CMS Expands the State Directed Payments That Qualify for “Grandfathering” Under H.R. 1

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On February 2, the Centers for Medicare & Medicaid Services (CMS) issued regarding the implementation of H.R. 1’s () provisions limiting state directed payments (SDPs), a mechanism by which states can direct managed care plans to implement specific payment methodologies or payment enhancements for providers.

H.R. 1 limits the total payment rate of any new SDPs to 100 percent of Medicare rates for Medicaid expansion states and 110 percent of Medicare rates for non-expansion states, but temporarily “grandfathers” certain SDPs with higher payment levels. Under H.R. 1, SDPs that cover rating periods occurring within 180 days of H.R. 1’s enactment (on July 4, 2025) can qualify for grandfathering. Beginning in 2028, states must reduce these grandfathered SDPs by 10 percentage points per year until they fall below H.R.1’s new limits.  

In preliminary  issued on September 9, 2025, CMS stated that SDPs would be grandfathered if their rating period covered any days from January 5, 2025 to December 31, 2025 (i.e., the 180 calendar days before and after H.R. 1’s enactment).  The new February 2 guidance replaces the September 9 guidance and represents a new interpretation of H.R. 1, allowing SDPs to be grandfathered with a rating period covering any days from October 11, 2024 to March 27, 2026, representing 180 business days before and after H.R. 1’s enactment.  

The previous guidance essentially limited grandfathered SDPs to those covering state fiscal year (SFY) 2025, calendar year (CY) 2025, and SFY 2026. The now-widened window will allow SDPs for the CY 2024 and CY 2026 rating periods to be grandfathered as well. However, the other criteria SDPs must meet to qualify for grandfathering—including the requirement that SDP preprints must have been approved prior to May 1, 2025 for non-rural hospitals, approved prior to July 4, 2025 for rural hospitals, or submitted to CMS prior to July 4, 2025—did not change under the new guidance.  

CMS has specified (consistently in the prior and updated guidance) that the aggregate dollar amount in a grandfathered SDP is the payment limit for the SDP going forward, until the SDP is subject to further cuts under H.R. 1. By expanding the “window” for SDPs to qualify for grandfathering, this guidance will allow some states to grandfather a greater number of SDPs, or SDPs at higher aggregate levels, compared to under the prior guidance. This will be particularly impactful for states that operate their SDPs on a calendar year basis and have SDP approvals (or pending preprints submitted to CMS prior to July 4, 2025) for new or increased SDPs covering CY 2026.  

The other policies related to SDP grandfathering included in the September 9 letter did not change under the revised guidance. As in the prior letter, CMS notes this guidance is preliminary and will be followed by formal rulemaking. The policies outlined here will not be finalized—and may still be subject to change—until they are codified in regulation.  

For more on H.R. 1, Manatt on Health subscribers can see the Manatt on Health

The reductions apply to rate years beginning on or after January 1, 2028. 

For more on the September guidance, Manatt on Health subscribers can see the Manatt on Health

H.R. 1 additionally specifies that SDPs may be grandfathered where states made a “good faith effort” to receive approval by May 1, 2025 for non-rural hospitals and July 4, 2025 for rural hospitals. CMS specifies that this only applies to SDPs that would already be grandfathered under another pathway, so no additional SDPs would be grandfathered solely based on the “good faith effort” criteria.

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