The 2025 reconciliation law reduced federal Medicaid spending by an estimated $911 billion from 2025 through 2034, some of which stems from new restrictions on Medicaid state directed payments (SDPs) for hospital and other health care services. While states are generally prohibited from directing how managed care organizations (MCOs) pay for care, states can implement SDPs that require MCOs to increase rates or set minimum rates for specified Medicaid services. In authorizing SDPs, the Centers for Medicare and Medicaid Services (CMS) aimed to help states improve access to care and provider participation. Many states that contract with MCOs use SDPs to make uniform rate increases that function like supplemental payments in fee-for-service (FFS) Medicaid.

This issue brief describes SDPs and forthcoming policy changes stemming from the 2025 reconciliation law and the proposed regulation to implement those requirements and make other changes. A companion issue brief describes states’ current spending on SDPs before those policy changes take effect.  Key takeaways include:

• In 2016, CMS established SDPs and their use has grown since, contributing to higher federal Medicaid spending.
• A 2024 rule on Medicaid managed care spurred additional spending on SDPs but also established new restrictions on how states could pay MCOs to implement them.
• The 2025 reconciliation law established new limits on SDPs, capping them at or near Medicare rates.
• CMS released a proposed rule in May 2026 to implement the SDP provisions in the law and included several provisions that would expand the scope of new limits on SDPs, estimating that implementing the changes would reduce federal spending by $510 billion between 2026 and 2034.
• CMS’ estimated reductions in federal spending exceed those of the Congressional Budget Office (CBO) that accompanied the 2025 reconciliation law, but differences reflect variation in data and timing in addition to provisions that would expand the scope of SDP limits.

It is unknown how states and providers will respond to the new limits on SDPs and FFS Medicaid in the reconciliation law and accompanying rule. States may try to offset reductions in SDPs with increases in base payment rates, but offsetting reductions may be challenging due to other Medicaid financing changes (like limits on provider taxes) and more tenuous fiscal conditions. Some financially vulnerable providers could be forced to close or curtail services with less revenue from Medicaid, particularly if there are revenue losses from increases in the number of people without health insurance coming from Medicaid work requirements and reductions to Affordable Care Act premium subsidies. Other providers may be able to absorb reduced payments without changes to quality or access because research—including by KFF—suggests that average commercial rates are much higher than Medicare, reflecting consolidation in provider markets and constrained Medicare rates. However, providers that serve primarily Medicaid enrollees often have lower operating margins and may be more financially vulnerable than other providers, suggesting that safety net providers may be especially affected by the reduced revenues.

What are state directed payments (SDPs)?

The Centers for Medicare and Medicaid Services (CMS) established SDPs in 2016, allowing states to put in place requirements governing MCO payments to providers. States may use SDPs to require MCOs to adopt minimum or maximum payment rates for providers, provide uniform dollar or percentage increases to providers that supplement base payment rates, or implement value-based payment arrangements. The most common type of SDPs requires uniform rate increases that function similarly to supplemental payments in FFS Medicaid. Uniform rate increases instruct MCOs to make payments on top of their regular payment rates. They, along with SDPs that establish minimum or maximum fee schedules, require the state to specify a “benchmark.” Benchmarks are standardized rates to measure MCO rates relative to other payment rates such as Medicaid FFS, Medicare FFS, or average commercial rates. Since they were introduced in 2016, SDPs have become a core component of provider reimbursement in Medicaid (see Appendix for a timeline of SDP history).

A 2024 rule on Medicaid managed care spurred changes in SDP policy and higher federal spending on SDPs. Before 2024, there was no official cap on the total payment rate that accounted for base rates and SDPs, but CMS noted in the May 2026 proposed rule that it determined to use average commercial rates as the unofficial payment limit starting in 2018. The 2024 rule on Medicaid managed care codified the average commercial rate limit for hospital services, nursing facility services, and professional services at academic medical centers. CMS also indicated that it would continue applying the average commercial rate limit to other providers. Formalizing the payment limit for SDPs at average commercial rates likely increased states’ awareness of the limit and their confidence that SDPs at that level would be permitted to continue moving forward. As a result, the number of SDPs pegged to average commercial rates, and spending on those SDPs, increased after CMS released the final rule.

The 2024 rule also required states to incorporate all SDPs into their capitation rates (e.g., premium payments to MCOs) instead of using separate payment terms, which provide additional payments outside of the capitation rates. The change moves these payments from predictable, separate payments to more complex, risk-based arrangements, which may reduce states’ ability to target reimbursement for specific provider types. CMS eliminated separate payment terms due to concerns that the separate payments undermine the risk-based nature of managed care and are frequently driven by the financing of the non-federal share. MACPAC analysis found that over half of SDP arrangements approved between February 2023 and August 2024 were incorporated through separate payment terms.

Use of SDPs that paid providers with average commercial rates had been growing prior to the 2024 final rule and continued after CMS’ informal practice was codified. Tying payments to average commercial rates—which are substantially higher than the Medicare payment ceiling used for other Medicaid FFS supplemental payments—aimed to help Medicaid attract a broader network of providers and to ensure robust access to care for Medicaid enrollees. However, the new payments to health care providers resulted in higher Medicaid spending. In June 2024, the Congressional Budget Office (CBO) updated its Medicaid spending projections for 2025-2034 to reflect a 4% (or $267 billion) increase, with half of the increase attributed to expected growth in SDPs (driven in part by CMS’ projections in the final rule).

What changes to SDPs were included in the 2025 reconciliation law and CMS’ proposed regulations?

The 2025 reconciliation law created new payment limits for SDPs for four services, capping them at or near Medicare rates instead of average commercial rates. The law specified that the new limits would apply to inpatient and outpatient hospital services, nursing facility services, and professional services at academic medical centers. Under the limits, the total payment amount under the SDP may not exceed 100% of the Medicare payment rate in states that have adopted the Affordable Care Act (ACA) Medicaid expansion (“expansion states”) and 110% of the Medicare payment rate for non-expansion states. Payment rates for services without an applicable Medicare payment rate are limited to Medicaid fee-for-service rates. Certain SDPs are initially grandfathered (e.g., allowed to continue) but the total spending amount will be reduced by 10 percentage points each year (starting January 1, 2028) until they reach the allowable Medicare-related payment limit. At the time the bill was passed, the CBO estimated that revising the payment limit for SDPs would reduce federal Medicaid spending by $149 billion between 2025 and 2034.

