DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
 
 
 
SMD# 21-001 
RE: Additional Guidance on State 
Directed Payments in Medicaid Managed 
Care 
 
January 8, 2021 
 
Dear State Medicaid Director:  
 
The Centers for Medicare & Medicaid Services (CMS) Medicaid managed care regulations at 42 
C.F.R. Part 438 govern how states may direct plan expenditures in connection with 
implementing delivery system and provider payment initiatives under Medicaid managed care 
contracts, including those with managed care organizations (MCOs), prepaid inpatient health 
plans (PIHPs), and prepaid ambulatory health plans (PAHPs), herein referred to as managed care 
plans. These types of payment arrangements permit states to direct specific payments made by 
managed care plans to providers under certain circumstances and can assist states in furthering 
the goals and priorities of their Medicaid programs.  
In November 2017, CMS published guidance, a related appendix with examples, and a preprint 
for states to obtain approval of state directed payments under 42 C.F.R.  438.6(c). In May 2020, 
CMS also published guidance on managed care flexibilities to respond to the COVID-19 public 
health emergency. Overall, CMS has reviewed and approved more than 450 state directed 
payment arrangements since this part of the regulation took effect beginning with contract rating 
periods on or after July 1, 2017. Based on our reviews, CMS believes additional guidance is 
needed to:  
  Clarify existing policy and alleviate burden faced by states by proactively addressing 
common questions that arise during the preprint review;  
  Enhance program integrity in the use of state directed payments; and  
  Remind states of the quality-related requirements that must be met to secure CMS 
approval. 
To this end, this State Medicaid Director Letter (SMDL) provides guidance on the broader policy 
regarding state directed payments, clarifies what is considered a state directed payment, and 
provides additional clarification on the federal requirements for state directed payments.1   
   
                                                           
1 The contents of this document do not have the force and effect of law and are not meant to bind the public in any 
way, unless specifically incorporated into a contract.  This document is intended only to provide clarity to the public 
regarding existing requirements under the law.  Page 2  State Medicaid Director 
 
Contract Requirements Considered to be State Directed Payments 
In general, states are not permitted to direct the expenditures of a Medicaid managed care plan 
under the contract between the state and the plan or to make payments to providers for services 
covered under the contract between the state and the plan (42 C.F.R.  438.6 and 438.60). 
Under the 2016 Medicaid and CHIP Managed Care Final Rule2, CMS permits only the following 
exceptions that allow states to make payments directly to providers or direct managed care plan 
expenditures for plan-covered services:  
 
-  State directed payments that comply with the requirements at 42 C.F.R.  438.6(c); 
-  Payments by the state to providers required by a specific provision of Title XIX or in 
another regulation implementing a Title XIX provision; and 
-  Permissible pass-through payments that comply with the requirements of 42 C.F.R.  
438.6(d).  
 
For state directed payments, 42 C.F.R.  438.6(c) specifies the ways states may set parameters on 
how expenditures under managed care contracts are made by managed care plans to assist states 
in achieving their overall objectives for delivery system and payment reform and performance 
improvement. These permissible state directed payments may include: value-based purchasing 
models, multi-payer or Medicaid-specific delivery system reform or performance improvement 
initiatives, or fee schedule requirements for provider reimbursement (e.g., minimum fee 
schedules, maximum fee schedules, and uniform increases). These categories are not mutually 
exclusive. 
 
In the November 2017 CMCS Informational Bulletin (CIB), we noted instances when states may 
include general contract requirements for provider payments that would not be subject to 
approval under 42 C.F.R.  438.6(c). CMS also noted these contract requirements would not be 
state directed payments under our interpretation of the regulation as long as the state is not 
mandating a specific payment methodology or amounts under the contract. In addition, CMS 
noted that when the provider payment is tied to the utilization and delivery of a specific service 
or benefit provided to a specific enrollee under the contract, such payments are not pass-through 
payments as defined in 42 C.F.R.  438.6(a) and not subject to the requirements under 42 C.F.R. 
 438.6(d). In particular, the November 2017 CIB described two scenarios: 
 
First scenario: States contractually implementing a general requirement for managed care 
plans to utilize value-based purchasing or alternative payment arrangements when the state 
does not mandate a specific payment methodology and managed care plans retain the 
discretion to negotiate with network providers the specific terms for the amount, timing, and 
mechanism of such value-based purchasing or alternative payment arrangements. An 
example of this would be when a state implements a general contract requirement for 
managed care plans to make 20 percent of their provider payments as value-based purchasing 
payments.  
 
