Hospitals serving Medicaid patients prepare to take proposed payment caps on the chin

New federal limits on state-directed payments are set to cut Medicaid funding in most states. Hospitals are expected to bear the brunt since they account for the majority—84%, around $78B a year—of state-directed healthcare spends. 

The changes are coming unless public comments cause the agency to significantly amend a rule it proposed in May. 

As it now stands, the rule would broaden the scope of the “One Big Beautiful Bill Act’s” limits on state-directed payments. Passed into law on the Fourth of July 2025, the Act is now commonly referred to as the 2025 reconciliation law.  

In an analysis posted June 15, KFF senior vice president Robin Rudowitz, MPA, and colleagues note the reconciliation law capped Medicaid state-directed payments, aka SDPs, at or near Medicare rates.

The 2025 law “established new ceilings on state-directed payment (SDP) limits but did not prohibit certain types of SDPs from being used,” Rudowitz and co-authors point out. 

Uniform rate increases on the block  

Rudowitz and co-authors comment on several key provisions in the proposed rule, including its pending elimination of uniform rate increases—the most common type of SDP—for future years. 

“It is unclear whether it will be possible for states to transition uniform rate increases to other types of SDPs, such as minimum or maximum fee schedules,” the KFF analysts write. 

“When combined with the elimination of separate payment terms from the 2024 rule,” they add, “this change effectively precludes states from using SDPs to provide supplemental payments in managed care that parallel arrangements in fee-for-service Medicaid.” 

Restrictions expanded, options limited 

In a separate news item posted the same day, KFF shows at least 41 states use state-directed payments, collectively laying out around $93 billion per year. 

KFF notes annual federal spending on SDPs is highest in California (an estimated $10.6 billion)—followed by Texas ($6.3 billion), North Carolina ($5.2 billion) and Illinois ($5.1 billion). 

The Centers for Medicare and Medicaid Services estimates that SDP-related changes in both the reconciliation law and the proposed rule would reduce federal Medicaid spending by $510 billion between 2026 and 2035, with effects increasing in size each year, KFF news writers report. 

“How states and providers will respond to the new payment limits remains uncertain,” they add. “States have limited options for offsetting the federal cuts because of other changes to Medicaid financing from the reconciliation law, including new restrictions on provider taxes.”

High stakes for hurting hospitals 

The stakes are especially high for financially vulnerable hospitals, KFF notes, because these facilities are more likely to include safety net providers that primarily serve Medicaid enrollees. 

“Some hospitals could face pressure to close or reduce services,” KFF underscores, “especially if uncompensated care increases because people lose Medicaid or coverage through the ACA (Obamacare) marketplaces.”

Read the full Rudowitz et al. analysis here and the KFF news item here.