrollees, and we are always available to provide
technical assistance to States interested in implementing VBP SDPs.
Because such arrangements are typically structured as prospective
payments to providers (that is, per member per month (PMPM) payment)
for an attributed population and defined set of services, we considered
alternative proposals in recognition of the unique challenges that may
arise for States when implementing VBP SDPs.
One alternative approach we have considered for VBP SDPs is
requiring the State to work with its actuaries to develop the
population or condition-based SDP using actuarial principles and have
the State's actuary certify that the provider payment under the SDP
(inclusive of any performance based payments and/or shared savings) was
developed in such a way that payment to providers would not exceed the
permissible applicable payment limit based on the services covered
under the SDP. We seek public comment on this alternative and other
operational or oversight approaches to ensure fiscal integrity with
regards to the payment limit and VBP SDPs. We also seek potential ideas
to operationalize alternative value-based arrangements in Medicaid,
given that value-based care is a is a tool to support CMS priorities
including holding providers accountable for health outcomes and
reducing wasteful spending.
We remind States of certain existing regulatory requirements that
are applicable to their monitoring and oversight of SDP implementation
and compliance with the payment limit. The term ``overpayment'' is
defined at Sec. 438.2 to mean any payment made to a network provider
by a managed care plan to which the network provider is not entitled to
under Title XIX of the Act or any payment to a managed care plan by a
State to which the plan is not entitled to under Title XIX of the Act.
Payments under SDPs to providers in excess of the applicable payment
limit would meet the definition of an overpayment. Part 438 subpart H
outlines requirements with respect to overpayments, including both
State and managed care plan obligations. Contracts with managed care
plans must specify policies and procedures related to reporting,
documentation, and recovery of overpayments made by the managed care
plan to the provider, as required at Sec. 438.608(d). Given these
requirements, States and plans should already have in place policies
and procedures to address overpayments and should consider whether any
refinements are necessary to address SDP-related overpayments. This
level of oversight and monitoring should occur with regularity
throughout the applicable rating period and at least on a quarterly
basis.
While States may work with their managed care plans to implement
upfront processes and system guardrails to avoid per service payments
in excess of the SDP payment limit, such as automating a limit in the
claims processing system, Sec. 438.242(d) requires States to review
and validate encounter data collected, maintained, and submitted by
their managed care plans. Under Sec. 438.242(c)(3), the encounter data
must include allowed amounts and paid amounts. By regularly validating
encounter data inclusive of the amount paid by the managed care plan,
the State can ensure that any SDP overpayments are identified and
addressed in a timely manner. In accordance with Sec. 438.608(d)(4),
the State must use that encounter data and information collected on
overpayments identified or recovered for purposes of setting
actuarially sound capitation rates for each managed care plan
consistent with the requirements at Sec. 438.4. States must work with
their actuaries to ensure that assumptions related to overpayments are
accounted for in capitation rate development.\57\ We remind States that
they must reimburse us for an amount equal to the Federal share of
overpayments consistent with section 1903(d)(2) of the Act and Sec.
433.312.
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\57\ The Medicaid Managed Care Rate Development Guide outlines
documentation requirements for rate certifications related to
overpayments (see section I, Item 3.B.ii.).
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If States do not provide sufficient documentation of their
monitoring approaches as required in proposed Sec. 438.6(c)(8)(ii)(A)
and (B), and to ensure that we would be able to require any additional
documentation necessary to ensure compliance with the proposed payment
limit, we propose Sec. 438.6(c)(8)(ii)(C) that would require States to
provide any additional documentation that we request to document
compliance. In our experience reviewing and approving SDPs since 2017,
we often must request additional materials or data as part of our SDP
review to ensure State compliance with Federal requirements and to
mitigate fiscal and program integrity concerns. This proposal would
formalize our authority to continue to request additional documentation
when needed to ensure that States are complying with the applicable
payment limit.
We propose to repeat the requirements proposed at Sec.
438.6(c)(8)(ii)(A) through (C) in paragraphs (8)(iii)(A) through (C)
but add ``upon request'' to the last phrase of the introductory text in
paragraph (8)(iii). We believe it would be necessary to repeat these
requirements to ensure that when the payment limit applies to all SDPs
as proposed in Sec. 438.6(c)(8)(iii), we are able to continue to
request this information from States to assess compliance with the
payment limit. This proposed revision would enable us to request this
documentation from States with SDPs that do not require submission of a
preprint for written prior approval by us. We propose that paragraph
(c)(8)(iii) would be applicable beginning with the first rating period
on or after January 1, 2029, to all 50 States, DC, and the U.S.
territories.
Based on our experience reviewing and approving SDPs since 2016,
States often request extensive technical assistance on SDP policies and
regulatory requirements including guidance on key SDP policy, SDP
design, the SDP quality evaluation, compliance with the applicable
payment limit, associated documentation that must be submitted to CMS,
and strategies for State monitoring and oversight of SDP
implementation. We also acknowledge that as the Original Medicare
program revises their payment rules and policies, States will have
questions about the applicability of those changes to the SDP payment
limit in Medicaid managed care. Under Sec. 438.7(e), we issue
additional guidance to States on a number of topics and elements
relevant to requirements for rate certification submission; this
guidance came to be known as the Medicaid Managed Care Rate Development
Guide \58\ and is published on an annual basis. We believe that similar
published guidance is necessary for SDPs given the complexity of SDP
policy and the new payment limit under the law. We propose new Sec.
438.6(c)(9) which would require us to issue guidance, as needed, on
topics including: Federal requirements and standards for the SDP,
documentation required to determine that the SDP has been developed in
[[Page 30418]]
accordance with the requirements of Sec. 438.6(c), any considerations
for applicability of the payment limit, the documentation required to
demonstrate compliance with the payment limit, any updates or
developments in the State directed payment review process to facilitate
prompt CMS review, and any considerations for state monitoring,
oversight, and evaluation of the SDP. We believe that this guidance
will be necessary to provide more granular guidance to States than is
possible under a regulation.
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\58\ <a href="https://www.medicaid.gov/medicaid/managed-care/guidance/rate-review-and-rate-guides">https://www.medicaid.gov/medicaid/managed-care/guidance/rate-review-and-rate-guides</a>.
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d. State Expansion Status
For States that begin providing expansion coverage on or after July
4, 2025 (the date of enactment of the WFTC legislation), section
71116(c) of the WFTC legislation specifies that the payment limit for
SDPs described under current Sec. 438.6(c)(2)(iii) would be the
applicable payment limit for Expansion States as outlined in section
71116(a)(1) of the WFTC legislation. Section 71116(c) of the WFTC
legislation states that this newly applicable SDP payment limit would
apply to services furnished during the first rating period on or after
the date of enactment. Because section 71116(c) of the WFTC legislation
ties the applicability of the payment limit (see proposed definition of
``payment limit'' in section II.A.1.A. of this proposed rule) to the
rating period in which the service is furnished, we interpret this to
mean that the payment limit for an Expansion State (see proposed
definitions of ``Expansion State'' and ``Non-Expansion State'' in
section II.A.1.A. of this proposed rule) would apply beginning with the
first rating period that begins on or after the date the State begins
providing expansion coverage.
