Federal Medicaid spending through state-directed payments reached $93 billion a year across 41 states before the One Big Beautiful Bill Act took effect, with 84 percent benchmarked to commercial rates well above Medicare (KFF). OBBBA caps those payments at 100 to 110 percent of Medicare. The provider payment architecture sitting inside July 2026 capitation certifications was severed after those certifications were signed.

Key Takeaways

  • $93 billion of federal SDP spending across 41 of the 42 managed care states, $78 billion of it directed to hospital services, with 84 percent benchmarked to commercial rates that run 15 to 40 points above Medicare.
  • A 2024 CMS rule pulled SDP pass-throughs inside the capitation rate, so a capped SDP now leaves a certified rate component above what a state can legally pay.
  • Mid-period rate changes above 1 percent require full re-certification as a contract amendment subject to CMS review, which is months of lag against a statutory cut that lands immediately.
  • Semiannual redeterminations could remove 2.0 to 3.1 million expansion adults in 2028, 10.7 to 17.0 percent of an 18.2 million baseline, and roughly 11 percent of those facing redetermination are disenrolled procedurally rather than for ineligibility.
  • The Big Five MCOs shed 1.4 million members, 3.8 percent, from 36.2 million to 34.8 million since enactment, with UCare exiting Medicaid entirely and PacificSource leaving Lane County, Oregon.

The Payment Layer That Sits Inside the Certified Rate

State-directed payments are not marginal. Of 42 states with Medicaid managed care contracts, 41 had SDPs in place in 2026, channelling $137 billion a year in combined state and federal spending, with the federal share at $93 billion and $78 billion of that going to hospitals. The concentration is severe: California directs $10.6 billion of annual federal SDP spending, Texas $6.3 billion, North Carolina $5.2 billion, Illinois $5.1 billion.

The benchmark was commercial. KFF found 84 percent of the $93 billion federal total set relative to commercial rates, and Medicare hospital rates run 15 to 40 percentage points below commercial depending on service category and state. A cap at 100 to 110 percent of Medicare cuts straight through that layer in exactly the states carrying the most of it.

A 2024 CMS rule is what makes this a rate certification problem rather than a state budget problem. Before it, states could direct supplemental payments through mechanisms outside the capitation structure. The rule required all SDP pass-throughs to be incorporated into capitation rates, which improved transparency and created a direct chain from the SDP preprint to the certification to the soundness opinion. When the cap lands below what the preprint assumed, the capitation component built on that preprint sits above the legally payable amount.

Soundness Was Not Designed for a Statutory Change Mid-Period

Actuarial soundness under 42 CFR 438.4 requires rates projected to cover all reasonable, appropriate and attainable costs for the time period and population covered. The time period language is the constraint: a rate certified in April 2026 for July 2026 through June 2027 carries that certification across the whole period.

The escape hatch is narrow. States may modify capitation rates mid-period, but a change exceeding 1 percent of the certified rate requires complete re-certification filed as a contract amendment subject to CMS review, adding months between recognising an adequacy problem and correcting it. An MCO whose SDP pass-through revenue is cut by statute has only marginal movement available inside that ceiling.

This is a different class of event from trend variance. Cost trend deteriorating mid-year is within the range a sound rate is required to absorb. A statute reducing a specific payment mechanism after certification is not, and Medicaid managed care has not previously repriced provider payment architecture inside an active rating period at this scale. The Congressional Budget Office scored $840.2 billion of Medicaid spending reductions over ten years.

The grandfathering provision was meant to soften it and instead adds a second unknown. SDPs sufficiently advanced at enactment can continue above the cap until January 1, 2028, when a 10-percentage-point annual phase-down begins. Qualification turns on two terms CMS has not defined: "good faith effort" and "completed preprint."

For a certifying actuary that leaves three paths and no clean one: assume grandfathered status, assume non-grandfathered status, or bracket the rate as contingent on guidance that has not arrived. None produces an unqualified soundness opinion under 438.4. The CMS 2026-2027 Rate Development Guide, released February 2026, predates the enacted form of these provisions and does not address the question, and the July rating period did not wait for it.

The Revenue Cut and the Morbidity Drift Arrive Together

Semiannual eligibility redetermination for expansion adults, effective for renewals scheduled on or after December 31, 2026, is the provision that reaches the cost side. The Urban Institute projects it alone removing 2.0 to 3.1 million people in 2028, 10.7 to 17.0 percent of the 18.2 million average monthly expansion baseline.

Those exits are not random. Roughly 11 percent of expansion adults facing redetermination are disenrolled procedurally, not found ineligible but lost to unanswered renewal notices, and the members who navigate that reliably are residentially stable and more engaged with the health system. Members with complex chronic conditions, behavioural health diagnoses or long-term services dependencies do not lapse their own coverage by inaction. The healthier population cycles out; the higher-acuity population stays.

So the retained book carries higher average morbidity than the July 2026 certification assumed, and that drift is not in the rate. It is the adverse selection mechanics that destabilised the post-2014 individual market, compressed into a six-month cycle and running on a population whose retaining cohort is clinically heavier to begin with.

Pharmacy pushes the same way. Certified trend was built on Medicaid programs covering GLP-1s mainly for diabetes and excluding the obesity indication, and CMS launched the BALANCE model in 2026 to expand GLP-1 access on a voluntary basis. Branded GLP-1 pricing stays above $800 a month before Medicaid's mandatory rebates, and OBBBA's PBM pass-through requirements make that cost more visible per member than a spread model would.

Plan exits then redistribute the problem. The Big Five shed 1.4 million members, 3.8 percent, from 36.2 million to 34.8 million since enactment, with UCare leaving Medicaid entirely and PacificSource withdrawing from Lane County, Oregon. An exiting plan's members transfer to remaining plans at those plans' certified rates, so a plan that had attracted lower-acuity expansion adults hands its neighbours a population their rates were not built for.

California and Texas alone carry $16.9 billion of annual federal SDP spending, and 81 percent of SDPs above Medicare rates are financed wholly or partly through intergovernmental transfers and provider taxes, which OBBBA also restricts by banning new provider taxes in expansion states. The revenue cap, the morbidity drift and the financing restriction land on the same states in the same rating period, and none of them fits through a 1 percent adjustment.

Further Reading

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