                                                           
2 Medicaid and Childrens Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered 
in Managed Care, and Revisions Related to Third Party Liability; Final Rule, 81 Fed. Reg. 27498 (May 6, 2016) 
(available at: https://wwwfederalregister.gov/documents/2016/05/06/2016-09581/medicaid-and-childrens-health-
insurance-program-chip-programs-medicaid-managed-care-chip-delivered).   Page 3  State Medicaid Director 
 
Second scenario: States contractually implementing a general requirement for the managed 
care plans to increase provider reimbursement for covered services provided to Medicaid 
beneficiaries covered under the contract, as long as the state is not mandating a specific 
payment methodology or amounts and managed care plans retain discretion for the amount, 
timing, and mechanism for making such provider payments. An example of this would be 
when a state implements a general requirement for managed care plans to increase their 
overall rates for primary care services provided to all Medicaid enrollees covered under the 
contract.  
 
When CMS published that guidance, we believed that both types of general contract 
requirements for provider payments left sufficient discretion to plans and maintained the link 
between payments and delivery of services under the contract. We believed that these types of 
contract requirements would not trigger the prohibition and limits in 42 C.F.R.  438.6(c) and 
that the general contract requirements maintained the link between payment and delivery of 
services under the contract as to not trigger the prohibition and limits in 42 C.F.R.  438.6(d) on 
pass-through payments. As CMS has continued to review managed care contracts and rate 
certifications since the publication of the November 2017 CIB, general contract requirements 
described in the first scenario seem to continue to leave sufficient discretion to plans by 
including minimal direction from the state and link payments to the delivery of services under 
the contract such that prohibitions and limits under 42 C.F.R.  438.6(c) and 438.6(d) are not 
triggered.  
 
However, CMS has grown concerned that the November 2017 sub-regulatory guidance created 
an unintentional loophole in regulatory oversight in relation to general contract requirements 
described in the second scenario that require managed care plans to increase provider 
reimbursement for covered services. For example, some states are including general contract 
requirements for provider payments that require an additional amount be added to the contracted 
payment rates for a specific service (e.g., hospital services) but without any further 
accountability to ensure that the additional funding included in the rate certification is linked to a 
specific service or benefit provided to a specific enrollee covered under the contract (see the 
definition of pass-through payment in 42 C.F.R.  438.6(a)). 
 
CMS is concerned that vague contract requirements, particularly when significant amounts of 
funding are being added to the rates and rate certification(s) as part of the actuarially sound 
capitation rate, do not provide sufficient accountability to ensure that the additional funding will 
be used to pay for specific services provided to specific enrollees covered under the contract. 
Additionally, such vague contract requirements do not provide sufficient accountability for the 
substantial increase in funding and circumvent the intent of the 2016 Medicaid and CHIP 
Managed Care Final Rule and the subsequent 2017 Pass-Through Payment Final Rule3 to 
improve the fiscal integrity of the program and ensure the actuarial soundness of all capitation 
rates. As stated in the preamble of the 2016 Medicaid and CHIP Managed Care Final Rule, [w]e 
believe that the statutory requirement that capitation payments to managed care plans be 
                                                           
