CMS updates Medicaid financing rules

CMS released an informational bulletin outlining major changes to how states can finance Medicaid programs through provider taxes and State-Directed Payments (SDPs). The guidance follows the passage of the Working Families Tax Cut Act (Public Law 119-21) and introduces new federal limits on the use of provider taxes while capping SDP payment levels tied to Medicare rates.

The bulletin represents one of the most significant shifts in Medicaid financing rules in more than a decade and is expected to affect states, managed care organizations, and providers across home and community based services, including those supporting individuals with intellectual and developmental disabilities.

New restrictions on provider taxes

Under the new law, states cannot create new health care related provider taxes or increase existing provider tax rates beyond what was in place on July 4, 2025. Only provider taxes that were both enacted and imposed by that date qualify for grandfathering.

CMS explained that provider taxes are a major component of state financing strategies, but the new federal limitations are intended to increase transparency and reduce financing structures that obscure the true state share of Medicaid spending.

States with nursing facility taxes, ICF IID taxes, hospital assessments, or other provider tax programs may need to reassess how they fund rate increases or supplemental payments going forward.

New caps on State Directed Payments

CMS also established new ceilings on the size of State Directed Payments, supplemental payments that states direct through Medicaid managed care contracts. These payments must now align closely with Medicare benchmarks.

Key changes include:

• Expansion states: SDP payments cannot exceed 100 percent of Medicare rates for the service category.

• Non expansion states: SDP payments are capped at 110 percent of Medicare rates.

States that submitted SDPs before July 4, 2025 may qualify for temporary grandfathering until January 1, 2028, but will then be required to comply with the new limits.

The new rules apply across inpatient hospital, outpatient hospital, physician, and other major service categories.

Implications for IDD and HCBS providers

Although the rule does not specifically target HCBS or IDD services, the financial effects may be felt across the sector.

Many states rely on provider taxes and SDPs to finance higher reimbursement rates, particularly within long term services and supports. With new caps now in place, states may need to redesign payment structures that previously relied on these tools.

IDD providers should prepare for:

• Possible changes to how states structure waiver or managed care rate enhancements

• Adjustments to funding streams supported by supplemental payments

• More scrutiny of payment methodologies tied to Medicare benchmarks

• Redesigns of rate programs supported by provider tax revenue

States will need to review their financing structures, determine which taxes and SDPs qualify for grandfathering, and revise their Medicaid managed care contracts before the 2028 compliance deadline.