CMS released a proposed rule in May 2026 to implement the SDP provisions in the law and included several provisions that would expand the scope of new limits on SDPs. The list below highlights some of the key provisions governing SDPs included in the proposed rule:

• Expanded scope of services. The 2025 reconciliation law specified that new limits applied to hospital services, professional services at academic medical centers, and nursing facility services. The proposed rule would apply the new payment limits to all services.
• Applicable in territories. The 2025 reconciliation law only applied to the 50 states and D.C., but the proposed rule would also apply to the territories. In FY 2025, Puerto Rico had four SDPs approved, which were projected to account for $131 million in federal Medicaid spending.
• Eliminates uniform rate increases. The 2025 reconciliation law established new ceilings on SDP payment limits but did not prohibit certain types of SDPs from being used. The proposed rule would eliminate uniform rate increases in future years, the most common type of SDP. It is unclear whether it will be possible for states to transition uniform rate increases to other types of SDPs, such as minimum or maximum fee schedules. When combined with the elimination of separate payment terms from the 2024 rule, this change effectively precludes states from using SDPs to provide supplemental payments in managed care that parallel arrangements in FFS.
• Phase-down of grandfathered SDPs. Starting with the first rating period after January 1, 2028, the proposed rule would reduce the total approved payment amount in grandfathered SDPs by 10% each year until they comply with the new limits in the 2025 reconciliation law. For example, if an SDP was approved at $1 billion, the first year’s decrease would be at least $100 million (unless the Medicare limit is reached in year 1 with a decrease of less than $100 million). This will cause some SDPs (particularly benchmarked to higher payment rates) to come into compliance somewhat earlier than if the SDP payment rate had been reduced by 10 percentage points (relative to Medicare rates) each year.

Beyond expanding the scope of new limits on SDPs, CMS’ proposed rule makes parallel changes for FFS payments that target specific providers. The proposed rule aims to align payment requirements across delivery systems by applying the Medicare-based payment limits for SDPs to some FFS payments (which govern all provider payments, not only supplemental payments). The new limits would apply to payments that target specific providers such as physicians, dentists, emergency and non-emergency medical transportation providers, and other licensed professionals. The new limits would not apply to payments that are already governed by other limits (e.g., upper payment limit rules). Those requirements would take effect for the first state fiscal year beginning on or after January 1, 2029.

The proposed rule also specifies the basis for new payment limits in SDPs and in FFS Medicaid payments that target specific providers.  Both types of payment limits would apply on a per-service (or per-discharge) basis, rather than being calculated in aggregate using an upper payment limit-like approach. Where possible, states would be required to use the published Medicare payment rates, drawing from the Medicare physician fee schedule, the hospital inpatient and outpatient prospective payment systems, and the skilled nursing facility prospective payment system. For providers who are paid based on their costs, such as critical access hospitals, cancer hospitals, and freestanding hospitals; states are instructed to use the Medicare cost reports as Medicare does.

Although most of the limits would be calculated similarly in SDPs and in targeted FFS Medicaid payments, there are some small differences. The most notable difference occurs when there are no Medicare payment rates available, as occurs for services that Medicaid covers but Medicare does not. In such instances, SDP payments would be limited to Medicaid FFS rates, which include rates established by 1115 waivers but exclude any supplemental payments. For FFS payments targeting specific providers, states would be required to develop methods for identifying reasonably comparable Medicare rates, which would then be the basis for the payment limit.

How might forthcoming changes affect federal spending on SDPs in the future?

In its May 2026 proposed rule, CMS estimates that SDP changes would reduce federal Medicaid spending by $510 billion between 2026 and 2035. Several factors contribute to the differences between CMS estimates and CBO’s estimate of limiting SDPs in the 2025 reconciliation law (which was $149 billion through 2034).

• The CMS estimates account for SDPs in preprints available through December 31, 2025. During the 2025 calendar year, many states submitted new SDP proposals (some of which were submitted during deliberations on the reconciliation bill in anticipation of future restrictions). CMS posted many newly approved SDPs after the reconciliation law was enacted, some of which were posted 6 to 12 months after their start date. As a result, there are more SDPs in place than was known during deliberations over the 2025 reconciliation law.
• The CMS estimates are through 2035. Most of the estimated reductions in federal spending on SDPs do not start until FY 2028. As a result, the period between 2026 and 2035 will have an additional year of substantive changes in SDP spending relative to earlier estimates.  In CMS’ year-by-year analysis, the estimated cuts to federal Medicaid spending from limiting SDPs are $81 billion in the year 2035, which would not have been included in the CBO analysis.

Beyond using different data and covering a different period, CMS provides estimates for some but not all specific provisions and policy decisions included in the rule. It is unknown how much the new provisions contribute to the cost difference because CMS did not itemize the effects of all decisions in the proposed rule. For example, one of the most significant decisions was to eliminate the option for states to use uniform rate increases in SDPs after the new limits are fully implemented. When combined with other policies (including the 2024 prohibition on separate payment terms), this change effectively eliminates the option for states to use SDPs to make supplemental payments in Medicaid managed care. The effects of this change interact with other policy changes (including changes to provider taxes) so it’s difficult to quantify how much this affected CMS’ estimates.

In some cases, the proposed rule describes how much certain decisions affected estimated spending reductions:

• The biggest single change in dollar terms is the acceleration of grandfathering requirements which will bring SDPs into compliance with the new Medicare-related limits more quickly (estimated to increase the spending reduction by $17 billion over 10 years).
• CMS estimated that extending the new limits on SDPs to services other than the four enumerated in the law would increase spending reductions by $3.5 billion over 10 years.

New limits on FFS payment rates could reduce federal spending by $1.5 billion over 10 years. CMS estimates that 25 states would have to amend state plans to come into compliance, and that the change would reduce federal Medicaid spending by $1.5 billion over 10 years. Although $1.5 billion seems small compared to the total reduction in federal Medicaid spending, the affected providers account for much smaller shares of overall Medicaid spending. As a result, there could be major implications for affected services in affected states.

