The 2025 reconciliation law known as the One Big Beautiful Bill Act (OBBBA) rewrote how states can finance Medicaid, and the new state-directed payment (SDP) caps land directly on skilled nursing facility revenue. For operators, the Medicaid cost report is no longer just a compliance filing: it is the document that will determine how much grandfathered payment a facility can defend as the caps phase in. If your forecasting model still assumes today’s supplemental payment levels will hold, it is already out of date.
Quick answer: OBBBA caps Medicaid state-directed payments for nursing facility services at 100% of the total published Medicare rate in expansion states and 110% in non-expansion states. Existing CMS-approved SDP arrangements can keep their legacy dollar amounts through the end of 2027, then must be cut by at least 10 percentage points each year beginning January 1, 2028, until they hit the Medicare-based limit. Separately, the provider-tax safe harbor that helps fund those payments is dropping from 6% to 3.5% by FY 2032 in expansion states, though nursing homes and ICF-IID facilities are exempt from that reduction. The result is a multi-year squeeze on Medicaid cash flow that the Medicaid cost report sits at the center of, and facilities should model it now.
How Do the State-Directed Payment Caps Work?
State-directed payments are a major source of supplemental Medicaid revenue for nursing facilities, layered on top of base rates through managed care contracts. OBBBA ties those payments to Medicare for the first time. For states that adopted Medicaid expansion, SDP rates for nursing facility services are limited to 100% of the total Medicare published payment rate; for non-expansion states, the ceiling is 110% of that rate.
For many facilities, current SDP levels already exceed those Medicare-based limits, which is exactly why the cap matters. The gap between today’s approved payment and the new ceiling is the revenue at risk. According to the Kaiser Family Foundation’s analysis of the forthcoming SDP policy changes, the law’s limits apply to nursing facility services alongside inpatient and outpatient hospital services and professional services at academic medical centers.
CMS released a proposed rule in May 2026 to implement these provisions, and the proposed rule would extend the new payment limits to additional services beyond the categories named in the statute. That expansion is significant because it widens the universe of payments subject to the cap. Facilities should treat the proposed rule as the operative roadmap while watching for the final rule, since comment-period changes could shift specific definitions.
A second point about scope deserves attention. Because SDPs flow through managed care contracts rather than direct fee-for-service billing, the cap interacts with each state’s contracting cycle and rating periods. A facility cannot simply read its current contract and assume the number holds, since the approved arrangement and its timing both feed into how the cap and the grandfathering rules apply.
What Is the Grandfathering Window and the 2028 Phase-Down?
The law does not pull SDP revenue away overnight. Certain eligible SDPs that CMS had already approved receive transition treatment: they can maintain their legacy total dollar amounts through the end of 2027. This grandfathering window is the single most valuable piece of breathing room operators have, and it is finite.
Starting with the first rating period on or after January 1, 2028, states must reduce each grandfathered legacy amount by at least 10 percentage points per year until the payment reaches the applicable Medicare-based limit. A facility well above the ceiling could therefore face several consecutive years of declining supplemental revenue rather than a single cliff. That structure converts what might have been an abrupt loss into a scheduled, modelable decline, which is both a planning advantage and a planning obligation.
The practical consequence is that 2026 and 2027 are planning years, not crisis years. Whether a facility can claim the full legacy amount depends on what was approved and documented before the law took effect, which puts a premium on clean, accurate cost reporting. Our team’s cost report preparation services focus on exactly this kind of documentation, because the figures filed today set the baseline a facility will defend through the phase-down.
It is worth being precise about what “legacy amount” means in practice. The grandfathered figure is a total dollar amount tied to an approved arrangement, not an open-ended entitlement, so a facility that cannot substantiate the basis for that amount risks entering the phase-down from a lower starting point. Each percentage point of unsubstantiated baseline compounds across the multi-year step-down.
How Does the Provider-Tax Squeeze Add Pressure?
SDPs are only half the financing picture. States fund the non-federal share of Medicaid in part through provider taxes, and OBBBA tightens those too. For expansion states, the safe harbor threshold falls from 6% to 5.5% in FY 2028, then 5% in 2029, 4.5% in 2030, 4% in 2031, and 3.5% in FY 2032 and after, a half-point reduction each year.
There is an important carve-out for the long-term care sector. The reduced thresholds apply to most provider types, including hospitals, but nursing homes and intermediate care facilities for individuals with intellectual disabilities (ICF-IID) are exempt and keep the original 6% threshold, as confirmed in Georgetown’s Center for Children and Families analysis of the CMS provider-tax guidance. That exemption protects the nursing-facility tax base itself from the phase-down.
