CMS Proposes Major Medicaid Reform to Enhance Care and Reduce Costs
The Centers for Medicare & Medicaid Services (CMS) has proposed a significant rule aimed at reforming state Medicaid payment practices. This initiative seeks to better align these practices with Medicare standards and potentially reduce federal expenses by an estimated $775 billion over a decade. Approximately $510 billion of these savings would directly affect the federal budget. The proposed changes aim to redirect Medicaid funds towards enhancing patient care rather than supporting inefficient payment systems.
State Directed Payments (SDPs) allow states to determine how health plans should compensate providers, often bypassing typical negotiation processes. These payments have been utilized to increase reimbursement rates for specific providers and bolster states' non-federal share contributions through methods such as provider taxes and intergovernmental transfers. These transfers often involve local entities, like public hospitals, channeling funds back to the states, enabling disproportionate financing of Medicaid costs with federal funds.
The Medicaid and CHIP Payment and Access Commission (MACPAC) has reported that although states cover 70% of managed care payments with state funds, over half are backed by intergovernmental transfers or provider taxes. This underscores the need for robust oversight to ensure SDPs truly enhance care delivery rather than inflate expenditures inefficiently. Proper management of SDPs can contribute to expanded access, reduced costs, and improved healthcare outcomes for Medicaid enrollees.
Dr. Mehmet Oz, CMS Administrator, emphasized the importance of reforming Medicaid to maintain its sustainability and transparency. He remarked, "Medicaid was never meant to be a blank check — it was meant to be a lifeline," highlighting the necessity for reform to balance payment systems with patient-first approaches.
SDP usage has increased dramatically, growing from two states in 2016 to 41 states, now representing over one-quarter of Medicaid managed care spending. Without intervention, annual SDP spending could rise from $107 billion in FY 2024 to $296 billion by FY 2034. The number of states using provider taxes has also risen, with 49 states and the District of Columbia now implementing them, up from 35 in 2004. Current regulations lack stringent controls, allowing increased federal spending without adequate value or results assurances.
This proposed rule emerges from section 71116 of the Working Families Tax Cut legislation and a Presidential Memorandum aimed at reducing waste, fraud, and abuse in Medicaid, issued on June 6, 2025. CMS suggests transitional changes to enhance fiscal responsibility and program integrity, allowing states and providers time to adapt. Stakeholders are encouraged to submit feedback on this proposal through the Federal Register. CMS also provides a fact sheet detailing the proposed rule for further information.