Appendix Figure: Timeline of SDP Policy Changes

The 2025 reconciliation law reduced federal Medicaid spending by an estimated $911 billion from 2025 through 2034, some of which stems from new restrictions on Medicaid state directed payments (SDPs) for hospital and other health care services. While states are generally prohibited from directing how managed care organizations (MCOs) pay for care, states can implement SDPs that require MCOs to increase rates or set minimum rates for specified Medicaid services. In authorizing SDPs, the Centers for Medicare and Medicaid Services (CMS) aimed to help states improve access to care and provider participation. Many states that contract with MCOs use SDPs to make uniform rate increases that function like supplemental payments in fee-for-service (FFS) Medicaid. This issue brief analyzes Medicaid spending by state on SDPs that require prior CMS approval to better understand the use of SDPs before new limits in the reconciliation law take effect. A companion issue brief provides more details about the forthcoming changes.

Using a sample of SDPs estimated to currently be in effect, the analysis includes 305 preprints from 41 states, from SDPs that were publicly available and approved from January 1, 2024 through May 12, 2026. Preprints are application forms which document how states direct Medicaid managed care plans to pay providers using SDPs. Preprints are the only national source of data on SDPs but are limited because there are gaps in data provided by the preprints (see Box 1 and Methods for more details).

KFF’s estimates of spending on SDPs are consistent with CMS’ estimates in the May 2026 proposed rule on SDPs. However, KFF estimates provide state-level data and other information not included in the proposed rule, use the most recently approved preprint for each SDP (instead of providing year-by-year estimates and projections), and include SDPs that were approved between January and May 2026 (which are not included in CMS’ analysis). This analysis finds that:

• KFF estimates that annual spending on SDPs is $137 billion in total spending and $93 billion in federal spending.
• There are 41 states with SDPs in place (including the District of Columbia, which is hereafter referred to as a state), but the number, structure, and financial impact vary.
• Most (84%) of estimated SDP spending is for hospital services.
• Most (84%) of estimated SDP spending is from SDPs that use commercial (private) payment rates as a basis for MCO payments, but data on specific payment levels are often not publicly available.

Much remains unknown about how forthcoming policy changes for SDPs will affect states, providers, and Medicaid enrollees, but data about existing SDPs highlights states and services for which changes could be most substantial.

How much spending currently flows through SDPs?

Using a sample of preprints estimated to be currently in effect, KFF estimates that Medicaid is spending about $137 billion per year through SDPs. Based on states’ projected spending in the preprints, the federal government pays an estimated 68% ($93 billion) of the total, and the remainder is paid through the state share of SDP financing. The federal and state shares of financing are determined using the standard formulas for Medicaid financing and reflect the state’s federal matching assistance percentage, along with adjustments for some services and eligibility groups for which the federal government pays a higher rate. The state share of financing may come from a variety of sources including state general fund revenues, provider taxes, and intergovernmental transfers.

Financing for SDPs is often complex, and providers may pay for part of the state share of spending through provider taxes and intergovernmental transfers. States may finance the state share of Medicaid spending through provider taxes and intergovernmental transfers (such as transfers from public hospitals), which means those payments are not new revenues for the providers receiving them. In the proposed rule on SDPs, CMS reports that among current SDPs with payment rates above Medicare rates:

• 40% are financed wholly or in part by intergovernmental transfers,
• 27% are financed wholly or in part by provider taxes, and
• 14% are financed wholly or in part by both intergovernmental transfers and provider taxes.

Combined, 81% of those SDPs are financed wholly or in part by intergovernmental transfers and provider taxes. In such cases, it is difficult to determine the amount of new revenues for health care providers. For that reason, KFF’s analysis focuses on changes in federal spending rather than changes in total spending.

How many states have publicly available SDPs?

Nearly all states with comprehensive managed care in Medicaid are estimated to use state directed payments, but the number, structure, and financial impact of these payments vary. Of the 42 states that contract with MCOs, all but two states (Arkansas and North Dakota) have approved SDPs that are estimated to still be in effect. (Arkansas has two approved SDPs for the 2022 rating period, but none have been approved since.)

Vermont does not contract with comprehensive, risk-based MCOs but does have an SDP to implement an accountable care organization program that is transitioning providers to value-based payments through Medicaid. Under the accountable care model, provider groups contract with state Medicaid agencies to assume accountability for the costs and quality of care. The Accountable Care Organization distributes payments to contracted providers in the way comprehensive MCOs pay contracted providers. In essence, the SDP functions similarly but is directing payments through an accountable care organization instead of through an MCO.

The number of SDPs and dollars spent through SDPs varies by state:

• New Jersey and Ohio have the largest number of SDPs (28 and 20 respectively), while two states (Minnesota and West Virginia) and DC have one SDP each (data not shown).
• California has the highest projected federal SDP spending ($10.6 billion), followed by Texas ($6.3 billion), North Carolina ($5.2 billion), and Illinois ($5.1 billion).

Vermont has the lowest projected federal SDP spending ($12.4 million), followed by Maryland ($52.6 million), Missouri ($145 million), and Minnesota ($161 million). Although this analysis focuses on trends in federal spending, patterns are similar when looking at total spending (Appendix Table 1). All 10 states with the highest federal spending also are in the top 10 states for total spending. Many—but not all—of these SDPs could be affected by the new requirements for SDPs in the 2025 reconciliation law.  

How are SDPs used across provider types?

An estimated 84% of federal dollars spent through SDPs that require CMS approval pay for hospital services (Figure 3). Of $93 billion in annual projected federal SDP spending, an estimated $78.0 billion (84%) is directed to hospital services. (The share of total spending that pays for hospital services is the same as the share of federal spending.) Professional services at academic medical centers ($3.2 billion) and nursing facility services ($2.1 billion) comprise the next largest shares of federal SDP spending. Although most spending is from SDPs exclusively targeting hospital services, many SDPs include spending for multiple service types and do not specify how much of the total spending is for each service, which creates uncertainty in the estimates (see Methods).

