What Are State Directed Payments?

SDPs are financial arrangements authorized by the Centers for Medicare & Medicaid Services (CMS) that allow state Medicaid programs to direct MCOs to make specific payments to providers under certain conditions or guidelines. These payments, first authorized through Medicaid Managed Care Final Rule of 2016 (42 C.F.R. § 438.6(c)), are tied to quality improvement initiatives, access to care, or other state-defined priorities. Unlike traditional fee-for-service models, directed payments enable states to align provider incentives with overarching healthcare goals of their Medicaid programs.

Improving reimbursement levels for Medicaid—traditionally lower reimbursement than Medicare and significantly lower than commercial payers—enhances the financial viability of providers serving this population and increases long-term access to care for the beneficiaries. By directing resources to underserved populations, these payments help reduce disparities in access to care and improve overall health outcomes.

Types of State Directed Payments

Each state has the flexibility to design its directed payment programs based on local needs and priorities, and may include:

• Value-Based Payments (VBPs). These are designed to reward providers for delivering high-quality, cost-effective care. Examples include performance-based incentives tied to patient outcomes.
• Minimum or Maximum Fee Schedules. States can mandate minimum or maximum payment levels for covered services to ensure providers are adequately compensated by managed care plans.
• Uniform Rate Increases. This approach standardizes payment increases across certain provider types or services, fostering consistency in reimbursement.   The Medicaid and CHIP Payment and Access Commission (MACPAC) stated in its October 2024 issue brief that between February 1, 2023 and August 1, 2024, CMS approved 302 state directed payment arrangements in 40 states and Puerto Rico. Of the total spending, 67% was allocated to Uniform Rate Increases.
• Quality Incentive Payments. These are linked to metrics such as patient satisfaction, reduced hospital readmissions, or improved chronic disease management.

CMS uses an application form called the "Preprint" as part of the prior approval process for managed care contracts and rate certifications to ensure compliance with federal Medicaid Managed Care regulations under 42 CFR §438. States must complete the Preprint by detailing the terms, conditions, and payment arrangements of their managed care contracts.  

CMS recommends submitting Preprints at least 90 calendar days before the start of the rating period that includes the payment. CMS approval is required before states can implement specific payment arrangements, with one exception, which is addressed later in this discussion. Providers can use these Preprints to estimate their share of payments and support their financial planning.

What Is Not Considered a State Directed Payment?

In November 2017, the Center for Medicaid and CHIP Services (CMCS) issued an Informational Bulletin (CIB) that noted instances when states may include general contract requirements for provider payments that would not be subject to approval under 42 C.F.R. § 438.6(c). CMCS also noted these contract requirements would not be state directed payments under their interpretation of the regulation as long as the state is not mandating a specific payment methodology or amounts under the contract. The November 2017 CIB provided two scenarios:

• States contractually implementing a general requirement for managed care plans to increase provider reimbursement for services provided to Medicaid beneficiaries covered under the contract, as long as the state is not mandating a specific payment methodology or amounts, and managed care plans retain the discretion for the amount, timing, and mechanism for making such provider payments.
• States contractually implementing a general requirement for managed care plans to utilize value-based purchasing or alternative payment arrangements when the state does not mandate a specific payment methodology and managed care plans retain the discretion to negotiate with network providers the specific terms for the amount, timing, and mechanism of such value-based purchasing or alternative payment arrangements.

The 2024 CMS Final Rule

In April 2024, CMS issued a significant update to the Medicaid Managed Care regulations, addressing key areas such as access, quality, and accountability within Medicaid managed care programs. This summary primarily focuses on the rule's impact on how states implement SDPs. The Final Rule addresses 16 aspects of directed payment policy; we will highlight a few key provisions here:

• Network participation. Historically, CMS restricted SDPs to network providers only. However, the Final Rule removes this limitation, allowing states the flexibility to direct payments to both network and non-network providers. This reduces some of the administrative burden in previous models that required documentation of contractual relationships for SDPs.
• Payment rate limit. Average Commercial Rate (ACR) will serve as the regulatory ceiling for services such as inpatient and outpatient hospital services, nursing facility services, and professional services at academic medical centers. This formalizes what had been applied on a case-by-case basis previously.
• Financing of the non-federal share of SDP. States proposing a SDP must ensure that participating providers attest that they do not participate in any hold harmless arrangement for any health care-related tax as specified in 42 CFR 433.68(f)(3). This provision prohibits private agreements among providers to redistribute funds. Enforcement by CMS begins January 1, 2028.
• Evaluation plans and reports. States are now required to submit written evaluation plans for SDPs that exceed 1.5% of managed care capitation payments. Evaluation reports are due within two years following the conclusion of the first three-year period, with subsequent reports due every three years thereafter.
• Prohibition of post-payment reconciliation. The use of post-payment reconciliation processes for SDPs that are based on fee schedules is prohibited. Payments must be made on the utilization and delivery of services within the contract rating period.
• Exemption from CMS prior approval of SDP. States adopting a minimum-fee schedule using 100% of the total published Medicare payment rate for providers that provide a particular service under the contract are exempted from written prior approval of the SDP. The SDP arrangement must use a total published Medicare payment rate that was effective no more than three years before the start of the rating period.