We also believe that the reverse would be true; that is, if a State
were to transition from an Expansion State to a Non-Expansion State,
that State's SDPs would then be subject to the applicable payment limit
for Non-Expansion States. Although this scenario is not delineated in
section 71116(c) of the WFTC legislation, we believe that the payment
limit for a State's SDPs should be tied to its expansion status as
explicitly defined in sections 71116(a)(1) and (2) of the WFTC
legislation. We believe this would be necessary to implement the
proposed payment limit equitably among States and with clarity for
enforcement. We are not proposing any specific regulation text to
address this policy; we believe our proposals to define and implement
the payment limit (see sections II.A.1.A. and B. of this proposed rule)
would permit us to enforce this interpretation, if finalized as
proposed. We seek public comments on all of our proposals.
2. Grandfathered SDPs (Sec. 438.6(a) and (c)(2)(iii))
Section 71116(b) of the WFTC legislation provides for delayed
compliance with the payment limit (described in section II.A.1. of this
proposed rule and in section 71116(a) of the WFTC legislation) for
certain, eligible SDPs. In this proposed rule, we refer to section
71116(b) of the WFTC legislation as the ``grandfathering provision''
and SDPs that are described in and subject to the provision are
referred to as ``grandfathered SDPs.'' We also refer to the period of
delayed full compliance with the payment limit in section 71116(a) of
the WFTC legislation for grandfathered SDPs as the ``temporary
grandfathering period.'' The criteria for an SDP to qualify as a
grandfathered SDP are specified in section 71116(b) of the WFTC
legislation, including applicable types of services, the applicable
rating periods, and status of the SDP preprint.
a. Definition of a Grandfathered SDP
The first criterion for an SDP to qualify to be grandfathered is
that it be described under Sec. 438.6(c)(2)(iii), which is limited to
SDPs that require written prior approval and are for inpatient hospital
services, outpatient hospital services, nursing facility services, or
qualified practitioner services at an AMC. The current regulatory
requirements in Sec. 438.6(c)(2)(iii) specify that the total payment
rate for each SDP for which written prior approval is required for the
four services must not exceed the ACR. Because the grandfathering
provision in section 71116(b) of the WFTC legislation allows delayed
compliance with the payment limit in section 71116(a) of the WFTC, we
propose to adopt these criteria pertaining to the four services and an
SDP that requires written prior approval as part of the definition for
``Grandfathered State directed payment'' under Sec. 438.6(a).
The second criterion is that the SDP must be for a ``rating period
occurring within 180 days of the date of enactment'' of the WFTC
legislation. We interpret ``180 days'' to refer to 180 business days.
We believe this interpretation is appropriate because activity on SDP
preprints, including our review and approval, occurs on business days
and not on weekends or Federal holidays. To align with Federal
practice, we propose to define ``Business day'' under Sec. 438.2 to
mean Monday through Friday, excluding Federal holidays as set forth
under 5 U.S.C. 6103.\59\ Other government agencies, such as the Office
of Personnel Management (OPM) rely on 5 U.S.C. 6103 to determine
Federal holidays, and we believe aligning our definition with that
framework provides clarity and administrative consistency.
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\59\ Holidays include the 12 Federal holidays, including
Inauguration Day, as recognized by OPM (<a href="https://www.opm.gov/policy-data-oversight/pay-leave/federal-holidays">https://www.opm.gov/policy-data-oversight/pay-leave/federal-holidays</a>). Federal government
closures by Executive Order are also applicable to this timeframe.
Those known at the time of proposed rule publication include
December 24, 2024, January 9, 2025, December 24, 2025 and December
26, 2025.
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Section 71116(b) of the WFTC legislation further specifies that the
rating period must be ``occurring within'' the 180-day timeframe. A
rating period is defined in Sec. 438.2 as a period of 12 months
selected by the State for which actuarially sound capitation rates are
developed and documented in the rate certification submitted under
Sec. 438.7(a). States utilize different rating periods. For example,
some States utilize a CY rating period while others use 12-month rating
periods that begin in April, July, August or October. In some cases,
these non-CY rating periods align with a State fiscal year (SFY). Given
these variations, we interpret the phrase ``occurring within 180 days
of enactment'' to encompass rating periods that begin within 180
business days before or within 180 business days after July 4, 2025,
the date of enactment of the WFTC legislation. Under this proposed
interpretation of this criterion, the grandfathering provision would
apply to eligible SDPs in rating periods that include any business days
between October 11, 2024 through July 3, 2025 or between July 5, 2025,
and March 27, 2026. This would include rating periods for CY 2024, SFY
2025, CY 2025, SFY 2026, and CY 2026 which we refer to as ``eligible
rating periods'' in this proposed rule. Rating periods that do not
include any business days within those timeframes, including SFY 2027,
would not qualify. We propose to incorporate this interpretation into
the definition of a grandfathered SDP proposed at Sec. 438.6(a).
The third criterion to determine whether an SDP is eligible for the
grandfathering provision in section 71116(b) of the WFTC legislation
pertains to the status of an eligible SDP preprint. Specifically, SDPs
for an eligible rating period with one of the below statuses could
qualify for the grandfathering provision, consistent with section
71116(b) of the WFTC legislation. We acknowledge that the terms ``good
faith effort'' and
[[Page 30419]]
``completed preprint'' are further described in this section.
<bullet> SDPs (other than for rural hospitals) for which written
prior approval was made by us before May 1, 2025;
<bullet> SDPs (other than for rural hospitals) for which a good
faith effort to receive our approval was made before May 1, 2025;
<bullet> SDPs for rural hospitals for which written prior approval
was made by us before July 4, 2025;
<bullet> SDPs for rural hospitals for which a good faith effort to
receive our approval was made before July 4, 2025; and
<bullet> SDPs for which a completed preprint was submitted to us
prior to July 4, 2025.
