New CMS Proposal Aims to Cap Medicaid Payments and Boost Fiscal Accountability

The Centers for Medicare &amp. Medicaid Services (CMS) has introduced a proposed rule aimed at refining Medicaid payment structures. By capping certain state-directed and fee-for-service payments, the agency intends to align Medicaid more closely with Medicare standards, a shift projected to reduce overall Medicaid spending by over $775 billion during the next decade.

Understanding the Proposed Payment Limits

At the heart of the proposal is a move to standardize how states compensate providers within Medicaid managed care and fee-for-service programs. CMS has identified a trend where states use directed payments to favor specific provider groups—often those capable of supplying the non-federal share of funding through intergovernmental transfers or provider taxes. The agency argues this practice has allowed for an expansion of federal spending without a corresponding increase in state investment.

Key components of the proposal include:

• Medicare Alignment: For rating periods beginning on or after July 4, 2025, CMS proposes capping certain state-directed payments for hospital, nursing facility, and qualified practitioner services. These would be limited to 100% of Medicare rates in expansion states and 110% in nonexpansion states.
• Broader Implementation: By January 1, 2029, these rate limits are expected to extend to all state-directed payments for all services across all states, the District of Columbia, and territories.
• Fee-for-Service Caps: The agency plans to apply similar 100% and 110% Medicare-rate caps to specific targeted practitioner payments within fee-for-service models.

Addressing Rapid Growth in Spending

CMS data indicates a significant rise in the use of state-directed payments, which have grown from implementation in two states in 2016 to 41 states by fiscal year 2025. These arrangements now account for more than one-quarter of all Medicaid managed care spending. Without intervention, annual spending on these payments is projected to climb from $107 billion in fiscal 2024 to $296 billion by fiscal 2034.

To ease the transition, the proposed rule includes a temporary grandfathering period for existing arrangements that meet specific criteria. Under this plan, the total dollar amount of these grandfathered payments would be phased down by 10 percentage points annually, starting in 2028, until the new limits are met.

Building on Recent Regulatory Changes

This proposal follows a final rule issued by CMS on April 2, 2026, which targeted provider tax arrangements. That rule restricted the ability of states to use certain tax structures to generate federal Medicaid matching funds—a mechanism the agency previously categorized as a funding loophole. By preventing states from imposing higher tax rates on Medicaid business compared to non-Medicaid business, CMS aims to ensure greater fiscal transparency.

Looking Ahead

The latest proposal reflects a broader effort by federal regulators to modernize the Medicaid program and ensure that taxpayer dollars are directed toward patient care rather than complex financing schemes. As the agency seeks public input on these changes, the focus remains on balancing state flexibility with the need for national accountability in healthcare spending.

For more detailed information, stakeholders can review the full text of the proposed rule via the Federal Register.