Challenges and Considerations for Hospitals

While directed payments offer significant benefits, they also present operational challenges when managing directed payments at the hospital level. These challenges stem from the complexity of implementing directed payments, ensuring compliance with state and federal regulations, and addressing hospital-specific issues related to reimbursement and care delivery. Key challenges include:

• Complex billing and coding. Hospitals need to accurately track and report provided services to ensure that directed payments are correctly applied. This requires precise billing and coding practices, which can be difficult, especially if payment programs are complex or service specific. Incorrect coding or missed billing may result in payment delays or underpayment.
• Tracking quality metrics. Since SDPs are tied to quality performance, hospitals must implement systems to track and report quality metrics. Ensuring accurate data collection, meeting performance thresholds, and reporting results to state Medicaid programs can be resource-intensive and may require additional staff or technology investments.
• Compliance and regulatory requirements. Hospitals must comply with state and federal regulations for directed payments, including CMS guidelines and state-specific rules, requiring them to stay updated and adapt their processes as needed.
• Coordination with MCOs. Hospitals must collaborate with MCOs to ensure that directed payments are processed accurately and timely. This requires robust communication and coordination to avoid discrepancies between the services provided, the payments received, and the contractual agreements in place.
• Data management and reporting. Hospitals must have systems in place to capture and report data on the services provided, outcomes achieved, and payments received. This requires integration between clinical, financial, and operational data systems, which can be complex and time-consuming, particularly in large or diverse hospital systems. Multistate health systems face additional complexity that can come from state-specific requirements and measurement periods.
• Staff training and resources. Hospitals may need to invest in training for staff to ensure they understand the requirements and processes associated with directed payments. This may include training on coding, billing procedures, quality reporting, and compliance, which can require additional time and resources.
• Reimbursement disputes. Hospitals may encounter disputes over directed payment amounts or eligibility. Determining the source of issues between state Medicaid agencies and MCOs can be time-consuming and may require significant administrative effort to ensure proper reimbursement.
• Impact on hospital operations. Directed payments can place pressure on hospital operations to deliver specific services, improve quality metrics, or manage care in certain ways. This may require adjustments to staffing levels, care delivery models, or service offerings, potentially impacting the hospital’s ability to balance financial sustainability with quality care.
• Evaluation of payment effectiveness. Hospitals may face challenges in evaluating the impact of directed payments on service delivery and outcomes. Assessing whether the payments are achieving their intended goals (e.g., improving access to care, reducing health disparities) requires data analysis and continuous monitoring, which can be resource intensive and, many cases, significant time lags.

To mitigate these challenges, hospitals often invest in enhanced financial systems, staff training, and data management tools, and they must maintain close collaboration with state Medicaid agencies and MCOs to ensure the successful administration of directed payments.

Impact of Medicaid Redetermination on State Directed Payments

The redetermination of Medicaid eligibility, which occurs when states reevaluate enrollees' qualifications for the program, has had a notable impact on directed payments. This process has created both opportunities and challenges for directed payments in the Medicaid framework.

The redetermination process can lead to significant changes in Medicaid enrollment as individuals lose coverage due to ineligibility or administrative errors, often referred to as churn.

Directed payments that rely on a stable beneficiary population may face challenges in achieving intended outcomes if enrollment fluctuates widely. For example, fewer enrollees can reduce the funds allocated to certain providers, potentially impacting their financial stability and activities intended to improve health outcomes may be less effective without a stable population.

As individuals lose Medicaid coverage during redetermination, providers may see interruptions in care continuity, affecting the outcomes tied to directed payments. This could undermine efforts to improve quality or reduce health disparities.

Examples of SDPs

North Carolina Debt Relief Incentive Program. The Medical Debt Relief Incentive Program approved in July 2024 requires hospitals to forgive eligible medical debt for Medicaid enrollees dating back to January of 2014. The program also requires participating hospitals to implement policies intended to prevent low- and middle- income residents from incurring further medical debt.

California Maternity Supplemental (Kick) Payment: Kick refers to a lump sum maternity supplemental payment made by a plan to cover the costs for both the facility and the physician when one of its current members gives birth, provided that the California Department of Health Care Services (DHCS) is properly notified of the birth.

California Private Hospital Directed Payment Program (PHDP): PHDP directs managed care organizations (MCOs) to make specific payments to certain hospitals or health care providers, outside of the usual capitation rates. For the rating period from January 1, 2024, through December 31, 2024, CMS approved a separate payment of over $7 billion in the form of a uniform increase for inpatient and outpatient services provided by private hospitals as defined in CA Welfare & Institutions Code § 14169.51(ap).

Texas Directed Payment Program for Behavioral Health Services (DPP BHS). Designed to increase Medicaid payments to Community Mental Health Centers (CMHCs) and Local Behavioral Health Authorities (LBHAs), this initiative aims to enhance access to behavioral health services, improve care coordination, and support successful care transitions for both adults and children enrolled in the STAR, STAR+PLUS, and STAR Kids Medicaid managed care programs

Georgia Physician Directed Payment Program (PDPP). SDPs are made to eligible physicians and other health care professionals affiliated with governmental teaching hospitals. MCOs will reimburse directed payments for services rendered at physician faculty practices, up to the commercial equivalent. For the rating period from July 1, 2025, through June 30, 2026, CMS has approved a uniform increase for physician and other eligible professional services, incorporated into the capitation rates through a separate payment term of over $240 million.

We’re Here to Help

For assistance in navigating the operational challenges of managing directed payments, contact your Moss Adams professional.

Additional Resources

• Health Care Consulting Practice
• Revenue Cycle Services