The terms ``rural hospital'' and ``written prior approval''
utilized in section 71116(b) of the WFTC legislation are defined in
section 71116(d) of the WFTC legislation. Rural hospital is defined in
section 71116(d)(2) of the WFTC legislation to mean: (1) a section (d)
hospital (as defined in paragraph (1)(B) of section 1886(d) of the Act
(42 U.S.C. 1395ww(d))) that-- (i) is located in a rural area (as
defined in paragraph (2)(D) of such section); (ii) is treated as being
located in a rural area under paragraph (8)(E) of such section; or
(iii) is located in a rural census tract of a metropolitan statistical
area (as determined under the most recent modification of the Goldsmith
Modification, originally published in the Federal Register on February
27, 1992 (57 FR 6725)); (2) a critical access hospital (as defined in
section 1861(mm)(1) of such Act (42 U.S.C. 1395x(mm)(1))); (3) a sole
community hospital (as defined in section 1886(d)(5)(D)(iii) of such
Act (42 U.S.C. 1395ww(d)(5)(D)(iii))); (4) a Medicare-dependent, small
rural hospital (as defined in section 1886(d)(5)(G)(iv) of such Act (42
U.S.C. 1395ww(d)(5)(G)(iv))); (5) a low-volume hospital (as defined in
section 1886(d)(12)(C) of such Act (42 U.S.C. 1395ww(d)(12)(C))); or
(6) a rural emergency hospital (as defined in section 1861(kkk)(2) of
such Act (42 U.S.C. 1395x(kkk)(2))). Section 71116(d) of the WFTC
legislation specifies that the term ``written prior approval'' has the
meaning reflected in its use in Sec. 438.6(c)(2)(i) (or a successor
regulation).
The term ``completed preprint'' as used in section 71116(b) of the
WFTC legislation is not defined in section 71116(d) of the WFTC
legislation or existing regulation. In the CMCS Informational Bulletin
(CIB) published on November 7, 2023,\60\ we outlined guidance on the
components of a complete submission for Medicaid managed care
contracts, rate certifications, and SDP preprints. On page 6 of this
CIB, we noted that ``[a] complete State directed payment preprint
submission requires a State directed payments preprint form as well as
the preprint addendum tables in an Excel workbook, as necessary. . . .
The preprint must be completed in full, and all information must be
provided only in the fillable sections of the preprint and the addendum
tables.'' We believe it would be appropriate to define a ``completed
preprint'' consistent with the definition in this guidance, as it is an
accurate representation of the information necessary from States to
begin review of an SDP preprint, and would ensure that States had
adequate notice of this definition prior to enactment of the WFTC
legislation. We propose the definition of ``completed preprint'' at
Sec. 438.6(a) to mean an SDP preprint with all relevant sections of
the preprint filled out, and all information provided only in the
fillable sections of the preprint and the published addendum tables, as
applicable. Given the significance of a completed preprint for
implementation of section 71116(b) of the WFTC legislation, we believe
Sec. 438.6(c) would be more comprehensive and clear if it included a
definition of ``preprint'' and explicitly stated the requirement for
submission to obtain written prior approval. Although preprint
submission has been the only method by which a State could obtain
written prior approval of an SDP since their inception, we believe
Sec. 438.6(c)(2)(i) would benefit from the addition of a definition of
``preprint'' in Sec. 438.6(a) to reference the template published by
us and an explicit requirement in Sec. 438.6(c)(2)(i) that preprints
would have to be submitted for all SDPs that require written prior
approval.
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\60\ <a href="https://www.medicaid.gov/federal-policy-guidance/downloads/cib11072023.pdf">https://www.medicaid.gov/federal-policy-guidance/downloads/cib11072023.pdf</a>.
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The term ``good faith effort'' is also not defined in section
71116(d) of the WFTC legislation or in existing regulation. As noted in
the CIB published on November 7, 2023, ``[f]or those State directed
payments that require written prior approval, we must receive a
complete preprint before we will begin review.'' Consistent with this
guidance, we interpret a State's submission of a completed SDP preprint
prior to the applicable statutory date to constitute a good faith
effort to receive our approval. Therefore, we believe the term ``good
faith effort'' in status ``2'' and status ``4'' to mean submission of a
completed preprint. We believe this interpretation gives effect to the
phrase ``good faith effort'' by recognizing States that took
affirmative steps within the established SDP approval framework to seek
written prior approval. Under the existing regulatory structure,
submission of a completed preprint is the only objective action that
initiates our review, and other actions short of submission of a
completed preprint do not initiate review and therefore do not
demonstrate a good faith effort to obtain our approval. We do not
believe that adopting a broader interpretation of ``good faith effort''
would result in the inclusion of additional SDPs beyond those already
encompassed within statuses ``1'' and ``5''. We considered another
interpretation of ``good faith'' to mean that the SDP had been
documented in Medicaid managed care contracts and rate certifications
by July 4, 2025. However, the SDPs under the purview of the statute are
those that specifically require prior approval \61\ by us, meaning that
the State must submit a preprint for our review and approval prior to
implementation. In the absence of a completed SDP preprint submission,
documentation in contracts and rate certifications does not
sufficiently represent a good faith effort to receive our approval. The
preprint submission is needed for us to complete our review and
approval of an SDP that requires prior approval. We considered whether
technical assistance calls or informal consultation might rise to level
of a ``good faith effort;'' however, these activities do not provide
sufficiently cogent or detailed information for us to reasonably
initiate a SDP review.
---------------------------------------------------------------------------
\61\ 42 CFR 438.6(c)(2)(i).
---------------------------------------------------------------------------
Additionally, as a practical matter, SDPs for which a completed
preprint has been submitted to us prior to July 4, 2025 (status ``5''),
would encompass all SDPs that would otherwise be eligible under
statuses ``1'' through ``4.'' Under our existing review process, a
State cannot obtain written prior approval without submitting a
completed preprint. As a result, any State that received written prior
approval from us before May 1, 2025 or July 4, 2025, would necessarily
have submitted a completed preprint before July 4, 2025. Therefore,
rather than repeatedly list all five statuses in this proposed rule, we
propose that an SDP would be eligible under the third criterion if a
completed preprint was submitted to us prior to July 4, 2025. We
propose to adopt this criterion as part of the definition for a
grandfathered SDP at Sec. 438.6(a).
[[Page 30420]]
In addition, we propose that the grandfathering provisions apply
only where an SDP exceeds the payment limit set forth in Sec.
438.6(c)(8). In general, the statutory phase down framework applies to
bring higher payment levels into compliance with the applicable limit.
Where an SDP is already at or below the payment limit, application of
the grandfathering framework would not have practical effect and could
limit a State's ability to modify the SDP to increase payments up to
the permissible payment limit. In summary, to more easily reference
SDPs that meet these criteria for grandfathering in this proposed rule
and in Sec. 438.6, we propose to add the term ``Grandfathered State
directed payment'' to the definitions under Sec. 438.6(a). We propose
to define ``Grandfathered State directed payment'' to mean an SDP for
inpatient hospital services, outpatient hospital services, nursing
facility services, or qualified practitioner services at academic
medical centers that received written prior approval under paragraph
(c)(2)(i); is for a rating period that includes at least 1 business day
between October 11, 2024 and July 3, 2025 or July 5, 2025 and March 27,
2026; and for which a completed preprint with an eligible rating period
and documented total dollar amount (as specified in item 4 of the
current SDP preprint) was submitted to us prior to July 4, 2025. It is
essential to require that the completed preprint submitted to us prior
to July 4, 2025 contains an eligible rating period and documented total
dollar amount as these elements are essential to establish eligibility
for grandfathering. Under our proposed definition, States would not be
permitted to revise a preprint submission after July 4, 2025 to change
the rating period to qualify as a grandfathered SDP, or to increase the
total dollar amount of a grandfathered SDP. The SDP would also need to
exceed the payment limit set forth in paragraph (c)(8).
