Federal Medicaid spending on nursing home services through state-directed payments totals $3.7 billion annually, with $2.2 billion covered by federal funds. These payments, designed to help states set minimum rates for care, now face major restrictions under the 2025 reconciliation law, which targets a $911 billion cut in federal Medicaid spending over a decade—including reductions to SDPs for hospitals, nursing homes, and other services.
State-Directed Payments and New Caps
State-directed payments allow states to require managed care organizations to pay providers above standard Medicaid rates, often using commercial insurance rates as a benchmark. At least 15 states currently direct payments to nursing homes, though the new law will limit how much states can supplement care costs. Expansion states, those that adopted Medicaid expansion under the Affordable Care Act, face a cap of 100% of Medicare rates, while non-expansion states can go up to 110%. For services without Medicare benchmarks, payments are capped at Medicaid fee-for-service rates.
Some SDPs are temporarily exempt from these limits, but their total spending will drop by 10% each year starting in 2028 until they comply with the new rules. Pennsylvania alone accounts for nearly half of federal SDP spending on nursing homes, setting rates at 74.6% of average commercial rates. Rhode Island operates two separate SDPs for nursing homes, one at 88.3% of commercial rates and another tied to Medicaid rates. Indiana and Illinois do not use commercial benchmarks at all, Illinois ties its SDP to Medicaid rates, while Indiana references Medicare for one program and leaves another unspecified.
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Uncertainty Over Required Rate Cuts
How much rates will need to fall to meet the new limits remains unclear. While research shows commercial rates for hospitals and physician services often exceed Medicare payments, no comparable data exists for nursing homes. The Centers for Medicare and Medicaid Services assumed in its regulatory analysis that Medicaid nursing home rates average 80% of Medicare rates and commercial rates run 150% higher, but acknowledged significant uncertainty. A 2023 MACPAC report found Medicaid base rates for nursing homes vary widely and are generally lower than Medicare’s; but noted differences in resident care needs make direct comparisons difficult.
Federal vs State Funding Share
Federal SDP spending on nursing homes represents just 2% of total federal SDP outlays, with the majority, 84%, going toward hospital services. The analysis of 20 preprints from 15 states shows that federal funding covers about 60% of total SDP spending for nursing homes, while states finance the remaining 40% through general revenues, provider taxes, or intergovernmental transfers. Among the 15 states with nursing home SDPs, 11 rely at least partially on provider taxes to cover their share. Four states use intergovernmental transfers to bridge gaps in financing.
KFF’s analysis of 305 preprints, covering $93.1 billion in federal SDP spending, revealed gaps in data reporting that complicate national estimates. Five preprints were excluded due to unreadable formatting, including two from New Hampshire and one each from Ohio and Florida, totaling $89 million in federal spending. Two Illinois preprints were dropped after projecting over $100 billion in annual spending, far exceeding plausible Medicaid budgets, while a Minnesota preprint lacked spending details altogether.
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These exclusions suggest the $3.7 billion annual total for nursing home SDPs may understate actual spending if unreported or incorrectly formatted preprints exist. The process of standardizing data, converting percentages to dollar amounts, adjusting for multi-year periods, and aligning service types, required manual reviews to ensure accuracy, highlighting the challenges of tracking SDPs at scale.
Methodology and Scope of the Nursing Home State-Directed Payment Analysis
The review examined 20 state-directed payment preprints for nursing home services, covering 15 states. These documents were drawn from publicly available submissions approved between January 1, 2024, and May 12, 2026. Preprints serve as the sole national data source for SDPs, though they contain gaps in reporting. Additional preprints may have been approved after the cutoff date.
Selection criteria focused on the most recent preprint for each SDP, excluding older versions or those tied to temporary COVID-19 relief funds. Preprints with formatting errors, missing key details, or unrealistic spending projections were removed. For example, Illinois submissions with overstated budgets and Minnesota’s lack of spending data were excluded. The final dataset included 305 preprints, totaling $93.1 billion in federal spending, with 20 specifically addressing nursing home services.