3 Medicaid Program; The Use of New or Increased Pass-Through Payments in Medicaid Managed Care Delivery 
Systems; Final Rule; 82 Fed. Reg. 5415 (January 18, 2017) (available at: 
https://www.federalregister.gov/documents/2017/01/18/2017-00916/medicaid-program-the-use-of-new-or-
increased-pass-through-payments-in-medicaid-managed-care-delivery).  Page 4  State Medicaid Director 
 
actuarially sound requires that payments under the managed care contract align with the 
provision of services to beneficiaries covered under the contract. ... In our review of managed 
care capitation rates, we have found pass-through payments being directed to specific providers 
that are generally not directly linked to delivered services or the outcomes of those services. 
These pass-through payments are not consistent with actuarially sound rates and do not tie 
provider payments with the provision of services. We further explained that [a]s a whole,  
438.6(c) maintains the MCOs, PIHPs, or PAHPs ability to fully utilize the payment under that 
contract for the delivery and quality of services by limiting states ability to require payments 
that are not directly associated with services delivered to enrollees covered under the contract.4  
 
In light of these concerns, CMS has reconsidered the previously published guidance to realign 
our implementation of the regulation with the original intention of the 2016 Medicaid and CHIP 
Managed Care Final Rule and the 2017 Pass-Through Payment Final Rule. If the state includes a 
general contract requirement for provider payment that provides for or adds an amount to the 
contracted payment rates but the provider payments are not clearly and directly tied specifically 
to the utilization and delivery of a specific service or benefit provided to a specific enrollee under 
the contract, such contract requirements must be modified to comply with either 42 C.F.R.  
438.6(c) or (d). Absent modification of such contract requirements to comply with 42 C.F.R.  
438.6(c) or (d), we would consider such contract requirements out of compliance with federal 
regulations. This interpretation is consistent with the intent of the 2016 Medicaid and CHIP 
Managed Care Final Rule and will ensure federal regulatory oversight of managed care 
payments. Therefore, when a state includes a contract or payment requirement, even if vague or 
that leaves some discretion to the managed care plan, to control or direct payment to providers or 
adds any amount to the contracted payment rates which is considered in calculating the 
actuarially sound capitation rate, CMS will require compliance with 42 C.F.R.  438.6(c) or (d). 
Moving forward, CMS will continue to monitor contract requirements described in the first 
scenario in light of the concerns raised with contract requirements in the second scenario. 
 
To allow states time to amend their existing contract requirements, CMS will begin applying the 
regulation consistent with this guidance for contract rating periods that begin on or after July 1, 
2021. 
 
Basing Payment on the Utilization and Delivery of Services 
State directed payments must be based on the delivery and utilization of services to Medicaid 
beneficiaries covered under the contract. CMS further clarifies that state directed payments need 
to be conditioned on the delivery and utilization of services covered under the contract for the 
applicable rating period. Therefore, state directed payments must be tied to utilization and 
delivery of services covered under the contract during the corresponding contract rating period; 
payment cannot be based solely on historical utilization. To be clear, in capitation rate 
development, states can use historical data to inform the rate that will be paid to managed care 
plans for services under the contract rating period; however, payment to providers must be made 
based on the delivery and utilization of covered services rendered to Medicaid beneficiaries 
during the applicable rating period. 
  
                                                           
4 81 Fed. Reg. at 27587-89.  Page 5  State Medicaid Director 
 
In addition, CMS clarifies that the prior approval of a state directed payment under 42 C.F.R.  
438.6(c) provides authority for states to include such contract requirements directing a plans 
expenditures in their managed care contract(s) and in the related rate certification(s), but it does 
not provide authority for a new benefit or service. States must have authority either as part of the 
state plan or through some other Medicaid authority (e.g., section 1115 demonstration, section 
1915(c) waiver, etc.) to require their plans to cover the benefit or service linked to the state 
directed payment. 
 
Prior Approval of State Directed Payments 
Effective December 14, 2020, 42 C.F.R.  438.6(c)(2) requires contract arrangements that direct 
the managed care plans expenditures under  438.6(c)(1)(i) and (ii) and (c)(1)(iii)(B) through 
(D) to have written approval from CMS prior to implementation. 5 Therefore, states must obtain 
written approval of state directed payments before approval of the corresponding Medicaid 
managed care contract(s) and rate certification(s). The regulation does not permit states to add 
new state directed payments for rating periods that have ended. 
 
