The Centers for Medicare & Medicaid Services (CMS) on Feb. 2 issued updated guidance implementing Section 71116 (PDF) of the One Big Beautiful Bill Act (OBBBA, P.L. 119-21, PDF) related to Medicaid state directed payments (SDPs). This updated guidance replaces previous guidance issued by the agency in September 2025 [refer to Washington Highlights, Sept. 12, 2025].
Section 71116 reduces the total payment rate for non-grandfathered SDPs to 100% of the Medicare rate for SDPs in expansion states and 110% in non-expansion states for rating periods beginning on or after the July 4 date of enactment of the OBBBA. Grandfathered SDPs can continue to be paid at their current rate, but states must begin to reduce the payment rate for grandfathered SDPs by 10 percentage points each year beginning in 2028.
To qualify for grandfathering, in addition to having a submitted or approved SDP preprint (application) before July 4, an SDP must have a rating period that occurs within 180 days of the OBBBA’s July 4, 2025, date of enactment. In the new guidance, the CMS significantly revised its definition of the rating period requirement, stating that a rating period must occur within 180 business days of July 4, 2025 (as opposed to 180 calendar days in the earlier guidance). This will include SDPs in rating periods that include days from Oct. 11, 2024, to July 3, 2025, or July 7, 2025, through March 27, 2026. SDPs with rating periods occurring in SFY 2027 (i.e., beginning on or after March 30, 2026) occur more than 180 business days after July 4, 2025, and will not be grandfathered. The CMS’ new interpretation will capture SDPs with rating periods occurring in CY 2024 and CY 2026, which were previously ineligible for grandfathering based on the agency’s rescinded September 2025 guidance.
The CMS further stated that states cannot revise a pending or approved preprint to circumvent the requirements of Section 71116 and the guidance and that SDPs with an application approved before the Feb. 2 date of the letter will be preliminarily grandfathered. For other preprints under review, the CMS stated it will include preliminary feedback in its adjudication letters on whether that preprint is likely eligible for the grandfathering period.
Apart from these changes, the updated SDP guidance largely reflects the initial guidance issued by the agency in September 2025. The agency noted its plans to issue a proposed rule to further address the topic of SDPs.