The exemption is real relief, but it is not insulation. Even though the nursing-home provider tax can stay at 6%, the broader provider-tax reductions shrink the pool of state non-federal share dollars, and states also face a moratorium on new or increased provider taxes as of the July 4, 2025 enactment date. When a state has less financing capacity overall, the supplemental payments it can route to nursing facilities come under pressure regardless of the carve-out. The two provisions interact: capped SDPs plus a constrained financing base.
This interaction is the part that catches operators off guard. A facility might read the exemption and conclude it is protected, then watch its supplemental payments shrink anyway because the state’s total financing capacity has tightened. The carve-out shields the rate of the nursing-home tax, not the volume of dollars a state can ultimately direct toward nursing facilities.
What Does This Mean for Cash Flow and Forecasting?
The combined effect is a predictable, multi-year decline in Medicaid supplemental revenue for facilities that currently sit above the Medicare-based caps. CMS estimated its SDP changes, as expanded in the proposed rule, would reduce federal spending by roughly $510 billion between 2026 and 2035, with most of the reduction starting in FY 2028. That timing tells operators where to focus: protect the grandfathered amount now, and build the step-down into long-range models.
States may try to soften the blow by raising base Medicaid rates to offset lower SDPs, but offsets are far from guaranteed. With provider-tax limits squeezing the financing side and many state budgets already strained, base-rate increases may not fully replace lost supplemental dollars. California’s decision to wind down its Skilled Nursing Facility Workforce and Quality Incentive Program, a roughly $280 million annual incentive program ended early at the close of 2025 amid a state budget shortfall, shows how quickly state-level support can evaporate under fiscal pressure.
Forecasting under these rules requires more than a flat revenue assumption. A defensible model should isolate the portion of current SDP revenue that exceeds the applicable cap, apply the 10-percentage-point annual reduction from 2028 forward, and stress-test whether any state base-rate offset is realistic. The accuracy of that model depends on the Medicaid cost report, which establishes the cost basis, occupancy, and payer mix that underpin both the rate calculation and the grandfathered amount.
This is where cost reporting and forecasting converge. Facilities that file precise, well-supported cost reports give themselves the strongest position to claim full legacy SDP amounts during the grandfathering window and to substantiate base-rate arguments later. Pease Bell CPAs works with operators across the skilled nursing and long-term care sector to align cost reporting with cash-flow forecasting so the numbers tell one consistent story to regulators and lenders alike.
There is also a lender dimension that operators sometimes underweight. Debt covenants and refinancing conversations rest on forward revenue, and a model that ignores the 2028 step-down can overstate capacity to service debt. Building the phase-down into projections early gives an operator a credible story for capital partners rather than a surprise to explain after the fact.
Frequently Asked Questions
When do the OBBBA state-directed payment caps actually take effect?
The Medicare-based caps apply to SDP rates going forward under the 2025 reconciliation law, but eligible CMS-approved arrangements are grandfathered at their legacy dollar amounts through the end of 2027. The mandatory reductions begin with the first rating period on or after January 1, 2028, cutting at least 10 percentage points per year until the payment reaches the applicable limit. CMS issued a proposed rule in May 2026 to implement the details.
Are nursing homes exempt from the provider-tax reductions?
Partly. Nursing homes and ICF-IID facilities are exempt from the safe harbor phase-down that drops the threshold from 6% to 3.5% by FY 2032 in expansion states, so their provider tax can remain at 6%. They are not exempt from the SDP payment caps, and they are still affected indirectly when reduced provider-tax capacity elsewhere shrinks a state’s overall Medicaid financing.
How does the Medicaid cost report affect what we can keep under the caps?
The Medicaid cost report establishes the cost basis, occupancy, and payer-mix data that feed rate calculations and support the grandfathered legacy amount a facility can defend. Accurate, well-documented filings strengthen a facility’s position to claim the full legacy SDP amount during the 2026 to 2027 window and to substantiate base-rate arguments as the phase-down proceeds. Errors or under-documentation can permanently lower the baseline a facility carries into the cuts.
What is the difference between expansion and non-expansion states under these rules?
The SDP cap is set at 100% of the total Medicare rate in expansion states and 110% in non-expansion states, so non-expansion facilities have slightly more headroom on supplemental payments. The provider-tax safe harbor phase-down from 6% to 3.5% applies only to expansion states; non-expansion states generally do not face that scheduled reduction. Both groups remain subject to the moratorium on new or increased provider taxes.
