What are current legislation changes for SDP and when will they come into effect?
The landscape for State Directed Payments (SDPs) is currently undergoing a massive regulatory contraction. After years of explosive growth, federal lawmakers and the Centers for Medicare & Medicaid Services (CMS) are actively reining in how much states can pay providers through these programs.
The current changes are driven by a combination of the 2024 CMS Medicaid Managed Care Final Rule, the 2025 Working Families Tax Cut Act (H.R. 1), and a brand-new CMS proposed rule released just days ago on May 20, 2026.
Here is a breakdown of the major legislative and regulatory changes, followed by when they take effect.
The Core Changes
1. The Medicare-Based Rate Caps The most significant legislative change came from H.R. 1 (enacted in July 2025), which explicitly caps the amount states can pay providers via SDPs.
- Expansion States: Total SDP rates are capped at 100% of the published Medicare payment rate.
- Non-Expansion States: Total SDP rates are capped at 110% of the published Medicare payment rate. Originally, H.R. 1 only applied this cap to four specific areas (inpatient hospitals, outpatient hospitals, nursing facilities, and academic medical centers). However, the May 2026 proposed rule extends this cap to all services covered under SDPs.
2. The Phase-Down of Grandfathered SDPs Because an immediate cap would devastate hospital budgets in states that already pay well above Medicare rates, H.R. 1 allowed existing SDPs to be temporarily "grandfathered." The new May 2026 rule details exactly how that ends: states will be forced to slash these legacy payments by 10 percentage points every single year until they hit the Medicare limit.
3. The Ban on "Uniform Increases" Historically, states loved using "uniform increases"—simply telling managed care plans to add a flat percentage or dollar amount to every claim. The May 2026 rule proposes banning this structure entirely, arguing it doesn't do enough to tie payments to actual value or quality. States will have to transition to minimum fee schedules or value-based purchasing models instead.
4. The End of "Separate Payment Terms" Driven by the 2024 final rule, CMS is ending the practice of paying SDPs outside the normal managed care rates. Currently, some states hold back money and distribute SDPs as separate pools of funds. Soon, all SDPs must be baked directly into the base capitation rates the state pays the insurer upfront.
When Do These Changes Take Effect?
Because unwinding a $110+ billion system takes time, CMS has structured these changes across a multi-year runway.
H.R. 1 EnactedJuly 4, 2025
The Working Families Tax Cut Act officially became law, applying the strict Medicare-based caps (100% / 110%) to any new SDPs created in the four major service areas.
CMS Drops Implementation RuleMay 20, 2026
CMS releases a highly anticipated proposed rule outlining exactly how it will enforce H.R. 1, introducing the phase-down schedules and expanding the payment caps to all services.
End of Separate Payment TermsJuly 9, 2027
Mandated by the 2024 Final Rule: States must fully incorporate all SDPs into base managed care capitation rates, officially ending the practice of paying them as separate, retroactive lump sums.
Grandfather Phase-Down & Uniform BanJanuary 1, 2028
States must begin reducing the total dollar amount of their grandfathered legacy SDPs by 10 percentage points annually until they meet the Medicare limits. Additionally, states are prohibited from using flat "uniform increases" for any new rating periods.
Medicare Caps Expand to All ServicesJanuary 1, 2029
The stringent Medicare-based payment limits expand beyond the original four core service areas to cover absolutely all services funded by State Directed Payments.