State directed payments for nursing home services total an estimated $3.7 billion annually, with $2.2 billion coming from federal funds, according to an analysis published by kff.org. These payments represent about two percent of total federal spending on state directed payments, but upcoming limits under the 2025 reconciliation law could reduce these funds and affect nursing homes and residents.
In Plain English: The Clinical Takeaway
- Medicaid Dependence: Two-thirds of all nursing home residents rely on Medicaid as their primary payer for long-term care services.
- Federal Funding Cuts: The 2025 reconciliation law restricts state directed payments to specific percentages of Medicare payment rates, which will phase down federal support starting in 2028.
Federal Spending and State Financing Structures
Annual spending on state directed payments for nursing home services reaches $3.7 billion in total outlays, with the federal government covering $2.2 billion of that amount. This federal allocation accounts for approximately 2.4 percent of total federal spending on state directed payments, while hospital services capture the vast majority at 84 percent.
Based on projected spending figures in state preprints submitted to the federal government, the federal government covers roughly 60 percent of total spending on these nursing home payments. The remaining share is financed by individual states using standard Medicaid matching formulas. Among the 15 states implementing these specific payment arrangements, 11 rely on provider taxes to fund their share, while four utilize intergovernmental transfers.
| Financing Mechanism | Number of States | Share of Total Funding |
|---|---|---|
| Provider Taxes | 11 States | Variable state-share support |
| Intergovernmental Transfers | 4 States | Variable state-share support |
| Federal Matching (Average) | 15 States | Approximately 60 percent |
Benchmark Rates and State Disparities
States utilize different benchmarks to establish payment rates for nursing home care through managed care organizations. Among the 15 states with publicly available applications reviewed from January 1, 2024, through May 12, 2026, a total of 13 states benchmark their payment rates using average commercial rates, as kff.org reported.
Pennsylvania alone accounts for 47 percent of the $2.2 billion in federal spending dedicated to nursing home state directed payments, setting its payment rates at 74.6 percent of average commercial rates. Rhode Island operates two distinct programs, utilizing 88.3 percent of average commercial rates for one and standard Medicaid rates for the other.
Legislative Limits and Future Reductions
Federal spending on these nursing home payments faces mandatory reductions under the 2025 reconciliation law. The legislation caps total payments under state directed payments at 100 percent of the Medicare payment rate in states that adopted the Affordable Care Act Medicaid expansion, and 110 percent for non-expansion states. Services lacking a corresponding Medicare rate are restricted to standard Medicaid fee-for-service levels.
Certain existing arrangements receive temporary grandfather status, allowing them to continue before reductions take effect. Starting January 1, 2028, total spending amounts for these grandfathered programs will drop by 10 percentage points annually until they comply with the new Medicare-related payment ceilings. The Congressional Budget Office estimated that overall federal Medicaid spending will drop by $911 billion between 2025 and 2034 due to these and other eligibility adjustments included in the reconciliation law.
References
- Congressional Budget Office. CBO’s Cost Estimate for the 2025 Reconciliation Law. Available at: https://www.cbo.gov/publication/57422
- Centers for Medicare and Medicaid Services. Medicaid Program; Medicaid Managed Care State Directed Payments. Available at: Federal Register
- Medicaid and CHIP Payment and Access Commission. Estimates of Medicaid Nursing Facility Payments Relative to Costs. Available at: MACPAC
- Centers for Medicare and Medicaid Services. Approved State Directed Payment Preprints. Available at: Medicaid.gov
Disclaimer: This article is intended for informational and educational purposes only and does not constitute formal legal, financial, or medical advice.
