AHA Comments on HHS' Medicaid State-directed Payments Proposed Rule

July 21, 2026

The Honorable Mehmet Oz, M.D.
Administrator
Department of Health and Human Services 
7500 Security Boulevard
Baltimore, MD 21244

Re: Medicaid Managed Care State Directed Payments and Medicaid Fee-for-Service Targeted Medicaid Practitioner Payments

Dear Administrator Oz:

On behalf of our nearly 5,000 member hospitals, health systems and other healthcare organizations, our clinician partners — including more than 270,000 affiliated physicians, 2 million nurses and other caregivers — and the 43,000 healthcare leaders who belong to our professional membership groups, the American Hospital Association (AHA) appreciates the opportunity to comment on the Centers for Medicare & Medicaid Services (CMS) proposed rule regarding Medicaid managed care state-directed payments (SDPs) and Medicaid fee-for-service targeted practitioner payments.

The proposed rule would make substantial changes to Medicaid payment policies. The rule implements changes required under Section 71116 of Public Law 119-21, which reduces SDP limits from the average commercial rate to Medicare-based payments and establishes criteria for certain SDPs to be grandfathered and phased down from their current limit to the new limits. The rule also proposes changes beyond what the statute requires, including new requirements and limitations on SDP design. 

Given the totality of the proposed changes, CMS’ own scoring of the proposed rule projects a reduction of $510.1 billion over 10 years, which well exceeds the Congressional Budget Office’s estimate for the underlying statute ($149.4 billion over 10 years).¹ The cumulative effect of the proposed changes, if enacted, would greatly reduce patient access to care, exacerbate workforce challenges, and impact hospital and health system financial viability.

SDPs provide vital funding for essential healthcare services for some of the nation’s most medically complex and vulnerable populations. Medicaid covers a unique population that is composed disproportionately of children, pregnant women, people with disabilities, and those facing greater clinical and social complexity.² Hospitals provide a substantial share of care to Medicaid beneficiaries, and payments typically do not cover the cost of care because Medicaid base payments are below the costs hospitals incur in delivering those services. This has resulted in decades of chronic underpayments to providers.³

CMS has recognized that supplemental payments, when appropriately designed, can help advance access to care and delivery system improvements for Medicaid beneficiaries. SDPs have been used to help bridge the gap between base payment rates and the cost of delivering care, which ultimately supports access and quality goals in Medicaid managed care. Put simply, hospitals cannot maintain or expand access or invest in quality improvements for patients if they are chronically operating at a loss. 

The amount states reimburse hospitals through SDPs has changed over time as more states have used managed care organizations (MCOs) as the primary delivery system for beneficiaries. In other words, SDPs, which are the mechanism to provide supplemental payments in the managed care environment, have grown while enrollment in fee-for-service Medicaid and states’ use of supplemental payment types available in the fee-for-service program — or upper payment limit payments — have decreased. Specifically, state Medicaid programs now provide services to over 78% of beneficiaries through managed care.⁴

As these payments have become an increasingly vital provider payment mechanism under Medicaid, resource cuts of this magnitude will likely force affected institutions to reduce services and staffing, both of which directly limit access to care. These cuts would have an impact on all patients in the communities hospitals serve, not just Medicaid patients, because a service that is closed would no longer be available to any patients. Both the loss of financial resources and the reduction in services make it harder to recruit and retain clinical staff, deepening existing workforce shortages. The result is a cascading effect: a payment policy change simultaneously becomes a patient access crisis, a workforce crisis, and a significant financial headwind for hospitals and health systems. We ask that CMS carefully weigh the potential implications of this rule for service availability, provider participation under Medicaid managed care, and overall access to care for Medicaid beneficiaries and entire communities, so that it is consistent with the requirement that payment policies ensure sufficient provider participation and access. As such, we urge CMS, within its authority, to rescind proposed policies that exceed what is required by P.L. 119-21 and lessen the financial impact of the reduction of SDP limits to Medicare levels.

We appreciate your consideration of these issues. Our detailed comments are attached. Please contact me if you have questions, or feel free to have a member of your team contact Ben Finder, AHA vice president of coverage policy, at bfinder@aha.org, or Krista Geier, AHA senior associate director of Medicaid policy, at kgeier@aha.org. 

Sincerely, 

/s/ 

Ashley Thompson 
Senior Vice President 
Public Policy Analysis and Development

View the detailed letter below. 
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¹ https://www.cbo.gov/publication/61570
² https://www.macpac.gov/publication/medicaid-enrollment-by-state-eligibility-group-and-dually-eligible-status/
³ https://www.aha.org/fact-sheets/2020-01-07-fact-sheet-underpayment-medicare-and-medicaid
⁴ https://www.kff.org/medicaid/state-indicator/total-medicaid-mco-enrollment/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D