As key parts of the 2024 Managed Care Final Rule and H.R.1 come into effect, there are numerous changes to state-directed payment (SDP) policy to keep in mind while planning for upcoming rating periods. These changes could involve the SDP structure, as well as updates to capitation rate development, if necessary.
February 25, 2026
Overview
H.R. 1 Requirements Impacting SDPs
Payment rate changes
The legislation directs the Secretary to update the rules for SDPs for inpatient services, outpatient services, nursing facility services, and physician services at Academic Medical Centers, limiting the total payment rate for specific services to:
- 100% of the published Medicare payment rate for expansion states (or, if no specific Medicare rate is available, the Medicaid State Plan rate).
- 110% of the published Medicare payment rate for non-expansion states (or, if no specific Medicare rate is available, the Medicaid State Plan rate).
However, it is not clear what methodology CMS will require states to use to develop the new Medicare-based limits for SDP payments.
Grandfathering of certain payments
SDP preprints that 1) were submitted or approved prior to July 4, 2025 and 2) for a rating cycle within 180 days of July 4, 2025 can be "grandfathered" in. This means that total payment levels to providers are frozen at the amount included in calendar year (CY) 2024, state fiscal year (SFY) 2025, CY 2025, SFY 2026, or CY 2026 preprints. For these payments,
- The total payment amount will be gradually reduced by 10 percentage points each year starting January 1, 2028;
- Until the payment rate aligns with the new limits (either 100% or 110% of Medicare, depending on the state).
Provider taxes frozen
Provider taxes are often the source of the non-federal share of SDPs. H.R.1 places a moratorium on new or increased provider taxes as of October 1, 2026 beyond the levels that were enacted and imposed as of July 4, 2025. CMS released guidance on their current interpretation of “enacted” and “imposed” in a letter dated November 14, 2025, but further clarification is expected through rule making. States who fund their SDPs through provider taxes will need to understand the maximum collection amounts starting October 1, 2026, to determine if changes are necessary to their SDPs. Expansion states must follow the tax collection phase‑down schedule if they are collecting taxes above 3.5% of provider revenues starting October 1, 2027.
2024 Managed Care Rule Requirements Impacting SDPs
Prohibition on Retroactive Changes to SDP Preprints – Effective for Rating Periods Starting October 1, 2026; January 1, 2027; and July 1, 2027
States will no longer be permitted to submit retroactive changes to SDP preprints to adjust provider payment levels or total fiscal impact. Federal regulations (42 CFR § 438.6(c)(2)(viii)) require states to submit complete preprints or amendments, including all required documentation, prior to the start date of the preprint or amendment. This change affects states that previously used retroactive preprints to accommodate variable payment terms or utilization exceeding expectations.
Managed Care Contract Requirements – Effective for Rating Periods Starting October 1, 2026; January 1, 2027; and July 1, 2027
States must include detailed descriptions of every SDP in managed care contracts, as required by 42 CFR § 438.6(c)(5)(i)-(iv). Required contract elements include a description of the provider class, a description of the payment arrangement, including fee schedules, uniform increases, and performance measures, CPT or other claim codes linked to payment, and several other items.
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Questions for your specific state?
Please contact Dianne Heffron, Debbie Anderson, Charlie Greenberg, or your Mercer consultant to discuss the potential impact your specific state Program.
You may also email us at: mercer.government@mercer.com.
Mercer Government delivers an individualized focus, powered by industry leading experience, integrated capabilities, and passionate people. We help clients achieve better outcomes, develop and deploy defensible strategies, and reshape the delivery of health care. Brighter together.
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Caveats and Limitations
Mercer is not engaged in the practice of law, or in providing advice on taxation matters. This report, which may include commentary on legal or taxation issues or regulations, does not constitute and is not a substitute for legal or taxation advice. Mercer recommends that readers secure the advice of competent legal and taxation counsel with respect to any legal or taxation matters related to this document or otherwise.
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