The largest number of SDPs also pay for hospital services, although 64 SDPs are directed to multiple service types, including hospitals. Specifically, of the 305 preprints included in this analysis, 107 were exclusively for hospital services. The next most frequent services were behavioral health services (20 SDPs), professional services at academic medical centers (18), and nursing facility services (17) (data not shown). The remaining preprints were directed exclusively to other services, or to combinations of services.

What types of payment rates do existing SDPs require of MCOs?

Most spending (84%) comes from SDPs that use average commercial rates as a benchmark, which likely reflects the federal requirements that determine which SDPs require a preprint. The share of spending for SDPs that use average commercial rates is high relative to the share of preprints that use average commercial rates: Nearly two-thirds (65%) of preprints are benchmarked to average commercial rates. The dominance of average commercial rates in the publicly available preprint data likely reflects the fact that when benchmarks equal FFS Medicare or Medicaid rates, no preprint is required. Only a small share of spending is from SDPs that do not require a benchmark.

Roughly a quarter of SDP spending ($23 billion) is paid at or above 90% of average commercial rates, while over one third ($38 billion) is benchmarked to ACR rates that are not publicly available. An additional $10 billion is paid at 70%–90% of average commercial rates. Among the SDPs that do not use ACR as a benchmark, missing payment rates are somewhat less common. Among SDPs that use Medicare rates as a benchmark, just over half result in total payment rates greater than what Medicare pays. (Other SDPs that use Medicare rates as a benchmark may pay at or below Medicare.)

Methods

Data source: This analysis uses data available from the list of approved state directed payment preprints published by the Centers for Medicare and Medicaid Services (CMS) as of May 12, 2026. The approved state directed payment (SDP) preprints are PDF versions of forms that are completed by states and approved by CMS. States are required to seek approval using such a preprint for any SDP that requires managed care organizations (MCOs) to pay for services at any rate other than fee-for-service (FFS) Medicare or Medicaid rates. The approved preprints are often posted online 6–12 months after their start date, although some approved preprints are posted online much later.

KFF developed a Python script to download the available PDFs, extract relevant data from them, and standardize certain fields. Each preprint was turned into one row in a spreadsheet. Data from tables within the preprint were extracted and converted into separate tables in KFF’s data file with each row in the preprint table converted into a row in the spreadsheet table.

SDP preprint inclusion criteria: KFF included all SDPs in the analysis with a rating period start date of January 1, 2024 onwards for the 50 states and Washington DC (hereafter referred to as a state). Puerto Rico was the only territory that had published SDPs, which were excluded. In each case, KFF only kept the most recent preprint for any given SDP. For example, if an SDP had an initial approval in 2024 and then renewals in 2025 and 2026, KFF would only include the 2026 renewal in the final dataset. Out of the 305 preprints included in this analysis, 24 (totaling $8.8 billion in federal spending) ended in calendar year 2024.

A small number of SDP preprints were excluded due to file formatting or data validity issues. Specifically:

• Data from five preprints excluded from this sample were encoded differently, so the data could not programmatically be extracted into the dataset, and were therefore excluded from the analysis (two from New Hampshire, one from Ohio, and two from Florida, totaling $89 million in federal spending for one year).
• Data from preprints that had obvious data quality issues were excluded from this sample.  For instance, two were from Illinois (which projected total annual spending of more than $100 billion) while one from Minnesota did not report spending data in the preprint.

KFF also reviewed all preprints with end dates prior to July 1, 2025, and excluded preprints for the following reasons.

• The preprint was likely funded from COVID-19 relief dollars (including the increased federal funding for home care from the American Rescue Plan Act) and so unlikely to still be in place.
• The preprint was likely combined into a different preprint when renewed or was otherwise renamed when renewed.
• The preprint ended in 2024, and online research suggests that the payment was discontinued.

See Methods Table 1 for a list of the inclusion criteria, the counts of preprints after each criterion was applied, and the federal spending for preprints that were retained at each stage.

Calculating total spending on SDPs: This analysis used the states’ projected total, federal, and state spending from the preprint. Most preprints are for a one-year period but some are for longer or shorter periods. In such cases, KFF adjusted the data to be a one-year equivalent. When preprints were for periods shorter than 12 months, dollars were scaled up (e.g., if the preprint was for 6 months, the spending was multiplied by two) and for preprints that were for periods longer than 12 months, spending was scaled down (e.g., retaining two-thirds of spending if the preprint extended for 18 months).

KFF also manually reviewed the federal spending numbers because some states reported them as percentages and others reported them as dollar amounts. Manual review ensured the Python script had adequately handled the different reporting structures.

In most cases, the state and federal shares equaled the total share, but in 8 states, this was not always the case (see Appendix Table 1).

Calculating SDP spending by service type: For preprints that made payments for multiple service types (which accounted for $32.6 billion in federal spending), spending was apportioned across service types.

• For SDPs directed to hospital and non-hospital services, 90% of spending was allocated to hospital services. Remaining dollars were apportioned equally among any other service types.
• For SDPs directed to both inpatient and outpatient hospital services, 68% of hospital spending was allocated to inpatient services and 32% was allocated to outpatient services. This assumption does not affect the estimates of spending by service type but is relevant for calculating the amount of spending by benchmark rate.
• For SDPs that did not direct any spending to hospital services, spending was allocated equally among named services.

Apportioning spending across service types is difficult and KFF used a variety of sources to approach developing the most realistic assumptions feasible. KFF analyzed data on Medicaid spending including CMS-64 spending by service type, data on Medicaid spending by service type from the National Health Expenditures, the Congressional Budget Office Medicaid baseline, and existing studies on hospital payment policies such as those from the Medicaid and CHIP Payment and Access Commission (MACPAC). All of those data points suggest that the vast majority of SDP spending pays for hospital services, and $53.1 out of the $60.5 billion in federal spending from preprints directed to a single provider type went to hospital services. KFF also strove to use an assumption that resulted in estimates of hospital SDP spending that are similar to what could be expected on the basis of other data and research as described above.

When identifying the service types in the preprints, the Python script attempted to align service types between preprint Table 2 (which specifies payment rates for sets of providers) and preprint question 20 (a checklist of services included in the SDP). In many cases, this alignment involved some uncertainty, requiring manual review and classification of service types.

