Medicaid serves as a lifeline for nearly 80 million people nationwide, yet the payments providers receive for treating Medicaid patients often fall well below the actual cost of delivering care. This chronic underfunding leaves nursing homes, hospitals, outpatient clinics, and other providers—especially those that serve large numbers of Medicaid enrollees—struggling to keep their doors open, much less invest in the innovations needed to strengthen care quality and improve efficiency. The impact of low Medicaid payments can be seen in nursing homes struggling to fully staff their facilities and outpatient providers increasingly reporting longer wait times for primary and specialty care.1, 2 Hospitals serving large numbers of Medicaid enrollees and hospitals in rural communities are also feeling the impacts of low Medicaid payments. Hospitals often operate on razor-thin margins, making it nearly impossible for them to modernize facilities, expand services, or implement care delivery reforms that drive better outcomes. Additionally, in recent years, low margins have led to a significant number of hospital closures, particularly in rural communities.3 Without adequate reimbursement, these hospitals face difficult choices, including to limit services, delay infrastructure improvements, or, in the worst cases, shut down entirely, jeopardizing access to care for the nation's most vulnerable populations.
State Directed Payments (SDPs) have become a crucial tool for states operating their Medicaid programs through Medicaid managed care, enhancing rates for hospitals and other providers to sustain operations, enhance care quality, and support system-wide reforms. Established in 2016, SDPs allow states to direct Medicaid managed care organizations to implement targeted provider payment models—by, for example increasing payment rates—that strengthen access and care delivery. Like other Medicaid spending, states and the federal government share the cost of SDPs. For many hospitals that disproportionately serve Medicaid patients and have little revenue from commercial insurance, SDPs provide a financial bridge, offsetting shortfalls in base payments and helping to sustain vital services in communities where health care options are scarce. For hospitals that are not primarily serving Medicaid patients, raising Medicaid rates through SDPs helps to open the doors to specialty care and other services that might otherwise not be available to Medicaid enrollees.
Now, however, these essential payments are at risk. Congress and the Administration are considering substantial changes to Medicaid financing. Congress' joint budget resolution passed on April 10th calls for $880 billion in cuts from the House Energy and Commerce Committee (E&C)—which has primary jurisdiction over Medicaid—over the next ten years.4 On May 14th , the House E&C Committee advanced a set of significant Medicaid policy proposals to meet the budget reconciliation instructions for consideration before the full House of Representatives.5 Included is a policy that limits the level of new SDPs that the federal government will approve, while allowing states with current SDPs to maintain them at current levels. Other options to reduce or modify SDPs have been under consideration. Even if the provisions limiting SDPs contained in the current legislative language are not enacted, the Administration could also pursue reductions to SDPs through rulemaking in the coming months. These factors make SDP policy a continuously moving target.
SDP cuts would have profound consequences for a wide range of hospitals and other providers. In particular, SDP cuts would impact high-Medicaid hospitals, including certain urban hospitals, rural hospitals, and children's hospitals, all of which already struggle to stay afloat. Scaling back SDPs would exacerbate existing financial distress, forcing hospitals to make wrenching decisions about reducing staff, eliminating critical service lines, or even closing altogether. The ripple effects would be felt hardest in underserved communities, in health care "deserts" where access to care is already limited, and where Medicaid is the predominant payer.
With support from the Commonwealth Fund, Manatt Health presents an original analysis of potential state-level SDP reductions and takes a closer look at the role of SDPs in sustaining high-Medicaid urban hospitals, children's hospitals, and rural hospitals and assesses the potential consequences of proposed SDP reductions. Drawing on publicly available data and direct insights from potentially impacted hospitals, we quantify the state-level impact of SDP cuts across 25 states and examine the specific risks facing hospitals serving underserved populations. As Congress and the Administration debate Medicaid spending reductions, the future stability of America's most vulnerable hospitals—and the communities they serve—hangs in the balance.
Footnotes
1. Medicaid and CHIP Payment and Access Commission, Estimates of Medicaid Nursing Facility Payments Relative to Costs (2023), available at https://www.macpac.gov/publication/estimates-of-medicaid-nursing-facility-payments-relative-to-costs/.
2. Solomon Hsiang et al., Medicaid Patients Have Greater Difficulty Scheduling Health Care Appointments Compared with Private Insurance Patients: A Meta-Analysis, 56 Inquiry 1 (2019), available at https://pmc.ncbi.nlm.nih.gov/articles/PMC6452575/.
3. Cecil G. Sheps Center for Health Services Research, Rural Hospital Closures, (2025), available at https://www.shepscenter.unc.edu/programs-projects/rural-health/rural-hospital-closures/.
4. H.Con.Res.14, 119th Cong. (1st Sess, 2025). https://www.congress.gov/bill/119th-congress/house-concurrent-resolution/14/text.
5. House Committee on Energy and Commerce, Chairman Guthrie Celebrates Committee Passage of Reconciliation Text to Put Americans First (2025), available at https://energycommerce.house.gov/posts/chairman-guthrie-celebrates-committee-passage-of-reconciliation-text-to-put-americans-first.
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