Medicaid directed payments draw scrutiny, potential changes

As annual Medicaid state-directed payments (SDPSs) exceed $100 billion annually, congressional advisers are calling for transparency, while critics emphasizing the need for change.

Medicaid SDPs, which primarily benefit hospitals, have surged both in their number and total spending, according to a recent staff report from the Medicaid and CHIP Payment and Access Commission (MACPAC). In 2024, the cumulative spending on federally approved SDPs was projected to reach $110 billion, up from a cumulative $69 billion by February 2023.

About two-thirds of the annually renewed SDPs and three-quarters of the funding approved between February 2023 and August 2024 were uniform rate increases.  In those arrangements “the most commonly targeted providers were hospitals and hospital-affiliated providers,” said Asher Wang, a policy analyst for MACPAC at a Nov. 1 hearing.

Additionally, among the 29 largest directed payment arrangements, each projected to spend more than $1 billion annually, 24 were targeted to hospitals, and 26 were financed by provider contributions in the form of either provider taxes or intergovernmental transfers.

Transparency urged

Data is lacking, however, to show how the additional funding was meeting its intended goals.

“With respect to quality goals, most directed payment arrangements stated goals relating to access to care, but they did not clearly specify how directed payments would lead to improved access,” said Wang. “So, it’s not clear the extent to which directed payments have achieved meaningful improvements in access.”

That uncertainty led MACPAC commissioners to renew their previous calls for increased transparency around the payments.

“I think it really underscores how helpful transparency would be for everybody,” said Heidi Allen, PhD, a commissioner and associate professor at Columbia University School of Social Work. “Like we’re assuming nothing untoward is going on here, but if it’s transparent, then everybody can see the way that it’s being used and why.”

MACPAC previously found state evaluations for fewer than a quarter of SDP arrangements. In an attempt to boost some reporting, a Medicaid managed care rule finalized this summer will require — starting in July 2027 — evaluation plans that include at least two metrics, including a performance metric.

Changes proposed

Some health policy watchers expect the incoming Trump administration to look for ways to slow the overall growth of Medicaid, which the CMS Office of the Actuary projects will surpass $1 trillion in annual spending by 2028. 

One proposal for Medicaid savings would target SDPs by rolling back the Medicaid Managed care rule finalized in May. That rule formalized allowing Medicaid provider payment rates up to average commercial rates (ACRs) when SDPs are combined with the other Medicaid payments received by providers.

“In essence, CMS believes that before this rule, states were uncertain whether CMS would approve SDPs that functionally push payment rates as high as ACR but now, after this rule, states have clarity that CMS will approve such rates,” wrote Jackson Hammond, a senior policy analyst for Paragon Health Institute, in a proposal to roll back the rule.

Paragon is led by Brian Blase, who served as a special assistant to the president on economic policy in the first Trump administration.

Paragon’s proposal said failure to roll back the rule could result in an almost $84 billion increase in federal spending on Medicaid, based on CMS estimates.

“Another problem with this rule is that it incentivizes providers to increase their commercial rates,” wrote Hammond. “Because this rule enables states to pay providers up to the ACR courtesy of the federal reimbursement, providers will want to increase the rates they charge commercial payers in order to raise the ACR and thus what they receive through Medicaid.”

Matt Dean, a senior fellow for health care policy at the Heartland Institute, said he doubted the Trump administration would target SDPs “at least initially” due to continuing post-COVID financial pressures on hospitals.

“The payer mix is going to certainly be the thing that [hospitals] are going to look at and that supplemental payment is necessary because of that — to stay out of the red,” Dean said.

However, Dean does expect the Trump administration to target provider taxes, which are used to provide much of the state funding match needed to obtain SDPs.

“The provider taxes are the most regressive — other than smoking  tax — and the incoming administration is not going to like any additional sick taxes,” Dean said.

Hospital concern

Potential targeting of SDPs by the Trump administration comes as hospitals and health systems said the payments are increasingly important to support their finances.

“The fact that the ability for states to pay Medicaid providers the same rate as other payers has been truly transformational for many of our members,” Julie Kozminski, policy manager at America’s Essential Hospitals (AEH), told MACPAC. “Not only do these payments help offset low Medicaid payment rates but they also help to fund investments in quality and access.”

In the immediate aftermath of the election, health systems benefitting from them remained positive about their outlook.

 “[SDPs] have been very durable, very meaningful,” said Sun Park, executive vice president and CFO of Tenet Healthcare, said at a Nov. 11 conference. “The long-term environment for these is very positive, still.” 

SDP revenue for the health system by the third quarter of 2024 was almost $900 million, including $74 million just from Michigan and Texas, and SDP revenue was expected to further increase in 2025, executives said during their third quarter investors call.   

Michael Marks, CFO of HCA Healthcare, also was optimistic SDPs would not get rolled back.

“I also think about what it would take to make massive and structural changes to Medicaid — either the base program or the FMP percentage or supplemental payment programs,” Marks said at a Nov. 21 conference. “You know, getting legislation of that size and complexity through really thin margins in the House and Senate is going to be complicated.”

He added that “broad swathes of the hospital community” may not have the financial ability to survive disruption of SDPs. That fact, “gives a little bit of support to the [low] probability of massive structural changes to Medicaid or the supplemental payment program,” Marks said.

The importance of SDPs to safety-net hospitals, specifically, was highlighted in a September report from AEH.