State directed payments (SDPs) in Medicaid managed care have grown dramatically in scope, scale, and complexity over the last decade–accounting for about $110.2 billion in Medicaid spending in 2024. This rapid growth, coupled with the sheer dollar amounts, has drawn heightened federal scrutiny. The Medicaid and CHIP Payment and Access Commission (MACPAC) and the Government Accountability Office have raised concerns about the limited evidence supporting many SDPs and have recommended stronger oversight and evaluation. In addition, H.R. 1, the One Big Beautiful Bill Act, places new limits on states’ use of SDPs by capping the amount of state and federal funds that can be used for these payments.
Now more than ever, states must show that public dollars invested through SDPs deliver measurable value and tangible improvements in care for Medicaid beneficiaries.
Driving Improvement Through SDP Oversight
SDPs are payment arrangements that states use to expand access, stabilize provider networks, and improve quality. For example, an SDP might direct managed care organizations to increase payments to rural hospitals to cover their costs and keep them financially viable.
Although the Centers for Medicare & Medicaid Services (CMS) requires states to evaluate SDPs, MACPAC found that many states fail to submit the necessary data—or the level of data needed—making it difficult to assess whether these arrangements achieve their intended impact. As a result, states might struggle to evaluate their effectiveness and uphold core principles of sound program administration and oversight, such as ensuring payments are tied to measurable results and maintaining transparency in how Medicaid dollars are spent.
Fortunately, strengthening SDP oversight does not require building new evaluation frameworks or infrastructure. States can enhance transparency and accountability of SDPs in Medicaid managed care plans by more deliberately using existing tools—such as procurement and contract requirements, performance measure reporting, and external quality reviews (EQRs). By using these familiar mechanisms more strategically, states can assess how SDPs are designed, deployed, and perform in practice without complicating the process.
Data as a Lever for Oversight and Integrity
Better use of administrative data, particularly managed care enrollment, encounter, and quality reporting data, is central to more effective SDP oversight. States can embed their expectations for SDP-related data reporting into managed care procurement, contracting, and quality oversight processes to ensure they get consistent and practical information.
For example, states can:
- Integrate SDP expectations into procurement and readiness reviews by assessing how managed care plans intend to implement, monitor, and evaluate SDPs—strengthening plan selection and early oversight. Embedding these requirements also ensures plans understand their role in showing the value of these payments and promotes consistent, high-quality data reporting across plans.
- Include SDP reporting requirements in managed care contracts to convey expectations and align payment oversight with actuarial and regulatory review processes.
- Use capitation withholds and performance bonuses to encourage managed care plans to submit complete, timely, and accurate SDP data and demonstrate improvement on SDP-aligned metrics. For more information on aligning managed care payment incentives with SDPs, see Mathematica’s article in Health Affairs Forefront.
- Align SDPs with managed care plans’ quality improvement initiatives by requiring plans to incorporate SDP-related performance measures into their quality assurance and performance improvement (QAPI) programs.
- Require managed care plans to stratify Medicaid and CHIP Core Set or other existing performance measures by SDP participation, enabling states to generate provider-level data to support SDP evaluations, rather than relying solely on state-level metrics that might obscure the specific impact of the SDP.
- Work with provider organizations or associations that can furnish provider-level data and help interpret the results, particularly when provider-level context or qualitative insights can help explain underlying trends and variation.
- Engage external quality review organizations (EQROs) to support SDP-related data collection, validation, and analysis—especially when managed care plans cannot restrict their results to only those providers taking part in SDPs. CMS has announced a forthcoming external quality review protocol to help EQROs evaluate SDPs. Once the protocol is released, states that use their EQROs for SDP evaluations will be eligible for enhanced federal financial participation.
- Develop internal dashboards or summary reports to monitor SDP performance across managed care plans and years, enhancing transparency and helping track whether changes are needed in future SDP contracting cycles.
- Act when SDP challenges emerge—such as when data submissions are incomplete, delayed, or inconsistent, or when an SDP is not achieving its intended impact—by requiring corrective action plans, adjusting contract terms to strengthen compliance, or providing targeted technical assistance to managed care plans and providers.
A Path Forward
SDPs are an established but closely scrutinized payment strategy in Medicaid managed care. Fortunately, states don’t need to revamp their systems to increase the transparency, integrity, and effectiveness of SDPs—they can use familiar tools more strategically and engage partners to align program goals, data expectations, and evaluation plans.
Although CMS asks states to submit SDP evaluation data when renewing these payments, states can get far more value by making this process part of a continuous improvement cycle rather than treating it as a check-the-box compliance exercise.
By drawing on experts across managed care regulations, quality measurement, and data strategy, Mathematica helps states streamline SDP reporting; build dashboards that provide practical insights; and strengthen oversight to improve transparency, accountability, and impact. Contact us to learn how we can support your state’s SDP goals.
