Dissecting the Deepest Cuts: New Restrictions Limiting Medicaid State Directed Payments

Among the many provisions in the 2025 budget reconciliation law (H.R. 1) that gut Medicaid, one of the most consequential is the imposition of new limits on state directed payments (SDPs), which many states use to boost reimbursements to providers who serve Medicaid patients. On May 20, 2026, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule dictating how the agency will implement these new restrictions, including proposing to extend H.R. 1’s policies to more provider types.

Together, these analyses provide background on the SDP mechanism, break down the changes due to H.R. 1, and discuss the impact on providers, people with Medicaid, and the health care system at large.

Both papers serve as an important foundation for advocates to understand the new SDP rule, its effects, and some suggested next steps.