Identifying benchmarks for MCO payments: The most common type of SDPs requires MCOs to make payments that are on top of the regular base payment rate (as opposed to limiting or replacing the negotiated rate). In such cases, payments are measured using a “benchmark” or standardized rate to compare the MCO rates to other payment rates such as those of Medicaid FFS, Medicare FFS, or the average among commercial payers (“average commercial rates”). Among the 305 preprints in this sample (accounting for $93.1 billion in federal spending), 264 preprints are required to report a benchmark (accounting for $87.9 billion in federal spending). KFF used the Python script to identify the applicable benchmark type from the preprint, but also manually reviewed the data since states sometimes used inconsistent terminology to report the same benchmarks.

Identifying payment levels: To identify how current payment rates align with the new limits on SDPs in the reconciliation law, KFF first needed to identify payment levels in the preprints. The level is specified as a percentage of the benchmark (e.g., 90% of average commercial rates or 140% of Medicare rates). Both types of payments were pulled from Table 2 when available.  Payment rates for inpatient and outpatient hospital services were tracked separately with each row in Table 2 when applicable.

Methods Table 1

Appendix Table: States’ Number of and Spending on SDPs

The Medicare Part D prescription drug benefit was designed to offer Medicare beneficiaries the choice of drug coverage from either stand-alone prescription drug plans (PDPs) for people in traditional Medicare or Medicare Advantage prescription drug plans (MA-PDs) that offer both medical and drug benefits, with plans competing on premiums, coverage, and cost sharing. Increasingly, however, PDPs and MA-PDs are competing on uneven terms, in part because the payment system for Medicare Advantage plans enables MA-PDs to lower Part D premiums or reduce Part D cost sharing, making drug coverage from Medicare Advantage plans appear considerably cheaper, or even premium-free, to the beneficiary. The payment advantage for MA-PD sponsors makes it harder for PDP sponsors to compete on premiums, which may be especially challenging when all Part D plan sponsors are facing more cost pressures associated with a redesigned Part D benefit that shifted more costs onto plans and the loss of rebates for selected drugs under the Medicare Drug Price Negotiation program.

The federal government has recently taken steps to mitigate premium increases for Part D coverage, through both a provision in law capping annual growth in the base beneficiary premium to 6% for PDPs and MA-PDs and a temporary premium stabilization demonstration solely for PDPs. While these efforts have helped prevent an increase in the overall average PDP premium, the average premium for drug coverage remains significantly higher for PDPs than for MA-PDs. Recent years have also seen a decline in the average number of PDPs available to beneficiaries, which might make plan comparisons easier but might also make it harder to find an affordable plan that meets an individual’s unique needs. This reduction in the number of PDPs stands in sharp contrast to the MA-PD market where plan offerings have generally been increasing, though they have declined slightly over the past couple of years. 

This brief discusses the growing instability of the Part D stand-alone drug plan market and how the Medicare Advantage payment system makes it harder to maintain competitive and affordable options in the PDP market.

Takeaways

• Reflecting shifts in Part D plan availability in recent years, the average Medicare beneficiary now has nearly three times more options for Part D coverage from MA-PDs than from PDPs (32 vs. 11), a substantial change from five years ago when the average beneficiary had 30 PDP options and 27 MA-PD options.
• In 2026, MA-PD sponsors allocated over $600 in rebates per individual Medicare Advantage plan enrollee, or more than $50 per member per month, for Part D benefit enhancements and premium reductions. Due to rebate-financed Part D premium buydowns, most MA-PD enrollees are in plans charging no premium, including for drug coverage, in 2026.
• PDP sponsors are also receiving additional temporary premium subsidies through the PDP Premium Stabilization Demonstration, established to prevent substantial PDP premium increases as a result of the Part D benefit redesign. The federal government is providing around $190 in annual premium subsidies per PDP enrollee under the stabilization demonstration in 2026, based on a projected $16 per member per month premium reduction.
• Under a provision of the Inflation Reduction Act capping annual growth in the Part D base beneficiary premium to 6%, the federal government is providing a higher direct subsidy payment to both PDP and MA-PD plan sponsors to cover their basic Part D benefit costs, relative to what they would have received absent the 6% base premium cap, which helps absorb cost increases under the IRA’s Part D benefit redesign and mitigates premium increases for both PDP and MA-PD enrollees. The 6% base premium cap is projected to reduce the average premium by a similar amount in both markets in 2026.
• On a per member per month basis, the amount of rebates used by Medicare Advantage plans to buy down MA-PD Part D premiums in 2026 is projected to be over three times greater than the amount of premium subsidies to PDPs under the temporary premium stabilization demonstration—$53 for MA-PDs vs. $16 for PDPs. (These projections are based on 2025 Part D enrollment, not taking into account plan switching or new enrollment for 2026.)
• The total cost to the federal government of rebates to Medicare Advantage plans used for Part D premium buydowns is 3.5 times more than the amount of subsidies to PDP sponsors under the premium stabilization demonstration in 2026 ($13 billion versus $3.6 billion).

The PDP Market Has Been Shrinking in Recent Years

For Medicare beneficiaries who are enrolled in traditional Medicare, which is somewhat less than half of all people with Medicare, getting Medicare Part D prescription drug coverage means enrolling in a stand-alone PDP, a market that has been shrinking in recent years. Over the last five years, the number of PDPs available to the average beneficiary has decreased from 30 in 2021 to 11 in 2026, reflecting a decline in the total number of PDPs available around the country (Figure 1). By comparison, over this same period, the average number of Medicare Advantage drug plans (MA-PDs) increased from 27 to 32. The number of premium-free (“benchmark”) PDPs available to the average Medicare beneficiary who qualifies for the Part D Low-Income Subsidy (LIS) is even lower, decreasing from 8 benchmark PDPs in 2021 to 2 in 2026. This matters because for low-income Medicare beneficiaries who are eligible for the LIS, enrolling in certain PDPs provides the only guaranteed option for premium-free drug coverage and reduced cost sharing.