b. Temporary Grandfathering Period
Grandfathered SDPs are eligible for a temporary grandfathering
period and subject to a phase down of the total amount of the SDP to
the payment limit beginning with the first rating period on or after
January 1, 2028, as specified in section 71116(b) of the WFTC
legislation. Section 71116(b) of the WFTC legislation specifies that
beginning with the rating period on or after January 1, 2028, a State
must begin an annual phase down of the ``total amount'' of the
Grandfathered SDP. We believe the specified ``total amount'' of the SDP
refers to the total amount of the SDP approved for the rating period
for which the SDP qualified for grandfathered SDP status (for example,
SFY 2025, CY 2025, CY 2026 or SFY 2026). For SDPs that require written
prior approval, States are required to submit an SDP for written prior
approval using the current CMS issued preprint.\62\
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\62\ <a href="https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-4386c-preprint-template.pdf">https://www.medicaid.gov/medicaid/managed-care/downloads/sdp-4386c-preprint-template.pdf</a>.
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Item 4 of the current SDP preprint captures the State's estimated
total dollar amount associated with the SDP to provide transparency
regarding the fiscal impact (Federal and non-Federal share) of the
State's proposal and to aid our review for written prior approval
required under Sec. 438.6(c)(2)(i), including our assessment of
whether the SDP complies with standards outlined in Sec. 438.6(c)(2).
Therefore, we believe the estimated total dollar amount listed in item
4 of the preprint would be the most reasonable, practical, and
consistent way to interpret and implement ``total amount'' in section
71116(b) of the WFTC legislation. In the interest of controlling the
rapid growth in SDP spending and consistent with section 71116 of the
WFTC legislation and the Presidential Memorandum, we propose to utilize
the total dollar amount documented in item 4 of the preprint approved
by us for each grandfathered SDP as the maximum amount of expenditures
that would be allowed for that SDP during the temporary grandfathering
period prior to the start of the phase down that begins with rating
periods on or after January 1, 2028. We propose to define
``Grandfathered total dollar amount'' under Sec. 438.6(a) to mean the
total dollar amount approved by us for a grandfathered SDP. When
preprint submissions of the same SDP for different rating periods meet
the definition of a grandfathered SDP, the highest total dollar amount
approved by us is the maximum grandfathered total dollar amount. For
example, if a State has a SFY 2025 preprint and a SFY 2026 preprint for
the same SDP that both qualify as grandfathered SDPs, and the SFY 2025
preprint totals $100 million (as specified in item 4 of the approved
preprint) while the SFY 2026 preprint totals $105 million (as specified
in item 4 of the approved preprint), then $105 million would be the
grandfathered total dollar amount.
As described, the grandfathered total dollar amount identified in
item 4 of the preprint represents the maximum total amount of
expenditures for the SDP and is subject to the required phase down.
This makes it more challenging to incorporate a grandfathered SDP into
capitation rates as an adjustment to the capitation rates because fixed
aggregate funding amounts are generally not compatible with prospective
capitation rate development and actuarial soundness in risk-based
managed care. Capitation rates are generally paid on a PMPM basis and
total spending in a managed care program can fluctuate with enrollment
and utilization changes. When grandfathered SDPs are included in the
PMPM as an adjustment to the capitation rates it presents the
possibility that the grandfathered total dollar amount could be
exceeded if enrollee utilization is higher than projected. It could
also increase the administrative burden on States, which would need to
monitor actual utilization and SDP spending, and submit SDP preprint
amendments and/or rate amendments, as applicable to ensure that the
grandfathered total dollar amount is not exceeded.
We have considered how best to ensure fiscal integrity of the
grandfathered total dollar amount during the temporary grandfathering
period and through the phase down period. One option we considered is
to permit grandfathered SDPs to use separate payment terms on a time-
limited basis. However, as we have stated in prior guidance, ``[a]s CMS
has reviewed State directed payments and the related rate
certifications, CMS has identified a number of concerns around the use
of separate payment terms. Frequently, while there is risk for the
providers, there is often little or no risk for the plans related to
the directed payment, which is contrary to the nature of risk-based
managed care. This can also result in perverse incentives for plans
that can result in shifting utilization to providers in ways that are
not consistent with Medicaid program goals.'' \63\ We further stated in
the 2024 final rule that ``some States are increasingly relying on this
payment mechanism to circumvent risk-based payment to managed care
plans. More specifically, it is a way to circumvent compliance with the
requirement that SDPs be developed in accordance with Sec. 438.4, and
the standards specified in Sec. Sec. 438.5, 438.7, 438.8, and
generally accepted actuarial principles and practices.'' \64\
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\63\ <a href="https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/smd21001.pdf">https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/smd21001.pdf</a>.
\64\ 89 FR 41109.
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While we continue to have concerns with separate payment terms, we
also acknowledge that, in this limited context resulting from the WFTC
legislation, they may provide a more
[[Page 30421]]
transparent and administratively feasible mechanism for Federal and
State monitoring and oversight of compliance with the grandfathered
total dollar amount and associated phase down requirements as a
separate payment term can be directly targeted to the total dollar
amount. For this reason, we are proposing and seek comment on a time-
limited exemption to the prohibition on separate payment terms only in
this limited circumstance. More specifically, we propose in Sec.
438.6(c)(2)(iii)(F) to permit a State to delay compliance with the
separate payment term prohibition in Sec. 438.6(c)(6) and the preprint
timing submission requirements in Sec. 438.6(c)(2)(viii) for a
grandfathered SDP until the first rating period in which the payment
limit is met in accordance with Sec. 438.6(c)(8). Beginning with the
first rating period that the payment limit is met under Sec.
438.6(c)(8), the State would be required to comply with the prohibition
on separate payment terms and the prospective preprint submission
requirements because, under the proposed definition of ``Grandfathered
State directed payment'' in Sec. 438.6(a), an SDP that no longer
exceeds the payment limit would no longer qualify as a grandfathered
SDP. This means that with the first rating period that the payment
limit is met (as demonstrated by the total payment rate comparison in
Table 2 of the preprint submission), the State would be required to
incorporate the SDP as an adjustment to the capitation rates, submit
the preprint prospectively (if applicable) and, if the SDP is for a
rating period that starts on or after January 1, 2028, the State would
be required to comply with the permissible types of SDPs (that is,
minimum fee schedule, maximum fee schedule or value-based payment
arrangement). We request public comment on this specific approach and
if there are any other operational considerations we should take into
account. States with grandfathered SDPs are required to ensure that the
grandfathered total dollar amount is not exceeded in any rating period
during the phase down period. We are not proposing to revisit these
regulatory provisions for any other SDPs or scenarios and intend this
as a time-limited exemption for eligible grandfathered SDPs only.
