With the current cuts in SDP, are there any plans by states to fund the hospitals because the medicaid rate with will 100% or 110% of medicare rate is not enough to cover costs, or are they?

This is the exact crisis currently causing panic across state capitals and hospital boardrooms. States do want to keep funding their safety-net and rural hospitals, but the new combination of the 2025 Working Families Tax Cut Act (H.R. 1) and the May 2026 CMS proposed rule has systematically closed almost every major federal loophole states used to do so.

Because states can no longer legally force payments above the 100% or 110% Medicare threshold via State Directed Payments (SDPs), they are scrambling to find alternative workarounds.

Here is how states and hospitals are planning to survive the cuts:

1. Shifting to "Non-Directed" MCO Negotiations

The H.R. 1 caps apply specifically to what a state can direct a Managed Care Organization (MCO) to pay. However, federal law does not prohibit the private MCOs themselves from paying hospitals above Medicare rates out of their own pockets.

To keep hospitals afloat, states are likely to increase the base capitation rates they pay to the MCOs, with an informal, "wink-and-nod" understanding that the MCOs will use that extra money to negotiate higher base contracts directly with the hospitals. The downside for hospitals is that this money is no longer guaranteed by the state; they will have to fight the private insurance companies for it at the negotiating table.

2. Direct State Grants (Without the Federal Match)

For the past decade, the entire appeal of SDPs and other Medicaid workarounds was the "federal match." A state could tax its hospitals, put that money into Medicaid, and the federal government would match it (often paying 60 to 70 cents of every dollar).

If states cannot use the Medicaid program to funnel money to hospitals without hitting the Medicare cap, state legislatures can still simply write a check to a struggling hospital out of their state general funds. However, doing so means the state must bear 100% of the cost, losing out on billions in federal matching dollars. States like Massachusetts are currently holding emergency sessions with hospital associations to figure out how much state budget money can be freed up for this.

3. Maximizing Remaining Medicaid Silos

While the May 2026 CMS rule attempts to aggressively shut down loopholes (even capping "targeted" Fee-For-Service payments at Medicare rates), states still have a few older, heavily regulated buckets of money they will try to max out:

• DSH Payments: Disproportionate Share Hospital payments are a separate federal allotment designed to help hospitals that care for a large number of uninsured or Medicaid patients. While capped by Congress, states that haven't maxed out their DSH allotments will immediately do so.
• Uncompensated Care Pools: Some states operate under special 1115 Waivers that allow them to draw down federal funds for uncompensated care.

4. The Litigation Strategy

The final "plan" for many states and hospital associations is simply to sue the federal government.

When Congress passed H.R. 1, the law explicitly capped SDPs at Medicare rates for only four specific areas (inpatient, outpatient, nursing facilities, and academic medical centers). But in the May 2026 proposed rule, CMS went significantly further, applying the Medicare cap to all services and extending it into fee-for-service payments.

Hospital lobbyists are already arguing that CMS has vastly overstepped its statutory authority. Expect massive lawsuits aimed at tying up the new CMS rules in federal court before the aggressive phase-downs begin in 2028.