CMS Medicaid Rule Changes 2026: How SDP Payment Cuts and Work Requirements Impact Hospitals

Healthcare Policy Update
Jun 05, 2026
Article Background

What’s happening

The Centers for Medicare & Medicaid Services (CMS) issued two regulations to implement provisions from last summer’s One Big Beautiful Bill Act (OBBBA) on Medicaid managed care state directed payments (SDPs) and Medicaid work requirements.

Of interest

Both of these regulations will impact hospitals, health systems, and health centers.

The proposed SDP rule will reduce hospital and provider SDP revenue by:

Reducing inpatient and outpatient SDPs from average commercial payer rates to 110% of the Medicare rate in non-expansion states and to 100% of the Medicare rate in expansion states; and
Extending this cap beyond the four services listed in OBBBA (inpatient, outpatient, nursing facility and qualified practitioner services at an academic medical center) to all other SDPs, including services furnished by health centers, and to targeted practitioner payments in the fee-for-service program.

The work requirements interim final rule also will have major implications for hospitals and providers by:

Narrowly interpreting the medical frailty exemption to require an individual to show that their condition significantly impairs their ability to meet the work requirement; and
Requiring states to first attempt to verify an individual has met or is exempt from the work requirements using reliable data sources, such as claims or encounter data.

Our partners at McDermott+, one of healthcare’s most trusted and respected policy and lobbying consulting firms, summarized these regulations and the implications they will have on the healthcare system.

Comments are due by July 21, 2026, for the SDP proposed rule and July 31, 2026, for the work requirements interim final rule. Nonetheless, because the work requirements rule was issued as interim final, the provisions of the rule will become effective July 31st notwithstanding comments received.

Why you should care

Taken together, these rules will reduce Medicaid revenue, increase uncompensated care, and increase administrative burden. Hospital and clinic leaders should be informed about these policy changes and offer feedback to CMS on how these changes will impact your organization.

Looking to learn more?

McDermott+ offers valuable insights into what these policy updates mean and how they could affect organizations. McDermott+ will continue to track and analyze Medicaid rulemaking and implications for hospitals and providers. Read more below to see what McDermott+ is saying about these policies and how your organization could be impacted.

Click here for takeaways on the SDP proposed rule. Click here for takeaways on the work requirements interim final rule and here to listen to McDermott+’s podcast on the regulation.