CMS remains committed to ensuring a timely review of state directed payment preprints. To help 
expedite the review process for state managed care contract(s) and rate certification(s), CMS 
strongly recommends that states submit preprints for state directed payments to CMS at least 90 
calendar days in advance of the start of the rating period that includes the state directed payment. 
States should submit the preprint(s) to the following new mailbox: 
 
StateDirectedPayment@cms.hhs.gov to ensure proper processing. 
 
If a state has concerns or questions about a state directed payment (e.g., the state directed 
payment is new), CMS encourages seeking technical assistance prior to incorporating such 
directed payments into contract(s) and rate certification(s); such actions can help to facilitate the 
subsequent review of Medicaid managed care contract(s) and rate certification(s). 
  
State Directed Payment Levels 
All contract arrangements that direct an MCO's, PIHP's, or PAHP's expenditures under 42 C.F.R. 
 438.6(c)(1)(i) through (iii) must be developed in accordance with 42 C.F.R.  438.4, the 
standards specified in 42 C.F.R.  438.5, and generally accepted actuarial principles and 
practices. Under the definition in 42 C.F.R.  438.4, actuarially sound capitation rates are 
projected to provide for all reasonable, appropriate, and attainable costs that are required under 
the terms of the contract and for the operation of the MCO, PIHP, or PAHP for the time period 
and the population covered under the terms of the contract.  
 
As part of ensuring that the final capitation rates paid to the plan are reasonable, appropriate, and 
attainable for the populations to be covered and the services to be furnished under the contract, 
as well as adequate to ensure access to care, CMS has required states to demonstrate that the 
state directed payments result in provider payment rates that are reasonable, appropriate, and 
                                                           
5 Prior to December 14, 2020, 42 C.F.R.  438.6(c)(2) required contract arrangements that direct the managed care 
plans expenditures under  438.6(c)(1)(i) through (iii) to have prior written approval.  The regulation was amended 
by the Medicaid Program; Medicaid and Childrens Health Insurance Program (CHIP) Managed Care Final Rule, 
which appeared in the Federal Register on November 13, 2020. (85 FR 72754).  Page 6  State Medicaid Director 
 
attainable as part of the review of the preprint. To do this, CMS has required an analysis from 
states to understand the relative effect of the directed payment on reimbursement for each service 
type and each provider class receiving the state directed payment(s). Specifically, this analysis 
must provide the average base rate paid by plans to providers absent the impact of state directed 
payments, the effect each state directed payment(s) has on reimbursement for the service type(s), 
and any additional effects of permissible pass-through payments on reimbursement using a 
standardized measure (e.g., as a percent of Medicare or the Medicaid state plan rate). This 
analysis must be specific to each service type included in the state directed payment and specific 
to each provider class identified. For example, if a state directed payment provides a uniform 
increase for inpatient and outpatient hospital services with two provider classes (rural hospitals 
and non-rural hospitals), then states must provide CMS the following information: 
 
Effect on Total Reimbursement 
(as a Percent of Medicare or Another Standardized 
Average 
Measure) 
Base Rate 
Provider Class  Effect of Any 
Paid by  Effect of State  Effect of Any 
Other State 
Plans  Directed  Pass-Through 
Directed 
Payment  Payments 
Payments 
Rural Hospitals  Inpatient         
Services 
Rural Hospitals  Outpatient         
Services 
Non-Rural Hospitals          
Inpatient Services 
Non-Rural Hospitals          
Outpatient Services 
 
To ensure appropriate oversight and prudent program management, CMS has initiated a review 
of state directed payments and may issue future guidance and/or rulemaking based on the 
findings of this evaluation. This review was initiated based on our experience reviewing state 
requests for state directed payments, as we have seen proposals for significant changes to 
provider reimbursement, which may in turn have an impact on program expenditures. 
 
