A new analysis from KFF reveals that forty states and the District of Columbia collectively receive an estimated $93 billion annually in federal Medicaid spending through state directed payments (SDPs), a figure that now faces significant cuts due to forthcoming federal limits. These payments, first authorized in 2016, allow states to direct how managed care organizations compensate providers for services.
The vast majority of SDP spending—84%—goes to hospital services, totaling roughly $78 billion each year. California leads the nation with an estimated $10.6 billion in federal SDP spending, followed by Texas ($6.3 billion), North Carolina ($5.2 billion), and Illinois ($5 billion).
Most of this spending is currently benchmarked to commercial or private insurance rates, which are notably higher than Medicare rates. The Centers for Medicare and Medicaid Services (CMS) began approving SDPs tied to commercial rates in 2018, viewing the higher payments as a way to attract a broader network of providers and ensure robust access to care.
However, the 2025 reconciliation law imposed new restrictions, capping payment rates at or near Medicare levels. CMS has also proposed a rule that would expand these limits, potentially reducing federal Medicaid spending by $510 billion between 2026 and 2035.
The impact is expected to be most severe for hospitals, especially safety-net providers that serve a high proportion of Medicaid enrollees and already operate on thin margins. States have limited options to offset the cuts due to other changes in Medicaid financing, including new restrictions on provider taxes.
Some financially vulnerable hospitals could face closures or service reductions, particularly if uncompensated care rises as people lose Medicaid or marketplace coverage. The uncertainty surrounding state and provider responses adds to the stakes for communities that rely on these facilities for essential care.