Upcoming statutory limits on providers’ state-directed payments (SDPs) are expected to trim tens of billions of dollars from states’ Medicaid spending, and for 17 hard-hit states could range from 10% to 25% of their total annual Medicaid spending, according to a newly published analysis warning of subsequent reductions in care access.
The latest effort to quantify the fiscal impacts of 2025’s One Big Beautiful Bill Act (OBBBA) on healthcare payments, published today in Health Affairs, leans on the Centers for Medicare and Medicaid Services’ (CMS’) approved SDP applications from 2024 and 2025. It does not include the impacts of “uncertain” provider tax changes also required by the law, or those of a pending proposal from CMS to expand the SDP limits beyond four types of services outlined in the OBBBA—both of which the study’s authors said would compound upon their estimates.
Still, the analysis outlined an estimated $51.8 billion reduction in annual Medicaid spending across 36 states (including seven non-expansion states) paying providers at or around (90% to 100%) average commercial rates from the 2024 levels.
That reflects about 6.4% of those states’ total Medicaid spending, but just how large of a share the cuts will claim varies substantially from state to state, wrote Debra Lipson, a health policy analyst and the author of the analysis. Of particular note, though, total state Medicaid spending would plummet by more than a quarter in Nebraska, Louisiana and South Carolina.
The 36 states do have an avenue to spread the reductions over time if granted temporary grandfathered status, which would permit an 1% on average reduction ($8.7 billion collectively) beginning January 2028. Those would still exceed 2.5% of total 2024 Medicaid spending in nine states, and land as high as 3.85% in Nebraska. Lipson also cautioned that such status is not guaranteed, bringing the risk of an all-at-once reduction to state budgets.
These steep cuts “to provider reimbursement levels will likely increase uncompensated care costs and Medicaid shortfalls—the difference between Medicaid payments and the cost of caring for Medicaid patients—causing financial strain,” Lipson warned.
“In response, providers receiving lower Medicaid revenue might try to limit the number of Medicaid patients served, diminishing access to care. Providers might also try to offset the losses by negotiating higher prices with commercial payers, raising costs for non-Medicaid patients.”
Lipson noted that their analysis, by incorporating more recent data, outlines a greater number of states affected by the new SDP limits than prior publications, and unlike those characterized the reductions in relation to individual states’ Medicaid budgets.
The OBBBA’s changes to federal funding for states’ Medicaid plans were widely opposed by healthcare providers, who similarly warned of financial strains and subsequent reductions in care services.
Though the industry has been taking begrudging steps to prepare their finances in the meantime, CMS’ May proposal to expand the SDP cap beyond OBBBA’s four outlined service areas (inpatient hospital services, outpatient hospital services, nursing facility services and qualified practitioner services at an academic medical center) to “all SDPs for all services in all states” has become a new lobbying focus as CMS’ own estimates put the resulting spending reduction to more than triple the Congressional Budget Office’s 10-year estimate based on the OBBBA’s terms. The proposal also brings a new restriction on uniform fee increases, the most common type of SDP.
This week’s analysis notes that the agency’s proposal could require cuts “many times more than this study’s estimates.” CMS, meanwhile, has said its expanded proposal "would be a reasonable and appropriate approach" to ensure that states and hospitals don't try to circumvent the statutory caps by cost shifting provider payments to other services.