The Medicare Advantage Payment System Gives MA-PDs a Premium Advantage Compared to PDPs

One factor that has made the PDP market less competitive relative to MA-PDs is a payment system that gives sponsors of MA-PDs a clear advantage in terms of premiums. The Medicare Advantage payment system allows private insurers to retain a portion of the difference between their estimated costs for providing Medicare Part A and Part B services and the maximum Medicare Advantage payment rate. This portion of the federal payment to Medicare Advantage plans is called the “rebate” and it must be used by insurers to reduce the costs of benefits provided under the plan. In the absence of these payments, Medicare Advantage enrollees would face higher costs, including for Part D coverage. To the extent rebates are used to buy down Part D premiums or enhance Part D benefits, they provide a subsidy for Part D coverage to Medicare Advantage enrollees.

In 2026, Medicare Advantage plan sponsors are projected to allocate more than $600 in rebates per enrollee toward enhanced Part D coverage in individual MA-PDs, or just over $50 per member per month. Sponsors of individual MA-PDs use these federal rebates to subsidize Part D coverage by lowering or eliminating their Part D premiums and offering Part D supplemental benefits, including lower or no deductibles for drug coverage and lower cost sharing. Based on the 21 million enrollees in individual MA-PDs, the total amount of rebates from the federal government used for Part D buydowns is $13 billion in 2026.

These rebate subsidies are unavailable to Part D sponsors for PDPs, which means that beneficiaries in traditional Medicare who get Medicare Part D coverage through a PDP typically face higher premiums for their drug coverage than MA-PD enrollees and have far fewer zero-premium options in the PDP market. In 2026, nearly 8 in 10 (79%) MA-PD enrollees in individual plans without low-income subsidies pay no monthly premium for Part D coverage compared to around 3 in 10 (28%) PDP enrollees. For the average Medicare beneficiary in 2026, 21 out of their 32 MA-PD options charge no premium for drug coverage, while 2 out of their 11 PDP options charge no premium.

PDP Sponsors Are Receiving Additional Temporary Premium Subsidies Through the PDP Premium Stabilization Demonstration

The voluntary PDP Premium Stabilization Demonstration, established in 2024 under the federal government’s Section 402 demonstration authority and intended to run for three years, provides additional premium subsidies to sponsors of PDPs to prevent substantial premium increases associated with the Part D benefit redesign. Under the Inflation Reduction Act, the Part D benefit was redesigned to include a new out-of-pocket drug spending cap for Part D enrollees and other changes that significantly shifted costs under the drug benefit from the federal government to Part D plan sponsors, with sponsors paying a larger share of costs above the out-of-pocket spending cap and potentially passing those higher costs along to beneficiaries through higher premiums. The premium stabilization demonstration was targeted to PDP sponsors only, because CMS reported large increases and greater variation in the bids submitted by Part D plan sponsors of PDPs than MA-PDs for drug coverage in 2025, indicating greater variability in the expected impact on basic benefit costs and premiums in the PDP market associated with benefit redesign and other drug pricing cost pressures. In 2026, the federal government is providing around $190 in annual premium subsidies per PDP enrollee under the demonstration, based on MedPAC’s projection of $16 in premium subsidies per member per month in 2026, for a total cost of $3.6 billion.

Both PDP and MA-PD Plan Sponsors Are Receiving Higher Direct Subsidy Payments for Part D Benefit Costs, Which Help Mitigate Premium Increases

The federal government is providing a higher direct subsidy payment to Part D plan sponsors resulting from a provision of the Inflation Reduction Act capping annual growth in the base beneficiary premium to 6%, which helps absorb cost increases under the Part D benefit redesign and also mitigates premium increases. Along with changes to the Part D benefit design and other drug pricing provisions, the IRA capped the increase in the Part D base beneficiary premium to 6%. The base premium is calculated as a share of average plan bids for basic Part D benefits submitted by both PDPs and MA-PDs. As a result of the 6% base premium cap, the federal government is providing a larger direct subsidy payment to both PDP and MA-PD sponsors to cover their basic Part D benefit costs, relative to the level of direct subsidies they would have received without the 6% cap. The cap also has the effect of reducing Part D premiums paid by both PDP and MA-PD enrollees relative to what they would have paid in the absence of the cap (although this 6% cap doesn’t apply to the individual premiums that plans charge). According to MedPAC, the 6% base premium cap is projected to reduce the average premium by a similar amount in both markets in 2026 (as described further below).

The Part D Premium Reduction from Rebates Used by MA-PD Plans is Projected to be Over Three Times Greater Than from the PDP Premium Stabilization Demonstration on a per Member per Month Basis in 2026—$53 vs. $16

Data from MedPAC shows the differential premium impact of the various subsidies provided by the federal government to PDP and MA-PD plan sponsors, with MA-PD premiums substantially lower than PDP premiums as a result. On a per member per month basis, the amount of rebates used by Medicare Advantage plans for Part D premium buydowns in 2026 is projected to be more than three times greater than the amount of subsidies provided to PDPs under the temporary stabilization demonstration—$53 for MA-PDs vs. $16 for PDPs. (MedPAC’s estimates are projections for average monthly premiums per member per month in 2026, based on 2025 enrollment and not accounting for plan switching or new enrollees for 2026.)

After premium subsidies from the 6% base beneficiary premium cap and rebates, the average monthly Part D premium for individual MA-PDs is projected to be $9 per month, compared to an average monthly premium of $44 per month for PDPs, after accounting for the 6% cap and the PDP premium stabilization subsidies (Figure 3). MedPAC’s estimates show that without these extra subsidies, average monthly premiums for MA-PDs and PDPs would be on par with each other in 2026 (with or without the 6% base beneficiary premium cap). (These estimates are MedPAC’s projections for average monthly premiums per member per month in 2026, based on 2025 enrollment and not accounting for new plans, plan changes during open enrollment, or new enrollees for 2026, and therefore differ from other estimates published recently in a separate KFF brief, which are based on March 2026 enrollment and take into account new plans, plan switching, and new enrollees for 2026.)

For individual MA-PDs, the average monthly premium is projected to be $89 lower in 2026 than it would have been without the subsidies—from $98 per month to $9 per month. Rebate subsidies for Part D premium buydowns account for $53 of the premium reduction and subsidies from the 6% cap account for $36 of the reduction.

For PDPs, the average monthly premium is projected to be $53 lower in 2026 than it would have been without the additional subsidies—from $97 per month to $44 per month. Subsidies from the premium stabilization demonstration account for $16 of the premium reduction, while subsidies from the 6% cap account for $37 of the reduction.