We reiterate that we continue to have concerns with separate
payment terms and have considered several alternative proposals. An
alternative we considered, and invite comment on, was to maintain the
prohibition on the use of separate payment terms, without exceptions,
in Sec. 438.6(c)(6) and the preprint timing submission requirements in
Sec. 438.6(c)(2)(viii). Under this alternative, all SDPs would be
required to comply with the requirements finalized in the 2024 final
rule. Another alternative we considered was to maintain the prohibition
on the use of separate payment terms, require that all SDPs be
incorporated into rates as adjustments to the base capitation rates and
create narrow flexibilities to ease the administrative burden for
States to monitor compliance with the grandfathered total dollar
amount, including monitoring of actual utilization and SDP spending. We
also considered waiving only the prospective preprint submission timing
requirements in Sec. 438.6(c)(2)(viii), without waiving the
prohibition on separate payment terms in Sec. 438.6(c)(6). This
alternative would allow States to retroactively modify their SDP
preprints once utilization is known to ensure that the grandfathered
total dollar amount is not exceeded for a specific rating period. We
recognize that this alternative would be less consistent with the
prospective submission framework established in Sec.
438.6(c)(2)(viii), but considered it as a potential means of reducing
the risk that actual expenditures would exceed the grandfathered total
dollar amount.
We also considered whether we should require States to use separate
payment terms and uniform increase SDPs for all grandfathered SDPs.
Separate payment terms are typically structured as predetermined,
finite pools of funding, which aligns with our proposals for a
grandfathered total dollar amount. In our experience, it is difficult
to incorporate a minimum fee schedule or maximum fee schedule type SDP
into the capitation rates as a separate payment term because a fee
schedule by nature means that total provider payments that are based on
the fee schedule will ultimately vary due to utilization. For this
reason, if we were to require separate payment terms, we would likely
also need to require that States utilize either a uniform increase type
SDP or value-based payment SDP which can be more easily incorporated
into the capitation rates as a separate payment term. However, we did
not propose this alternative because of our longstanding concerns with
the use of separate payment terms, including that they are utilized by
States to circumvent risk-based payment to managed care plans (89 FR
41109). We are also concerned that such an alternative would remove the
State's ability to determine the type of SDP that furthers the State's
overall Medicaid program goals and objectives and could be overly
prescriptive.
In the 2023 proposed rule, we proposed a number of regulatory
provisions related to separate payment terms and we consider their
relevancy again given the new statutory requirements under the WFTC
legislation. We also considered whether to amend Sec. 438.6(a) to
define ``Separate payment term'' as a pre-determined and finite funding
pool that the State establishes and documents in the Medicaid managed
care contract for a specific SDP. Payments made from this funding pool
are made by the State to the managed care plan exclusively for SDPs and
are made separately and in addition to the capitation rates identified
in the contract as required under Sec. 438.3(c)(1)(i).\65\ Defining
the term ``separate payment term'' could offer additional clarity to
States regarding the nature and permissibility of a separate payment
term. We seek public comment on this potential definition. We also
consider whether it would be beneficial to again propose a regulatory
revision that the separate payment term could not exceed the total
dollar amount documented in the written prior approval for each SDP,
for additional clarity regarding the hard limit on the grandfathered
total dollar amount.\66\ We seek public comments on all alternatives
considered.
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\65\ 88 FR 28146.
\66\ 88 FR 28146.
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We propose to revise Sec. 438.6(c)(2)(iii)(A) through (C) as Sec.
438.6(c)(2)(iii)(C)(1) through (3) and to replace the existing text in
Sec. 438.6(c)(2)(iii) with proposed text stating that SDPs that meet
the definition of a grandfathered SDP would be eligible for delayed
compliance with the payment limit. We also propose new introductory
text in Sec. 438.6(c)(2)(iii) to make the requirements at Sec.
438.6(c)(2)(iii)(A) through (F) applicable to all grandfathered SDPs.
To establish clear guardrails to ensure that the maximum total
amount for a grandfathered SDP would not be exceeded during each rating
period of the temporary grandfathering period, we propose in Sec.
438.6(c)(2)(iii)(A) that subsequent renewals of or amendments to a
grandfathered SDP must not exceed the grandfathered total dollar amount
for each rating period beginning on or after July 4, 2025 but before
January 1, 2028.
Under Sec. 438.6(c)(2)(iii)(C), we propose that the total payment
rate that would be effective under proposed paragraphs
[[Page 30422]]
(c)(2)(iii)(A) and (B) (that is, the limits on total amount and phase
down applicable to a grandfathered SDP) must not exceed the ACR. We
believe this would prevent States from redesigning grandfathered SDPs
to result in total payment rate(s) that could exceed ACR without
exceeding the maximum total amount permitted for a grandfathered SDP.
For example, a State could choose to redesign a renewal of a uniform
increase grandfathered SDP during the temporary grandfathering period.
As part of that redesign, the State could redefine the eligible
provider classes and modify the uniform increase for each provider
class and service type such that the renewal SDP would not exceed the
maximum total amount permitted in paragraph (c)(2)(iii)(A) for the SDP
overall, but the total payment rate(s) by provider classes would exceed
the ACR.
We believe it would be necessary to monitor for a time-limited
period how the total payment rate under a grandfathered SDP would
compare to the ACR so as not to create a loophole that would allow
States to direct managed care plans to make payments to providers under
a grandfathered SDP that exceed ACR. This loophole would run counter to
Congressional intent to decrease SDP payment rates for the four
services from rates up to the ACR as currently allowed under regulation
to the new statutory payment rate limits based on the total published
Medicare or Medicaid State plan payment rates, as well as our goals of
fiscal integrity and more reasonable payment rates for Medicaid
providers via SDPs. Monitoring how the total payment rate compares to
ACR may only be necessary through the end of the first rating period of
the phase down period for a grandfathered SDP, after which we
anticipate that the general design of each SDP would remain relatively
stable as States focus on the required phase down and a comparison to
new payment limits, that is, the new limits based on the total
published Medicare payment rate or Medicaid State plan approved rate.
We contemplated whether States should be required to continue
demonstrating compliance with ACR demonstration and total payment rate
comparison \67\ to ACR for a longer period of time, given that States
retain flexibility to redesign grandfathered SDPs during the phase down
period so long as they comply with the required phase down schedule.
With this in mind, we considered extending the ACR requirements beyond
the first rating period of the phase down, including a period of more
than 1 year and up to 10 years. We believe that a 10-year requirement
is likely unnecessary given the required phase down schedule (see
section II.A.2.c. of this proposed rule for additional information
about the phase down) which will significantly reduce the risk of
exceeding the ACR as the total dollar amount associated with the SDP
phases down over time. In addition, maintaining the ACR demonstration
and total payment rate comparison to ACR for a longer period of time
would increase the administrative burden for both us and the State as
States with grandfathered SDPs would be required to calculate and
submit additional annual total payment rate comparisons under our
proposals. We request public comment on whether the ACR monitoring
requirement should apply for 1 year, or for another whole numbers of
years, up to 10 years to ensure that we have adequate oversight into
how total payment rates compare to the ACR.
