The Centers for Medicare & Medicaid Services (CMS) proposed a rule intended to reduce what it describes as excessive state payment practices, and to redirect funding toward direct patient care. CMS estimates that the proposal could save hundreds of billions of dollars over the next decade.
Supporters say it addresses waste and abuse; critics worry it could reduce funding available to providers and states.
The Medicaid Managed Care State Directed Payments (SDPs) and Medicaid Fee-for-Service (FFS) Targeted Practitioner Payments Proposed Rule would set clear caps and better align Medicaid payments with Medicare standards. If finalized, the Proposed Rule would generate an estimated $775 billion in total savings over 10 years, including $510 billion in federal savings. CMS’s goal: to refocus Medicaid dollars on individuals and families, instead of inefficient payment schemes.
The Proposed Rule would:
- Cap SDP provider payment rates at 100 percent of Medicare payment rates for expansion states and 110 percent of Medicare payment rates for non-expansion states (or 100 percent of the Medicaid state plan rate if a comparable Medicare rate is not available);
- Apply similar limits to certain targeted Medicaid FFS payments; and
- Establish consistent national standards to improve transparency and accountability.
A temporary 2.5-percent physician payment increase for 2026 was included in the 2025 budget law. Physician organizations continue to argue that Medicare reimbursement has not kept pace with inflation, and are pushing for longer-term reforms (duh). Reimbursement rates for Medicare and Medicaid are abysmal.
On another note, Medicare Advantage (MA) payments are increasing.
CMS finalized an average 5.06-percent increase in MA plan payments for 2026, amounting to roughly $25 billion in additional federal payments compared with 2025.
In September 2025, a federal court in Texas vacated CMS’s 2023 (Risk Adjustment Data Validation) RADV Final Rule, ruling that CMS had not properly followed administrative procedures when changing its audit methodology. The ruling was a major setback for CMS’s audit strategy and a significant win for the entities being audited.
What is the RADV? MA plans receive higher payments when enrollees have documented medical conditions that increase expected healthcare costs. In a RADV audit, CMS reviews medical records to verify that diagnosis codes submitted by the health plan are supported by documentation. If diagnoses cannot be validated, CMS can determine that it overpaid the plan.
The decision prevented CMS from immediately using the challenged rule to extrapolate audit findings across entire MA contracts. This was widely viewed as a major victory for MA organizations facing large audit recoveries.
Key points:
- The court vacated the 2023 RADV rule;
- CMS’s removal of the FFS adjuster was challenged successfully; and
- The ruling created uncertainty around billions of dollars in potential audit recoveries.
CMS appealed the decision and has stated that RADV audits will continue, despite the court ruling. The agency has released updated guidance and is moving ahead with future audit cycles while the appeal proceeds.
There have also been individual provider successes. For example, a healthcare law firm reported obtaining fully favorable CMS appeal decisions totaling more than $8 million for two laboratory providers in Medicare COVID-19 testing reimbursement disputes. While this was not a court case, it is a recent example of providers prevailing through the Medicare appeals process.
On the Medicaid side, the current trend is increased scrutiny, rather than provider victories. CMS has directed states to conduct broad provider revalidation and enrollment reviews, meaning many Medicaid providers can expect more audits and documentation requests during 2026.