The Total Amount of Medicare Advantage Rebates Used for Part D Premium Buydowns in 2026 is 3.5 Times Greater than Subsidies Provided Through the PDP Premium Stabilization Demonstration

The $13 billion in rebates provided by the federal government to individual Medicare Advantage plans used to buy down MA-PD Part D premiums in 2026 is 3.5 times larger than the $3.6 billion in premium subsidies to PDPs under the premium stabilization demonstration (Figure 2). According to GAO,the cost of the PDP premium stabilization demonstration for the first and second years of operation totaled $9.8 billion ($6.2 billion in 2025 and $3.6 billion in 2026). The cost of the demonstration was lower in 2026 than in 2025 because the Trump administration reduced the level of the premium subsidies provided to PDP sponsors in the second year of the demonstration. By comparison, rebates provided to individual Medicare Advantage plans used for Part D premium buydowns totaled $23.7 billion in 2025 and 2026 ($10.6 billion in 2025 and $13.0 billion in 2026). Between 2020 and 2026, rebates to Medicare Advantage plans to offer enhanced Part D benefits, including premium buydowns, totaled $82.2 billion. (These estimates exclude the aggregate cost of extra direct subsidies provided under the 6% base beneficiary premium cap, but this subsidy is applied equally across all plans.)

Recent Trends in the PDP Market Could Make It Harder for Traditional Medicare Beneficiaries to Find Affordable Drug Coverage that Meets Their Needs

A continuation of recent trends in the Part D market—fewer PDPs coupled with higher average premiums for PDPs than MA-PDs—could diminish the ability of Medicare beneficiaries in traditional Medicare to find PDPs at a comparatively affordable price, especially for those with modest incomes, which could make enrollment in Medicare Advantage more likely. Although there are some low-premium PDP options in 2026, roughly half of PDP enrollees are in plans charging $10 or more per month and 20% are paying $100 per month or more in 2026. The choice to enroll in a PDP versus an MA-PD plan comes with tradeoffs that extend beyond prescription drug coverage. While Medicare Advantage plans typically charge zero premium beyond the standard Part B premium and offer extra benefits beyond what is covered under traditional Medicare, they also have more limited provider networks and greater use of prior authorization than in traditional Medicare. Greater financial pressure on Part D plan sponsors that results in additional PDP withdrawals could also further reduce premium-free benchmark PDP options for low-income Medicare beneficiaries. Overall, instability in the PDP market has larger implications for the viability of traditional Medicare as an option for beneficiaries nationwide, but especially for beneficiaries who live in rural areas, who are more likely to be enrolled in traditional Medicare and rely more on drug coverage from PDPs than Medicare Advantage plans.

As of June 8, 2026, six carriers have announced that they will exit the ACA Marketplaces in plan year 2027, either in some or all states that they are currently offering plans: Cigna Health, CareSource, PacificSource, Scott and White, Providence Health, and Taro Health. These insurer exits, expected to impact roughly a third of states, follow the expiration of the enhanced premium tax credits at the end of 2025, which drove sign-ups to fall by over a million from the 2025 to 2026 Open Enrollment Periods—with further membership declines in the ACA Marketplaces expected as the year progresses. ACA Marketplace enrollment declines affect the size of the potential market for insurers, and, potentially, the risk pool—to the extent that healthier than average enrollees are more likely to drop coverage.

As people leave the Marketplace, insurers may reassess the profitability of their Marketplace participation and decide to pull out in the future. Cigna has decided to leave the individual market in 2027 to focus on other segments given the lack of potential to grow their ACA Marketplace business. Cigna, which reported first-quarter on-exchange enrollment of over 350,000 individuals, will exit the 11 states in which it currently participates both on- and off-exchange. In some cases, multiple insurers are announcing exits in the same state, such as in Indiana, Oregon, and Texas. With fewer insurers participating in the ACA Marketplaces, remaining insurers will have less competition and consumers will be left with fewer choices. For example, after the departure of CareSource and Cigna from Indiana, only three companies will remain in that state’s Marketplace if no other companies enter.

In 2025, an average of 9.6 insurers per state participated in the ACA Marketplaces, but this number has since declined to 9.0 insurers in 2026, driven primarily by the exit of Aetna CVS from the Marketplaces. It is possible that more insurers will announce exits ahead of the 2027 plan year and average insurer participation in the ACA Marketplaces will continue to decline. Despite the number of insurers that have decided to exit the ACA Marketplaces for plan year 2027, at least one insurer (Colorado Access) has indicated that it is entering the market.

While insurer participation in the ACA Marketplaces is not yet fully in focus, there are no signs at this point that there will be “bare” counties with no insurers at all, which was a major concern during an earlier period of instability.

For the first time since the enhanced premium tax credits were introduced in 2021, insurer participation in the ACA Marketplaces has gone down. This drop follows the expiration of the enhanced premium tax credits at the end of 2025 and is primarily driven by the exit of Aetna CVS from 17 states as well as exits from other insurers. While the average number of insurers per state offering plans in the Marketplaces in 2026 is lower than in the years after the enhanced premium tax credits were established, more insurers are now offering plans than were before the enhanced tax credits.  

Key Findings:

• The average number of issuers offering plans in the ACA Marketplaces has declined from a record high of 9.6 issuers per state in 2025 to 9.0 issuers per state in 2026.
• In total, 18 states experienced a net decrease in the number of issuers offering ACA Marketplace plans.
• Three in 10 counties have fewer participating ACA insurers than last year. In 165 counties, only one issuer is offering plans on the ACA Marketplace, up from 93 counties in 2025.

Insurer Participation

National Level

Nationally, average insurer participation in the ACA Marketplaces has decreased from the record high of 9.6 insurers per state in 2025 to 9.0 insurers per state in 2026. This decrease follows the nationwide departure of CVS from the Exchanges and marks the first time since 2018 that the average number of insurers in the ACA Marketplaces has gone down. Insurer participation on the ACA Marketplaces fell in 2017 with the exit of UnitedHealthcare from most states. In 2018, following several attempts to repeal the ACA in Congress as well as changes to enforcement of the individual mandate and payments for cost-sharing reductions, many more insurers exited or scaled back their participation. As the Marketplace stabilized in the following years, participation in the ACA Marketplaces steadily grew with some insurers returning to the Marketplace and several others expanding their footprints.