Provider Class Definition 
State directed payments are required under 42 C.F.R.  438.6(c)(2)(ii)(B) to direct expenditures 
equally, using the same terms of performance, for a class of providers providing the service 
under the contract. As stated in the May 2020 CIB, historically, CMS has deferred to states in 
defining the provider class for purposes of state directed payment arrangements, as long as the 
provider class is reasonable and identifiable, such as the provider class being defined in the 
states Medicaid State Plan.  
 
Regardless of how a state defines the provider class, the same terms of performance must be 
applied to all providers that are in that provider class. To clarify, this requirement does not 
require that each provider that meets the provider class definition earns the same total dollars for 
the delivery of services. If a state directed payment arrangement is a fee schedule requirement,  Page 7  State Medicaid Director 
 
the fee schedule requirement would need to apply to the services provided by all providers that 
meet the class definition; however, the final amount earned by the provider would depend on the 
number of services provided.  
 
For quality-based or value-based purchasing payments under 42 C.F.R.  438.6(c)(1)(i) and (ii), 
the state directed payment arrangement would need to have the same terms of performance for 
all of the providers that are in the provider class. For example, for a state directed payment 
arrangement that was a pay for performance initiative, the same metrics and 
thresholds/benchmarks for earning the payment would apply to all the providers in the class. The 
amount each provider would earn would be based on each providers individual performance. 
 
Regardless of arrangement, the regulations at 42 C.F.R.  438.6(c)(2)(ii)(E) require that the 
payments cannot be conditioned upon the provider entering into or adhering to 
intergovernmental transfer agreements. Additionally, states must provide an analysis of the 
reimbursement level with sufficient detail for CMS to understand the relative effect of the 
directed payment on total reimbursement for each service and each provider class receiving the 
state directed payment(s). This analysis will need to be specific to the provider class(es) defined 
in the state directed payment preprint. For example, if the state defined the provider class for a 
state directed payment as primary care physicians, the analysis of the reimbursement levels 
would need to be specific to primary care physicians; it should not include all physicians 
(primary care and specialty physicians). 
 
Incorporation of State Directed Payments into Capitation Rates 
All state directed payments must be incorporated into all applicable managed care contract(s) 
and described in all applicable rate certification(s) as noted in 42 C.F.R.  438.7(b)(6). As part of 
the 2020-2021 Medicaid Managed Care Rate Development Guide, CMS provided guidance on 
two ways that states could incorporate state directed payments  either through adjustments to 
the base capitation rates as an adjustment to the rate or through a separate payment term.6 The 
rate guide describes the documentation requirements for each option. Incorporating state directed 
payments as adjustments to the base capitation rates is consistent with the nature of risk-based 
managed care. Most states adopting minimum or maximum fee schedules incorporate these 
directed payments through adjustments to the base capitation rates. However, there are an 
increasing number of states that are now incorporating directed payments into their rate 
certification(s) through separate payment terms.  
 
As CMS has reviewed state directed payments and the related rate certifications, CMS has 
identified a number of concerns around the use of separate payment terms. Frequently, while 
there is risk for the providers, there is often little or no risk for the plans related to the directed 
payment, which is contrary to the nature of risk-based managed care. This can also result in 
perverse incentives for plans that can result in shifting utilization to providers in ways that are 
not consistent with Medicaid program goals. To further enhance program integrity and financial 
oversight of state directed payments, CMS intends to require additional documentation and 
                                                           
6 This guidance has appeared in the Medicaid Managed Care Rate Development Guide for rating periods starting 
between July 1, 2019 and June 30, 2021.  Medicaid Managed Care Rate Development Guides for every rating period 
are located at: https://www.medicaid.gov/medicaid/managed-care/guidance/rate-review-and-rate-guides/indexhtml.  Page 8  State Medicaid Director 
 
justification from states as to their rationale for incorporating state directed payments through 
means other than adjustments to the base capitation rates as part of the preprint review.  
 