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\67\ In accordance with Sec. 438.6(c)(2)(iii)(C) the ACR
demonstration must be included with the initial documentation
submitted for a SDP, and then subsequently updated at least once
every 3 years thereafter as long as the State continues to renew the
SDP. The total payment rate comparison must be included and updated
with each preprint amendment and subsequent renewal.
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By redesignating the existing ACR demonstration and total payment
rate comparison currently in Sec. 438.6(c)(2)(iii)(A) through (C) as
Sec. 438.6(c)(2)(iii)(C)(1) through (3) and maintaining applicability
of these provisions to the original applicability dates in the 2024
final rule, we propose that the State would continue to provide an ACR
demonstration and total payment rate comparison using ACR for a
grandfathered SDP until the first rating period beginning on or after
January 1, 2029. We are not proposing to change any of the existing
requirements for an ACR demonstration or total payment rate comparison.
We seek public comments on all of our proposals.
c. Phase Down of Grandfathered SDPs
Section 71116(b) of the WFTC legislation provides that
grandfathered SDPs are subject to a temporary grandfathering period
followed by a required phase down of the total amount of the
grandfathered SDP to the allowable payment limit. Section 71116(b) of
the WFTC legislation requires that beginning with the first rating
period on or after January 1, 2028 for grandfathered SDPs, ``the total
amount of such payment shall be reduced by 10 percentage points each
year until the total payment rate for such service is equal to the rate
for such service specified in section (a).'' In section II.A.2.b. of
this proposed rule, we explained our interpretation of the phrase
``total amount'' of such payment to mean the total amount of the SDP
approved for the rating period for which the SDP qualified for
grandfathered SDP status as identified in item 4 of the preprint
approved by us for each grandfathered SDP. We also proposed a
definition of ``grandfathered total dollar amount'' under Sec.
438.6(a) to mean the total dollar amount approved by us for a
grandfathered State directed payment. When preprint submissions of the
same SDP for different rating periods meet the definition of a
grandfathered State directed payment, the highest total dollar amount
approved by us is the grandfathered total dollar amount.
Next, we consider the phrase ``the total amount of such payment
shall be reduced by 10 percentage points each year.'' We interpret this
provision to require an annual reduction equal to 10 percentage points
of the grandfathered total dollar amount, calculated using the original
grandfathered total dollar amount as the baseline, each year of the
phase down period until the applicable payment limit is reached. We
base this interpretation on the statutory language ``10 percentage
points each year,'' which supports a fixed annual reduction from a
constant baseline (that is, the grandfathered total dollar amount).
Section 71116(b) of the WFTC legislation requires that the
grandfathered SDP be phased down until ``the total payment rate for
such service is equal to the rate for such service specified in section
(a).'' In sections II.A.2.a. and 2.b. of this proposed rule, we explain
our interpretation of section 71116(a) of the WFTC legislation and
propose a definition of ``Payment limit'' under Sec. 438.6(a) to mean,
as applicable, one of the following: 100 percent of the total published
Medicare payment rate for an Expansion State; 110 percent of the total
published Medicare payment rate for a Non-Expansion State; and only in
instances when there is no total published Medicare payment rate for
the covered service, 100 percent of the State plan approved rate. See
sections II.A.1.a. and 1.b. of this proposed rule for further
discussion of the proposed definition of ``Payment limit'' in Sec.
438.6(a) and applicability of the payment limit in Sec. 438.6(c)(8).
We believe it is reasonable to interpret sections 71116(a) and (b)
of the WFTC legislation to require that beginning with the first rating
period on or after January 1, 2028, the grandfathered total dollar
amount must be phased down by the amount that represents 10
[[Page 30423]]
percentage points of that amount annually, unless a greater reduction
is requested by the State, until the applicable payment limit is
reached. As discussed in sections II.A.2.a and II.A.2.b. of this
proposed rule, the payment limit is defined in proposed Sec. 438.6(a)
and reflects the limits specified in section 71116(a) of the WFTC
legislation. To implement this phase down consistent with the statute,
we propose to add Sec. 438.6(c)(2)(iii)(B) which would require that
beginning with the first rating period on or after January 1, 2028, the
State would be required to decrease the total dollar amount of a
grandfathered SDP by at least 10 percentage points annually, until the
payment limit proposed in Sec. 438.6(c)(8) is met. Under our proposal,
the 10-percentage point phase down is based on the original
grandfathered total dollar amount rather than an annually compounding
reduction.
To illustrate our proposal, we outline a phase down example for a
State with an SDP for a CY 2025 rating period that meets the definition
of a grandfathered SDP. In this example, the grandfathered total dollar
amount for CY 2025 is $1 billion, as identified in item 4 of the
approved preprint. Under our proposal, the State would be permitted to
submit SDP renewals to maintain or reduce the Grandfathered total
dollar amount ($1 billion) for each of the two subsequent rating
periods (CY 2026 and CY 2027). Beginning with the CY 2028 rating period
(that is, the first rating period beginning on or after January 1,
2028), the State would be required to phase down the grandfathered
total dollar amount by at least 10 percentage points annually (that is,
$100 million) until the applicable payment limit is reached. Under our
proposal, that annual reduction amount would be at least $100 million,
which is 10 percent of the Grandfathered total dollar amount of $1
billion. In the event that a State opted to phase down by greater than
the annual reduction amount for a year, we expect the following annual
phase down reduction amount would still follow the prescribed schedule
but the reduction could be pro-rated to reflect the cumulative
reduction required under Sec. 438.6(c)(2)(iii)(B), taking into account
any excess reduction in the prior rating period. Using the $1 billion
grandfathered total dollar amount example, if the State chooses to
phase down by $150 million in the first rating period of the phase
down, they would only need to phase down by an additional $50 million
in the subsequent rating period. The State would not be permitted to
direct their managed care plans to expend amounts exceeding the
applicable total dollar amount of the grandfathered SDP for each year
of the grandfathering period or during the required phase down period.
States would need to work closely with their managed care plans each
year to monitor and ensure that the total dollar amount of projected
and actual expenditures for the grandfathered SDP paid by managed care
plans to providers for the rating period does not exceed the applicable
total dollar amount under Sec. 438.6(c)(2)(iii)(B) for each rating
period during the grandfathering period and the phase down period.
We believe monitoring by both CMS and the State is necessary to
ensure compliance and assess the State's progress toward the payment
limit. We propose Sec. 438.6(c)(2)(iii)(D) to require certain
documentation annually in the form and manner prescribed by us for each
grandfathered SDP beginning with the first rating period on or after
January 1, 2027. We selected the first rating period beginning on or
after January 1, 2027 as the start for our proposed documentation
requirement because we believe baseline information is necessary before
States would commence the required phase down beginning with the first
rating period on or after January 1, 2028.
