In April, the Centers for Medicare and Medicaid Services (CMS) finalized new Medicaid rules with major implications for access, equity, and the workforce. For decades, as managed care grew to be the dominant delivery system in the Medicaid program, CMS held the position that states could not direct how managed care plans paid providers under contract with plans. States were expected to delegate payment policies to plans, subject to federal and state requirements that the plans had a sufficient network of providers to ensure access. In recent years, however, states have sought to be more engaged and prescriptive with plans; since 2016, CMS has allowed states to “direct” payment levels, subject to federal guardrails. In April, within the context of new regulations on managed care, CMS codified in regulation that states may direct Medicaid managed care plans to pay providers at rates up to those of commercial plans. CMS has previously approved this policy on a state-by-state basis, but without formal rules. At the same time, CMS introduced new guardrails to ensure payments would improve quality and access to care.
The final regulations have the potential to significantly improve Medicaid enrollees’ access to care and to give critical support to providers who care for a sizable Medicaid patient population.
Changes to Medicaid Managed Care Payment Policy
Almost three-quarters of Medicaid beneficiaries were enrolled in managed care in 2021. States pay plans a fixed monthly payment for each covered member. Plans then negotiate rates with providers and incur financial risk for spending on Medicaid enrollees — if monthly payments from the state exceed costs, plans see financial gains; if costs exceed payments, they incur losses.
In a break from longstanding policy, in rules first published in 2016, CMS allowed states, under certain conditions, to direct plans to pay providers at state-specified levels to promote priorities related to access, quality, and delivery system reform. These are called “state-directed payments.” States seeking to direct payments (there is no requirement that they do so) identify the class or classes of providers (e.g., hospitals, physicians) who will receive the payments, and, in most cases, they must secure federal approval. State-directed payment levels vary across the country and have been approved by CMS up to the rate commercial insurance would pay for the same service (i.e., the average commercial rate, or ACR). Commercial rates are typically much higher than the rates Medicaid and Medicare pay providers. A recent RAND study found that average commercial payments to hospitals were 254 percent of Medicare rates. Until the 2024 managed care regulation, CMS had never issued formal policy on the allowable levels of payment.
In the new rule, CMS codified the ACR payment flexibility and limit, based on research documenting the relationship between higher payment rates and improved access to care. The ACR limit, along with additional provisions in the final rules requiring new public reporting on Medicaid payment rates and comparisons to Medicare rates for certain services, underscores CMS’s view that adequate payment rates are a critical tool in improving access. Allowing Medicaid to pay rates more in line with Medicare or commercial levels is also a matter of equity. While there is no consensus on whether commercial or Medicare rates are the appropriate rates to pay for health services, it is hard to justify paying far lower rates to Medicaid providers whose patients tend to have more complex health needs and are disproportionately people of color.
Balancing a Commitment to Access and Equity with Fiscal Integrity
State-directed payments have grown sharply in recent years and have invited scrutiny from federal oversight entities. In 2023, directed payment spending exceeded $78 billion,1 an almost 50 percent increase from 2022 and more than 15 percent of total spending on Medicaid managed care. Thirty-nine states implemented directed payments in 2022 or 2023. States have implemented directed payments for hospitals, primary care physicians, and behavioral health providers, and have also used directed payments to address workforce shortages during COVID-19. This has included requiring plans to pay higher rates to direct care providers working in nursing homes and in patients’ homes.
The growth in directed payments has attracted attention, partly because in many states the nonfederal share of spending for these payments was raised through taxes imposed on health care providers, often hospitals and nursing homes. While provider taxes are a common and permissible source of state financing, federal rules require there be no guarantee that those liable for the taxes will be “paid back” through Medicaid reimbursements. CMS raised concerns in previous guidance and the proposed regulations about a practice where Medicaid payments to providers for services provided are “pooled” and redistributed among the broader group of providers who are subject to the tax to ensure no provider pays more in taxes than they receive in payments. For example, if Hospitals A and B are both subject to the tax but Hospital B does not serve many Medicaid patients, it would not receive much benefit from the directed payments compared to the tax it pays. Under pooling, Hospital A would share some of its Medicaid payments with Hospital B to offset Hospital B’s tax liability. CMS takes the position that by holding providers harmless from the tax, pooling violates federal provider tax rules.
In the final rule, CMS concluded that formalizing the ACR limit offers states an important policy lever. At the same time, CMS introduced new guardrails to address financing concerns. The new rule maintains CMS’s position that pooling is contrary to law and requires that states collect attestations from providers receiving directed payments that they are not pooling payments. The final rule delays the effective date of the attestation requirement until July 2028, giving states and providers time to come into compliance and for the courts to resolve outstanding litigation.
Why It Matters
The new regulations represent a significant development for Medicaid. Higher payments are expected to grow the pool of providers who serve Medicaid patients and improve access to providers that limit the number of Medicaid patients they serve. Additionally, as Medicaid becomes a more competitive payer, the policy can provide critical support to safety-net providers. The ACR limit for directed payments could lead to growth in Medicaid spending, particularly for hospitals, but Medicaid currently accounts for the smallest share (19%) of total hospital expenditures as compared to other payers. Assuming the projections detailed in the rule, directed payments could drive an additional $16 billion to $36 billion to hospitals by 2028, which is less than 2 percent of projected total hospital spending for that year.
CMS’s rules prioritize access and equity while addressing fiscal integrity concerns. The issues relating to pooling payments will continue to play out through the courts and as states and providers respond to the new attestation requirement. CMS and other oversight organizations will look closely at state-directed payments in the coming years to evaluate whether, and under what conditions, higher payment rates do indeed improve access for Medicaid enrollees.