Please note that CMS can provide technical assistance if a state has questions or concerns about 
how to include the impact of the payment arrangement in their Medicaid managed care rate 
certification(s). We also encourage states to consult the latest Medicaid Managed Care Rate 
Development Guide.  
 
Financing of State Directed Payments 
States can use permissible funding sources, including intergovernmental transfers and provider 
taxes that comply with federal statute and regulations to fund the non-federal share of state 
directed payments. Guidance provided in this SMDL is not intended to change this policy. 
However, approval of a state directed payment does not constitute approval of the financing 
mechanism for the non-federal share. States will need to work with the appropriate CMS staff to 
obtain the necessary approvals of a financing mechanism. Certain financing requirements in 
statute and regulation are applicable across the Medicaid program irrespective of the delivery 
system or program (that is, fee-for-service, managed care, state directed payments, 
demonstration authorities, etc.). Such requirements include, but are not limited to, limitations on 
financing of the non-federal share applicable to health care-related taxes, bona fide provider 
related donations, and intergovernmental transfers. 
 
For states that are using intergovernmental transfers to fund, in part or in whole, the non-federal 
share of a state directed payment, 42 C.F.R.  438.6(c)(2)(ii)(E) requires that states demonstrate 
in writing (except for minimum fee schedules using State plan approved rates) that the 
arrangement does not condition provider participation in contract arrangements that use state 
directed payments (that is, the contract and payment arrangements described in  438.6(c)(1)(i) 
through (iii)) upon the provider entering into or adhering to intergovernmental transfer 
agreements.7 To clarify, states can use intergovernmental transfers to fund the non-federal share 
of a state directed payment; however, states cannot limit either the providers ability to 
participate in state directed payments or the amount the provider is eligible to obtain through the 
state directed payment based on the providers participation in or adherence to an 
intergovernmental transfer. Similarly, provider classes cannot be defined or tailored to only 
include providers that provide intergovernmental transfers. If the provider meets the criteria for 
the provider class, the provider must be eligible to participate in the state directed payment 
arrangement regardless of whether the provider participates in any intergovernmental transfer 
agreements. 
 
   
                                                           
7 Prior to December 14, 2020, 42 C.F.R.  438.6(c)(2) required contract arrangements that direct the managed care 
plans expenditures under  438.6(c)(1)(i) through (iii) to have prior written approval.  The regulation was amended 
by the Medicaid Program; Medicaid and Childrens Health Insurance Program (CHIP) Managed Care Final Rule, 
which appeared in the Federal Register on November 13, 2020 (85 FR 72754).  Specifically, minimum fee schedules 
for network providers that provide a particular service under the contract using State plan approved rates as 
described in 42. C.F.R.  438.6(c)(1)(iii)(A) do not have to obtain written approval prior to implementation though 
they still need to comply with the regulatory requirements for state directed payments as described in 42 C.F.R.  
438.6(c).  Page 9  State Medicaid Director 
 
Quality and Accountability  
42 C.F.R.  438.6(c)(2) requires that directed payments be directly linked to quality 
improvement. Specifically, the regulations set forth the following three requirements that states 
must meet in order to receive CMS approval for their directed payment proposals:  
 
(1) Each directed payment must be expected to advance at least one of the goals and 
objectives in the states managed care quality strategy (QS)8;  
(2) Each directed payment must have an evaluation plan to measure the degree to which the 
arrangement advances at least one of the quality strategy goal(s) and objective(s)9; and  
(3) For states electing to direct managed care plans to implement a value-based or delivery 
system reform payment arrangement, the directed payments must use a common set of 
performance measures across all payers and providers participating in the reform or 
improvement initiative.10 
 
The November 2017 CIB provided further guidance on the quality requirements for state 
directed payment proposals. That CIB specified that the preprint should also include: the 
identification of performance criteria which can be used to assess progress on the specified 
goal(s) and objective(s); baseline data for performance measure(s); and improvement targets for 
performance measure(s). The November 2017 CIB also recommended that states look to 
measures already being collected, or that are widely available, and provided links to the 
Medicaid and CHIP Adult and Child Core Sets as well as other commonly used measure sets11. 
To facilitate the evaluation of state directed payment arrangements, the November 2017 CIB also 
suggested several ways that states may leverage activities they may already be undertaking, such 
as External Quality Reviews (EQRs), the use of consumer or provider surveys, or monitoring 
whether performance improves on key quality measures, in order to fulfill the evaluation 
requirement.  
 
