On February 2, 2026, CMS issued updated guidance on Medicaid state directed payment (“SDPs”) governed by Section 71116 of the “Working Families Tax Cuts Legislation” enacted in the One Big Beautiful Bill Act (“OBBBA”). The update replaces September 2025 guidance and reaffirms that SDPs may not exceed 100 to 110% of the published Medicare total payment rates, unless temporarily grandfathered. CMS also clarifies its approach to SDP grandfathering eligibility by redefining the 180‑day rating period window around July 4, 2025 (the date of the OBBBA enactment), to be calculated using business days rather than calendar days, effectively expanding the actual days included in rating periods that could qualify for grandfathering. The guidance also adds an explicit anti-circumvention provision to limit attempts to circumvent the grandfathering criteria. CMS states that it will issue a notice of proposed rulemaking to revise the Medicaid managed rule to codify CMS’ final policies on grandfathering.
SDPs allow states to implement contractual Medicaid managed care arrangements that generally direct Medicaid managed care plans on how much to pay eligible providers for specific services. From 2016 through the enactment of the OBBBA, CMS commonly approved SDPs that enabled Medicaid managed payments up to average commercial rates.
Congress reset SDP payment limits with Section 71116 of the Working Families Tax Cuts legislation, enacted in the OBBBA on July 4, 2025. For rating periods that begin on or after that date, SDPs must observe published Medicare rate-based caps, unless the program qualifies for a temporary grandfathering period. In expansion states, the cap equals 100% of the specified total published Medicare payment rate (or, if Medicare does not publish a total payment rate for the service, the Medicaid state plan rate or waiver rate). In nonexpansion states, the cap equals 110% of the specified total published Medicare payment rate (or, if no Medicare total rate exists, the Medicaid state plan rate or waiver rate). These caps replace the prior flexibility that allowed payments up to average commercial rate in many approved programs
CMS released initial guidance on September 9, 2025, to explain how Section 71116 applies to existing and new SDPs, including criteria for temporary grandfathering. On February 2, 2026, CMS issued updated guidance that largely tracks the September policy but makes two notable changes.
Change to Interpretation of “Within 180 Days” of July 4, 2025
First, CMS clarified how to measure the “within 180 days” window tied to the July 4, 2025 enactment date for purposes of grandfathering. CMS will now count business days rather than calendar days. This shift expands the range of rating periods that can qualify for the temporary grandfathering allowance, which can matter for programs with rating periods that straddle the enactment date.
Addition of Explicit Anti-Circumvention Instruction
The other significant update to the SDP guidance is the addition of an explicit “anti-circumvention” instruction, which the September 2025 guidance lacked. The new guidance provides that states cannot revise SDP preprints in an effort to circumvent the grandfathering criteria to gain grandfathered status. One example of such circumventing the guidance cites is revising a rating period originally stated in a pending or approved preprint.
The anti-circumvention instruction does not automatically mean that, with regard to an SDP for which a pending preprint was submitted to CMS prior to July 4, 2025, CMS is taking the position that any change made to the pending preprint would automatically prevent the preprint earlier, CMS specifies that, for grandfathering purposes, “completed preprint” means a “preprint completed in full” with “all information provided only in the fillable sections of the preprint and the addendum tables.”
