OBBBA Caps State-Directed Payments in Medicaid Managed Care, Reshaping Value-Based Payment Programs

The One Big Beautiful Bill Act (OBBBA) introduces significant statutory caps on state-directed payments (SDPs) within Medicaid managed care, marking a shift towards tighter federal control over these payments. SDPs have been a key strategy for states to promote value-based payment (VBP) reforms, improve network adequacy, and support underserved populations. The new law caps SDP payments based on Medicare rates, limiting them to 100% of the Medicare rate in Medicaid expansion states and 110% in non-expansion states, with payments for services without Medicare rates capped at Medicaid payment levels.

This legislation limits states' flexibility to use SDPs for supplemental payments and financial incentives, impacting existing value-based care programs that rely on supplemental payments layered atop higher base rates. States with high SDP funding above Medicare or commercial rates must redesign payment models and contracts with managed care organizations (MCOs). The caps also affect behavioral health and mental health services, which could face reduced funding and access challenges.

OBBBA offers a grandfathering provision allowing existing SDPs approved before July 4, 2025, to continue without adhering to the new caps until January 1, 2028. After that date, SDP payments must be phased down by 10% annually until they align with the Medicare-based limits. However, ambiguity remains regarding SDP approvals for discrete rating periods and what qualifies as a "good faith" effort to renew SDPs, which CMS will define through upcoming rulemaking.

The Centers for Medicare and Medicaid Services (CMS) is expected to release regulatory guidance on implementing these caps and exemptions. This presents an opportunity for states, providers, and advocacy groups to influence favorably broad interpretations of exemptions to reduce disruptions to provider networks and Medicaid beneficiaries.

States, MCOs, and providers should review their current SDP arrangements, document CMS approvals diligently, and prepare for significant financial modeling to transition to new payments under the capped framework. They also need to assess impacts on provider reimbursement, particularly in high-Medicaid hospitals and behavioral health networks.

Financial pressures will be most evident in states with large SDP programs exceeding Medicare payment benchmarks. The new regulatory environment will challenge states and providers to adapt VBP models within fixed caps while maintaining access and quality. Successful adaptation depends on CMS’s implementation of the transition period and the ability of stakeholder collaboration.

This policy shift reflects a federal effort to align Medicaid managed care payments more closely with Medicare benchmarks, aiming to control federal spending growth while reshaping state payment policies. The full consequences on care delivery, service innovations, and health equity initiatives will unfold as CMS guidance develops and states adjust.

Stakeholders are advised to stay informed on forthcoming CMS rules and proactively engage in regulatory processes to influence the practical application of these caps and grandfathering rules. OBBBA’s impact on Medicaid financing signals substantial transformation ahead for VBP strategies under tight federal oversight.