One factor that contributes to the number of insurers participating in the Marketplaces is the number of people with coverage. After the introduction of the enhanced premium tax credits in 2021, enrollment in the Marketplaces reached new records. In line with this trend, the number of insurers offering plans in the ACA Marketplaces increased significantly in 2022. Data shows that after the expiration of the enhanced premium tax credits, 2026 Open Enrollment Period sign-ups declined by over one million people relative to last year; and the number of people who pay to maintain and “effectuate” their coverage will likely decline throughout the year. KFF estimates that average effectuated enrollment in the Marketplaces could decline by about five million people from 2025 to 2026.

ACA Marketplace enrollment declines affect the size of the potential market for insurers and, potentially, the risk pool—to the extent that healthier than average enrollees are more likely to drop coverage. As people leave the Marketplace, insurers may reassess the profitability of their Marketplace participation and more may decide to pull out in the future, either fully or in select states. Several insurers have already announced departures for the 2027 plan year. KFF’s Insurer Participation Tracker maps announced insurer exits and entries for 2027.

State Level

The five states with the most insurers offering plans in their ACA Marketplaces in 2026 are Texas (15), New York (12), California (11), Florida (11), and Wisconsin (11). Going into 2026, most states had the same number of issuers participating in their Marketplaces as in 2025.

In 18 states, the number of insurers offering ACA Marketplace plans in 2026 is lower than in 2025. Illinois and Michigan saw the greatest net decrease in the number of carriers, with three fewer insurers participating in their Marketplaces than in 2025.

Four states (Alabama, Iowa, Louisiana, and Washington) experienced a net increase of one insurer. For example, Oscar Health newly joined the Exchange in Alabama and Elevance Health (doing business as Wellpoint) began offering plans in Washington.

The most prominent insurer in the Marketplace is UnitedHealth, which offers Marketplace plans in 30 states. Some of the other major players currently in the Marketplace include Centene Corporation (29 states), Oscar Health (20 states), Elevance Health (18 states), Molina Healthcare (14 states), Cigna Health (11 states), and Kaiser (10 states). CVS, which ran Aetna plans in the ACA Marketplaces, was a significant insurer participating in the ACA Marketplaces in 2025. Before leaving the Marketplace for plan year 2026, CVS Aetna offered plans in 17 states.

Some of the aforementioned insurers are among those with the largest number of enrollees in the individual market (the vast majority of which is made up of people in the Marketplace in 2025). For example, in 2024, 18% of people in the individual market were enrolled in a plan offered by the Centene Corporation and 8% of individual market enrollees were in a plan offered by CVS.

County Level

Even if an insurer remains in a state, it may significantly change its footprint from year to year. Insurers adjust their footprints by expanding into some counties or withdrawing from others. For example, UnitedHealth scaled back its footprint in Kansas from 87% of counties in 2025 to 33% in 2026, and in South Carolina from 72% of counties in 2025 to 37% in 2026. However, it also expanded its service area in Oklahoma, offering plans in 74% of counties in 2026, up from 18% in 2025. Another major player in the ACA Marketplaces, Centene Corporation, went from offering plans in all counties in North Carolina in 2025 to 63% of counties in 2026. This decrease is driven by the exit of WellCare (a subsidiary of Centene) from the North Carolina Marketplace starting in 2026. In Iowa, Centene’s footprint increased from 33% to 59% of its counties going from 2025 to 2026.

In 2026, three in 10 counties saw decreases in the number of insurers participating in the Marketplaces. The counties that experienced the greatest number of insurers leaving were in Wisconsin, which saw two insurers (Chorus Community Health Plan and Molina Healthcare) exiting the ACA Marketplace entirely as well as shrinking presence of others (namely, CareSource and University Health Care and Gundersen Lutheran). Some counties in North Carolina and Michigan also experienced significant declines in the number of participating insurers, with as many as three carriers leaving counties starting in 2026.

In total, 165 counties have only one insurer offering plans in the ACA Marketplaces in 2026. For 90 of these counties, this is a result of insurers not offering plans anymore starting in 2026. For the remaining 75 one insurer counties, the number of carriers offering plans remains the same as in 2025.

Issuers do not always offer bronze plans. By law, every ACA Marketplace insurer must offer at least one silver and gold plan wherever they sell coverage. In 2026, there were 490 counties (predominantly located in New Mexico, Indiana, Mississippi, New Jersey, Texas, and South Carolina) where some participating insurers decided not to offer bronze plans. In these places, the selection of plans for consumers who wish to decrease their premium payments by buying a lower coverage metal level may be reduced. However, for 433 of these 490 counties, at least two insurers offer bronze plans.

Methods

The Qualified Health Plan Individual Medical Landscape File and Robert Wood Johnson Foundation (RWJF) HIX Compare file were used to determine the number of insurers participating in states using the federal platform and state-based Exchanges, respectively. HIOS IDs from these files were mapped to the 2024 MR Submission Template Header to determine the NAIC Code for each insurer, which was then joined with 2025 data from Mark Farrah Associates’ Enrollment by Segment Exhibit (downloaded December 9, 2025) to identify the parent company associated with each insurer. In cases when a parent company is not successfully identified through the MR Submission Template Header and the Enrollment by Segment Exhibit, additional work was done to identify and manually assign either the NAIC code or parent company name for each plan.  Insurer in this analysis refers to parent company, irrespective of the name under which it does business across states.

The following manual additions/changes were also made:

• Data for New York was adjusted to include Anthem Blue Cross and Blue Shield HP, Anthem Blue Cross HP, and Independent Health.
• Bronze plans identified to be in San Juan County, Washington after combining the RWJF datasets together were removed.

HIX Compare insurer plan availability is reported by rating area—which may contain multiple counties—in conjunction with insurer participation reported by county. County-level insurer counts of plans in state-based Marketplaces may consequently be overstated when the insurer does not offer a given plan in a county but offers other plans in the same county, notably for plans of a given metal level. Although plan availability can vary within a county (such as by ZIP code), a plan is considered as available if offered anywhere in the county.

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