CMS Proposes a Rule to Limit Misused Medicaid Funds and "Reward Quality Care," Aiming to Improve Healthcare Management

Author: Amy Asubonteng

May 28, 2026

HRRC supports the Centers for Medicare and Medicaid Services’ press release and proposed rule. As both federal and state spending become increasingly crucial aspects of managing healthcare, HRRC further applauds the CMS administrators and federal regulators for seeking ways to regulate overspending that can divert resources away from directly improving the quality of healthcare for U.S. citizens.

[Image Credit: www.kaboompics.com via Pexels]

The Centers for Medicare and Medicaid Services (CMS) published a press release on May 20, 2026, titled “CMS Movies to Rein In Misused Medicaid Dollars and Reward Quality Care.” In the release, CMS outlined a proposed rule for 2026 that would limit certain state Medicaid payments that are above Medicare levels, leading to overly high federal costs. While both Medicare and Medicaid help citizens cover medical expenses, Medicaid is jointly funded by both the state and federal governments, whereas Medicare is funded solely at the federal level. 

The press release explained that State Directed Payments (SDPs) are a major factor driving up costs without necessarily improving the quality of healthcare provided. SDPs are mechanisms through which states determine how to pay for healthcare providers. CMS claims that SDPs are often used to increase providers’ payments, which can then be used to pay the non-federal share of Medicaid through intergovernmental transfers or provider taxes. 

Provider taxes are fees paid by healthcare providers or governmental agencies, such as public hospitals. Intergovernmental transfers are funds transferred from those governmental agencies back to the state for use as non-federal funds. Both are used to cover the state’s portion of Medicaid payments, which are then returned to those same providers. Through this arrangement, the state’s share of Medicaid payments comes from federal taxpayers (the providers). CMS argues that this allows the state to increase federal spending without increasing state spending or investment.

Furthermore, a Medicaid and CHIP Payment and Access Commission (MACPAC) report from June 2024 found that “more than half of [state] directed payments are financed by [intergovernmental transfers] or provider taxes,” despite 70% of non-federal Medicaid payments still coming from state funds. Over the past ten years, the use of SDPs has expanded from just two states in 2016 to 41 states today, accounting for more than a quarter of all Medicaid spending in 2025. 

For that reason, CMS has proposed a rule to cap certain state-directed payments for hospitals, nursing facilities, and other qualified services at 100% and 110%, depending on the state, to better balance state-level provider payments. The proposal also includes several other regulatory measures.

The overarching goal of this proposal is to ensure that taxpayer dollars are focused on patient care rather than inefficient financing schemes. If approved, the rule is expected to generate more than $700 billion in savings over the next ten years. 

By reducing such inefficiencies and redirecting funds, CMS aims to ensure that quality healthcare, a human right, remains sustainable and a foremost priority in governmental spending. CMS administrator Mehmet Oz supported this reasoning, stating, “When we hold the line on spending and put patients first, we protect Medicaid for the people who depend on it today and for generations to come."

---

Glossary

• Divert:  to turn from one course or use to another: deflect 

• Federal: of or constituting a form of government in which power is distributed between a central authority and a number of constituent territorial units 

• Inefficient: not efficient: such as: not producing the effect intended or desired 

• Medicaid: a program of medical aid designed for those unable to afford regular medical service and financed by the state and federal governments 

• Medicare: a government program of medical care especially for the aged 

• Press Release: an official statement that gives information to newspapers, magazines, television news programs, and radio stations 

• Proposal: an act of putting forward or stating something for consideration 

• Provider: one that provides 

• Regulator: one that regulates 

• Schemes: a plan or program of action, especially a crafty or secret one

• Sustainable: able to be used without being completely used up or destroyed; able to last or continue for a long time 

• Taxpayer: one that pays or is liable for a tax 

---

References

1. CMS Moves to Rein In Misused Medicaid Dollars and Reward Quality Care | CMS 

2. Medicaid.gov: The Official U.S. Government Site for Medicaid and CHIP Services | Medicaid 

3. CMS - Centers for Medicare & Medicaid Services (via Public) / CMS Moves to Rein In Misused Medicaid Dollars and Reward Quality Care 

4. What’s the difference between Medicare and Medicaid? | HHS.gov 

5. What are Medicare and Medicaid

6. Medicaid State-Directed Payments: An Update on CBO's Modeling