For the purposes of this required documentation, the State would
need to annually monitor the total payment rate(s) for each
grandfathered SDP and submit a total payment rate comparison
demonstrating whether the payment limit proposed under paragraph (c)(8)
has been met. For purposes of this comparison, States should calculate
the total payment rate using the components defined in Sec. 438.6(a)
and compare that rate to the applicable payment limit under paragraph
(c)(8). States currently perform a total payment rate comparison as
part of SDP preprint submissions for approval, amendment, and renewal,
using ACR as the benchmark. Under this proposal, States would instead
be required to submit this comparison annually beginning with the first
rating period on or after January 1, 2027, using Medicare or State plan
approved rates as the point of comparison. In Table 5 of this section,
we provide an illustrative example of how the total dollar amount phase
down of the grandfathered total dollar amount for a Non-Expansion State
might translate to the total payment rates for a Medicaid managed care
program and a provider class (Provider Class A) covered under the
illustrative grandfathered SDP. In this scenario, the State would reach
the applicable payment limit (110 percent of the total published
Medicare payment rate) by CY 2031.
[GRAPHIC] [TIFF OMITTED] TP22MY26.004
[[Page 30424]]
To monitor the phase down process and compliance with the payment
limit, we propose Sec. 438.6(c)(2)(iii)(D) to require that, beginning
with the first rating period on or after January 1, 2027, the State
submit a total payment rate comparison, certified by an actuary, for
services included in the grandfathered SDP, expressed as a percentage
of the most recent total published Medicare payment rate, or State plan
approved rate only when no total published Medicare payment rate exists
for the covered service. Under the proposed introductory text in Sec.
438.6(c)(2)(iii)(D), this total payment rate comparison would be
submitted annually in the form and manner prescribed by us. The term
``Total payment rate'' is defined under Sec. 438.6(a) and lists the
components for the total payment rate analysis; Sec.
438.6(c)(2)(iii)(D) would require that the total payment rate
comparison be conducted using Medicare or State plan approved rates as
the point of comparison for grandfathered SDPs. This total payment rate
comparison may be captured in the preprint, as currently reflected in
Table 2 of the preprint.
We considered whether to mandate specific methodologies or
permissible methodologies and specify data sources for the proposed
total payment rate comparison under Sec. 438.6(c)(2)(iii)(D). Based on
our experience, States currently use a myriad of different
methodologies when completing the total payment rate comparison
currently required in Sec. 438.6(c)(2)(iii)(B), often reflecting
differences in commercial data availability. We request public comment
as to whether it would be more beneficial to require that States use
specific methodologies or sources of data for the total payment rate
comparison. The total payment rate comparison should be developed using
the same assumptions utilized for the development of the related
capitation rates. For this reason, we believe it is appropriate to
require that the total payment rate comparison proposed under Sec.
438.6(c)(2)(iii)(D) be certified by an actuary.
Once the payment limit has been reached, the State would be
required to comply with the proposed requirements under Sec.
438.6(c)(1)(iii). See section II.A.3.c. of this proposed rule for
discussion of our proposals regarding changes to uniform increase SDPs.
We also considered an alternative approach under which the phase
down would apply to the total payment rate, rather than to the total
dollar amount of the SDP. Under this alternative, the total payment
rate (as a percentage of the total published Medicare payment rate) in
the grandfathered SDP would be reduced by 10 percentage points each
year until it reaches the applicable Medicare rate, as illustrated in
the following table for a Non-Expansion State.
[GRAPHIC] [TIFF OMITTED] TP22MY26.005
Because many States include multiple services, provider classes
and/or managed care programs within a single SDP, this approach would
require calculating and applying the phase down separately for each
provider class, service and program. We believe this would impose a
significant administrative burden on States. This alternative would
also significantly increase our administrative burden to review and
assess compliance with the phase down process. We invite public comment
on this alternative proposal and on all proposals in this section.
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\68\ In this example, the total dollar amount of managed care
plan base payments (before the SDP) is $1,600,000,000 per year, and
the total dollar amount of Medicare payments according to published
rates is $2,000,000,000 per year.
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These proposals implement section 71116(a) and (b) of the WFTC
legislation, which establishes statutory payment limits for certain
SDPs and provides a temporary grandfathering period followed by a phase
down of the total amount of grandfathered payments. They are also based
on our authority to interpret and implement section 1903(m)(2)(A)(iii)
of the Act, which requires contracts between States and MCOs to provide
payment under a risk-based contract for services and associated
administrative costs that are actuarially sound and our authority under
section 1902(a)(4) of the Act to establish methods of administration
for Medicaid that are necessary for the proper and efficient operation
of the State plan. These requirements would be extended to PIHPs and
PAHPs through regulations based on our authority under section
1902(a)(4) of the Act.
3. Types of Permissible SDPs and Provider Classes (Sec.
438.6(c)(1)(iii), (c)(2)(i), and (c)(2)(iii)(E))
a. Minimum Fee Schedule SDPs
We believe several other regulatory revisions would be needed to
create guardrails to ensure that the regulations do not include
weaknesses or gaps that could result in SDPs that exceed the payment
limit. In the 2024 final rule, we finalized Sec. 438.6(c)(1)(iii)(B),
which allowed States to adopt a minimum fee schedule for providers that
provide a particular service under the contract using a total published
Medicare payment rate that was in effect no more than 3 years prior to
the start of the rating period, and under which the minimum fee
schedule to be used by the managed care plan is 100 percent of the
total published Medicare payment rate. Through cross reference in Sec.
438.6(c)(2)(i), States are not required to submit these SDPs to us for
written prior approval via the current CMS issued preprint, but as is
the case with all SDPs, these SDPs must be documented in the applicable
managed care contracts and rate certifications and must comply with the
requirements currently at Sec. 438.6(c)(2)(ii).\69\ When we finalized
those provisions, we relied on the rationale that allowing States to
utilize a total published Medicare
[[Page 30425]]
payment rate in effect no more than 3 years prior to the start of the
rating period would be consistent with how Sec. 438.5(c)(2) requires
use of base data that is at least that recent for Medicaid managed care
rate development. However, considering the proposed changes in this
proposed rule in Sec. 438.6(c)(2)(iii)(B)(1), we believe aligning the
minimum fee schedules that States would be able to use for SDPs more
closely with our proposed payment limit would be prudent to facilitate
accurate implementation and validation.
---------------------------------------------------------------------------
\69\ 42 CFR 438.7(b)(6).
---------------------------------------------------------------------------
We also have similar concerns with SDPs that use minimum fee
schedules tied to State plan approved rates for services that have a
published Medicare rate. SDPs that use minimum fee schedules tied to
State plan approved rates are permitted in existing Sec.