CMS is available to provide technical assistance to states for any of the quality requirements of 
directed payments.  
 
Revised Preprint 
To make submission of state directed payment preprints easier, more comprehensive, and to 
reduce processing time, CMS is releasing a revised preprint to be used for all state directed 
payment requests for contract rating periods that begin on or after July 1, 2021. Under 42 C.F.R 
 438.6(c)(2), contract arrangements that direct the MCO's, PIHP's, or PAHP's expenditures 
                                                           
8 42 C.F.R.  438.6(c)(2)(ii)(C) 
9 42 C.F.R.  438.6(c)(2)(ii)(D) 
10 42 C.F.R.  438.6(c)(2)(iii)(B) 
11 Examples of measure sets in wide use across Medicaid programs include the Medicaid and CHIP Child Core Set 
(https://wwwmedicaid.gov/medicaid/quality-of-care/performance-measurement/adult-and-child-health-care-quality-
measures/child-core-set/index.html ), the Medicaid Adult Core Set (https://wwwmedicaid.gov/medicaid/quality-of-
care/performance-measurement/adult-and-child-health-care-quality-measures/adult-core-set/index.html#CoreSet), 
the Medicaid Health Homes Core Set (https://wwwmedicaid.gov/state-resource-center/medicaid-state-technical-
assistance/health-home-information-resource-center/quality-reporting/indexhtml), and the Core Quality Measure 
Collaborative sets (https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-
Instruments/QualityMeasures/Core-Measures.html).  Page 10  State Medicaid Director 
 
under paragraphs (c)(1)(i) and (ii) and (c)(1)(iii)(B) through (D)12 must have written approval 
from CMS prior to implementation and before approval of the corresponding managed care 
contract(s) and rate certification(s). The revised preprint implements the prior approval process 
and must be completed, submitted to, and approved by CMS before implementing any of the 
specific payment arrangements described in 42 C.F.R  438.6(c)(1)(i) and (ii) and (c)(1)(iii)(B) 
through (D). States may use the revised preprint for contract rating periods that begin before July 
1, 2021 and will be required to use the revised preprint for all state directed payment reviews for 
contract rating periods that begin on or after July 1, 2021. This revised preprint includes more 
information in tables and check-box formats to make completing the preprint easier and clearer. 
Additionally, by including more information in the revised preprint, CMS hopes to reduce 
processing time by reducing the quantity of follow-up questions during CMS review.  
 
Technical Assistance 
As noted earlier, CMS has already approved state directed payment arrangements in many states 
and found that early discussions with states and technical assistance on completing the preprint 
are beneficial for both states and CMS during the review process. We encourage states to reach 
out early for technical assistance to expedite CMS review of state proposals. Please contact us at 
StateDirectedPayment@cms.hhs.gov for technical assistance or questions. We look forward to 
continuing our partnership with you to deliver on our shared goals of providing high quality and 
sustainable healthcare to those who need it most.
 
 
 
Sincerely, 
Anne Marie Costello 
Acting Deputy Administrator and Director 
                                                           
12 Prior to December 14, 2020, 42 C.F.R.  438.6(c)(2) required all contract arrangements that direct the managed 
care plans expenditures under  438.6(c)(1)(i) through (iii) to have prior written approval.  The regulation was 
amended by the Medicaid Program; Medicaid and Childrens Health Insurance Program (CHIP) Managed Care 
Final Rule, which appeared in the Federal Register on November 13, 2020 (85 FR 72754).