State Directed Payments

A state directed payment (SDP) lets a state require its managed care plans to pay providers in a particular way, rather than leaving payment entirely to plan-provider negotiation. Created by the 2016 managed care rule and codified at 42 CFR 438.6(c), SDPs are how states reach back into managed care to shape provider payment, subject to CMS approval.

The three permitted forms

CMS allows directed payments in three shapes:

1. Value-based purchasing, such as pay-for-performance or bundled payment arrangements.
2. Delivery system reform or performance improvement initiatives.
3. Rate requirements: minimum fee schedules, uniform dollar or percentage increases, or maximum fee schedules.

The first two are about value. The third is about raising rates, and in practice it dominates.

How big they have become

SDPs have grown explosively. Arrangements approved as of August 1, 2024 were projected to total $110.2 billion a year, nearly 60 percent more than the $69.3 billion projected barely eighteen months earlier. What began as a flexibility has become one of the largest and fastest-growing streams of Medicaid provider payment.

Worth remembering: the 2024 final rule set the ceiling for directed payments at the average commercial rate, the average a service commands from private payers. That lets states lift Medicaid payment close to commercial levels, which both helps providers and drives federal spending sharply upward.

Why they are contested

The financing is the catch. States often fund their share of directed payments with taxes on the very providers who receive them, so the state puts in little of its own money while drawing down the federal match. The GAO has flagged this arrangement and the weakness of CMS oversight as reasons directed-payment growth deserves scrutiny. The 2024 rule added transparency and reporting requirements in response.

Key takeaways

• SDPs (42 CFR 438.6(c)) let states direct how MCOs pay providers, with CMS approval.
• They take three forms: value-based purchasing, delivery reform, and rate requirements, the last of which dominates.
• They have grown to roughly $110 billion a year and are capped at the average commercial rate; their provider-tax financing draws ongoing scrutiny.

Sources

• MACPAC, Directed Payments in Medicaid Managed Care (opens in a new tab)
• GAO, Medicaid Managed Care: Rapid Spending Growth in State Directed Payments Needs Enhanced Oversight and Transparency (GAO-24-106202) (opens in a new tab)
• eCFR, 42 CFR 438.6, Special Contract Provisions Related to Payment (opens in a new tab)