438.6(c)(1)(iii)(A) and do not require written prior approval, as
specified in Sec. 438.6(c)(2)(i). As discussed in section II.A.1. of
this proposed rule, the new proposed payment limit for all SDPs for
rating periods beginning on or after January 1, 2029 would be 100
percent of the total published Medicare payment rate for Expansion
States, 110 percent of the total published Medicare payment rate for
Non-Expansion States, and only when there is no total published
Medicare payment rate for the Medicaid covered service, would the limit
be 100 percent of State plan approved rates. We are concerned that if
we continue to permit SDPs that use minimum fee schedules tied to State
plan approved rates for services that have a published Medicare rate,
there would be greater risk of States implementing SDPs using minimum
fee schedules that could exceed the total published Medicare payment
rate since States set their own State plan rates within broad Federal
parameters including the requirements under section 1902(a)(30)(A) of
the Act. Because such SDPs currently do not require written prior
approval, we might only be able to identify if a State had exceeded, or
was at risk of exceeding, the total published Medicare payment rate as
part of a targeted SDP and Medicaid managed care contract audit.
To address our concerns related to minimum fee schedule SDPs and
organize Sec. 438.6(c)(1)(iii) for improved readability, we first
propose to move current Sec. 438.6(c)(1)(iii)(A) through (E) to Sec.
438.6(c)(1)(iii)(A)(1) through (5), and to revise the introductory text
in Sec. 438.6(c)(1)(iii)(A) which would establish that the types of
SDPs proposed in paragraphs (1) through (5) would be limited to rating
periods beginning from July 9, 2024, but before January 1, 2028. This
would limit the use of the existing minimum and maximum fee schedule
arrangements in current Sec. 438.6(c)(1)(iii)(A) through (E), as
redesignated as Sec. 438.6(c)(1)(iii)(A)(1) through (5) in this
proposed rule, to rating periods beginning from July 9, 2024, but
before January 1, 2028. This proposed time period would precede our
proposed effective date for the applicability of the payment limit to
all SDPs and States.
Next, we propose to revise Sec. 438.6(c)(1)(iii)(B) to add
introductory text that would specify the applicability date as
beginning with the first rating period on or after January 1, 2028 for
the proposed payment arrangements at Sec. 438.6(c)(1)(iii)(B)(1)
through (2). Since we are proposing these changes to ensure that States
would not exceed the payment limit, we believe it would be reasonable
that our proposed revisions to the types of allowable fee schedules
would precede the proposed applicability date for the payment limit to
all SDPs outlined in section II.A.1. of this proposed rule.
In lieu of listing the three types of minimum fee schedules
currently permitted at Sec. 438.6(c)(1)(iii)(A) through (C)
separately, we propose to combine them into one type and revise the
wording in Sec. 438.6(c)(1)(iii)(B)(1) for improved readability and
clarity. Specifically, we propose in Sec. 438.6(c)(1)(iii)(B)(1) that
States would be permitted to direct managed care plans to adopt a
minimum fee schedule for providers that provide a particular service
under the contract and that minimum fee schedule is no greater than the
payment limit. This would provide States the flexibility to direct
managed care plans to implement an SDP using a minimum fee schedule up
to the proposed payment limit. Under our proposal, States would also
have flexibility to design their own fee schedules for services that
have a published Medicare rate as is permitted under current Sec.
438.6(c)(1)(iii)(C), as long as that fee schedule on a per service
basis would not exceed the applicable payment limit. Since our proposed
revisions in Sec. 438.6(c)(1)(iii)(B)(1) would explicitly prohibit fee
schedules selected for SDPs that use a minimum fee schedule from
exceeding the proposed payment limit, we believe this would
substantially reduce the risk that States would breach the payment
limit. Therefore, we believe it would be appropriate not to require
written prior approval by CMS for such SDPs using minimum fee
schedules, consistent with the current treatment of SDPs specified
under Sec. 438.6(c)(1)(iii)(A) through (B). We again remind States
that SDPs that do not require written prior approval must still be
documented in the relevant Medicaid managed care contracts and rate
certifications, comply with the requirements at Sec. 438.6(c)(2)(ii),
and comply with all applicable Federal requirements.
b. Maximum Fee Schedule SDPs
Section 438.6(c)(1)(iii)(E) permits States to direct managed care
plans to implement maximum fee schedules for providers so long as the
plan retains the ability to reasonably manage risk and has discretion
in accomplishing the goals of the contract. We believe that maximum fee
schedule SDPs still represent an important tool that States may use to
control Medicaid managed care expenditures for providers. We propose to
revise the existing language in Sec. 438.6(c)(1)(iii)(E) and move to
newly proposed Sec. 438.6(c)(1)(iii)(B)(2). Proposed Sec.
438.6(c)(1)(iii)(B)(2) would allow States to require managed care plans
to adopt a maximum fee schedule for providers that provide a particular
service under the contract and the maximum fee schedule would be no
greater than the payment limit, so long as the MCO, PIHP, or PAHP
retains the ability to reasonably manage risk and has discretion in
accomplishing the goals of the contract. Retaining the phrase beginning
with ``so long'' is important to ensure that a State would not direct a
managed care plan to adopt a maximum fee schedule that is so low it
could jeopardize the basic tenets of a risk-based managed care delivery
system by preventing the development of adequate provider networks. As
noted earlier, we propose to revise Sec. 438.6(c)(1)(iii)(B) to add
introductory text that would permit the payment arrangements proposed
at Sec. 438.6(c)(1)(iii)(B)(1) through (2) applicable beginning with
the first rating period on or after January 1, 2029. To ensure that
States do not exceed the proposed payment limit for SDPs that use a
maximum fee schedule, we propose that Sec. 438.6(c)(1)(iii)(B) would
be applicable for rating periods beginning on or after January 1, 2029,
to align with the applicability of the payment limit to all SDPs (see
section II.A.1. of this proposed rule).
c. Uniform Increase SDPs
We are increasingly concerned that States are inappropriately using
SDPs that require managed care plans to pay ``uniform increases,'' as
permitted in existing Sec. 438.6(c)(1)(iii)(D), and that make a
tenuous or overly broad connection between the SDP and what is actually
needed to advance the goals and objectives in the State's Medicaid
[[Page 30426]]
managed care quality strategy as required under Sec.
438.6(c)(2)(ii)(C). Uniform increases are the most common type of SDP,
and in our experience reviewing SDPs, are increasingly designed to
ensure that managed care plans expend a specific amount on payments to
a provider class and that providers receive that specific aggregate
amount. States almost exclusively fund uniform dollar or percentage
increase SDPs with IGTs or provider taxes and then design the SDP in
such a way that the uniform increase will change depending on
utilization during the rating period to ensure that the entire funding
amount collected from the IGT or tax, plus at least a portion of the
Federal matching funds are expended via the SDP. In our years reviewing
and approving SDPs, we have seen States amend an SDP to direct a higher
dollar increase when utilization is lower than projected, effectively,
retrospectively rewarding providers with higher payments on a per-
service basis for furnishing fewer services to Medicaid beneficiaries.
To illustrate how States ma
[…truncated; see source link]Indexed from Federal Register on May 22, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.