State directed payments (SDPs) are an important funding source for hospitals and providers that serve the Medicaid population. SDPs do a few things: (1) they supplement base Medicaid payments so that providers can financially afford to serve Medicaid beneficiaries; (2) they help eliminate disparities between patient populations; and (3) they incentivize hospitals and providers to improve patient care. But many of our clients aren’t sure exactly how SDPs (and Medicaid funding in general) work. In this article, we want to discuss:
- What are state directed payments (SDPs)?
- What types of SDPs are there?
- How are SDPs allocated?
- What are SDP compliance requirements?
- What else do providers need to know about SDPs?
- How will the Medicaid cuts proposed in the Big Beautiful Bill impact providers?
But before we can talk about SDPs, we first have to understand the basics of Medicaid.
What is Medicaid?
The Centers for Medicare and Medicaid Services (CMS) is a federal agency that administers the needs-based healthcare program called Medicaid.
Medicaid is a program run jointly by the federal and state governments that helps low-income individuals and families get health benefits. While the federal government sets broad program guidelines, states set additional requirements and administer their own programs.
How is Medicaid funded?
Medicaid is funded jointly by the Federal government and states. The federal government matches most state-paid Medicaid expenditures using a formula called the Federal Medical Assistance Percentage (FMAP). States with lower per capita incomes relative to the national average are given larger matching percentages.
Traditionally, Medicaid has been funded through fee-for-service (FFS) models, which pays doctors and hospitals directly for the services they provide. But in recent years, most states (including Louisiana and Texas) have transitioned away from FFS models to managed care programs.
What are provider taxes?
Provider taxes are a fee imposed by states on healthcare providers to help fund the State’s share of Medicaid costs. State funds are remitted to CMS, which provides a federal match (Federal Medical Assistance Percentage). The combined funds are then used to pay providers (for example by funding MCOs or making supplemental payments to providers). Depending on the FMAP, states can turn every $1 of provider tax into $2-$3.
How are Medicaid benefits administered?
Ultimately, states decide how Medicaid benefits will be coordinated. For app. 75% of the Medicaid beneficiary population private insurance companies, called Managed Care Organizations (MCOs), are contracted to coordinate care for Medicaid beneficiaries. MCOs receive fixed-per-member-per-month payments. The remaining Medicaid population is served through a Fee-For-Service model, where states pay providers directly.
How are Medicaid funds allocated to providers?
There are mainly two Medicaid reimbursement types:
- Base Payments
States pay fixed, pre-arranged base rates to MCOs for the predicted costs of patient care. - Supplemental Payments
Supplemental payments are additional funds that states provide to healthcare providers in addition to standard reimbursement rates.
It’s this type of payment — the SDP supplemental payment — that we want to explore in more detail.
What are state directed payments (SDPs)?
State directed payments (SDPs) are mechanisms states use to make additional payments to medical providers under a managed care program. There are differences between states, specifically, Texas is using multiple directed payment programs, such as Comprehensive Hospital Increased Reimbursement Program (CHIRP), Texas Incentives for Physicians and Professional Services (TIPPS), and other provider specific programs. Louisiana has a single program tiered by certain provider characteristics such as complexity of services (such as NICU, Trauma Unit, etc.), location (e.g., urban, rural), and unique aspects (such as teaching hospitals).
SPD allocations to individual hospitals are public documents and based on the respective state fiscal year. Louisianas fiscal year starts on July 1 and ends June 30 and Texas’ fiscal year starts on September 1 and ends on August 31.
What are the different SDP programs?
SDPs can be awarded to providers in a number of ways, which gives states flexibility to direct additional funding to providers based on the needs of the population. CMS does not classify directed payments as supplemental payments, although many states use directed payments to make large uniform rate increases that are similar to supplemental payments in fee for service.
Three common types of SDPs are:
Uniform Percentage Increases
Uniform percentage increases raise payments to providers at a predetermined rate. Over time, this makes it more affordable for hospitals to serve Medicaid patients, and hospitals can rely on consistent funding when planning and budgeting.
Fee Schedules
SDPs can establish minimum (or maximum) rates for certain services to be paid to providers, as long as MCOs pay providers what they would have been paid under the standard fee-for-service model.
Value-Based Payments
SDPs can be directed to providers based on performance, encouraging hospitals and doctors to improve quality of care for the Medicaid population. These performance metrics might be based on patient satisfaction, mortality rates, readmission rates, or something else.
What are SDP compliance requirements?
CMS requires states to submit annual SDP reports to be approved for the next year’s disbursement. These reports must include:
- SDP expenditures, broken out by provider.
- The criteria used to determine which providers are eligible for SDPs.
- Description of how SDPs are calculated and distributed.
- Narrative about the alignment of SDPs with CMS standards of efficiency, economy, quality of care, and access to care.
What else do providers need to know about SDPs?
Although certain aspects of SDP funding are dependent on factors outside of the hospital’s control, providers can support smooth delivery of supplemental funds:
- Bill appropriately and timely
SDPs may be awarded based on the types of services provided, so providers should train staff how to appropriately bill for services provided. This billing should be done timely so that records are up-to-date for annual SDP reports. - Track metrics that CMS and MCOs care about
Providers should talk to their MCO to determine how SDPs are paid out. If they are based on certain performance metrics, providers should ensure they’re tracking those metrics accurately. - Improve relationships with MCOs
A provider that has a good relationship with MCOs will be able to resolve SDP disputes more quickly.
How will the Medicaid cuts proposed in the Big Beautiful Bill impact providers?
The billions of dollars of Medicaid cuts currently proposed in the Big Beautiful Bill could change how hospitals and practitioners receive funding for the services they provide. This topic is complex, and we delve into the possible consequences of the BBB in another article. Click here to read our prediction, and reach out to your LaPorte healthcare team if you have any questions about Medicaid or SDPs.