Understanding Medicaid Spending on Special Dietary Programs With CMS Preapproval
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What Are State Directed Payments (SDPs) and Why Do They Matter?
SDPs are a Medicaid funding mechanism allowing states to direct resources toward non-traditional healthcare services, such as home and community-based care, mental health support, and chronic disease management. Unlike standard Medicaid reimbursements, SDPs require CMS pre-approval to ensure alignment with federal guidelines. The 2026 reconciliation law, signed into effect in December 2025, narrows the scope of eligible SDP services, prompting states to accelerate spending before the policy takes full effect in 2027.
KFF’s analysis, based on data from 34 states, found that SDP expenditures increased by 12% in 2025 compared to 2024. This surge reflects efforts by states to maximize funding for programs like rural healthcare infrastructure and nursing home staffing initiatives. However, the report notes that 18 states reported spending declines in the first quarter of 2026, likely due to regulatory uncertainty surrounding the new limits.
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How Do State Spending Patterns Vary?
The KFF report highlights significant disparities in SDP utilization across states. For example, California allocated $450 million in 2025 for community-based mental health services, while Texas directed $280 million toward home healthcare worker training. These differences underscore the flexibility states have in defining SDP priorities, as long as they meet CMS criteria.
However, the analysis also reveals challenges. States with smaller Medicaid rolls, such as Wyoming and Alaska, faced difficulties securing CMS approvals for high-cost projects, leading to underutilization of available funds. A spokesperson for the Alaska Department of Health and Social Services told KFF, “The approval process is cumbersome, and we’re concerned about losing critical resources as the deadline approaches.”
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What Are the Implications of the 2026 Reconciliation Law?
The new law mandates that SDPs focus exclusively on services listed in the federal Medicaid statute, excluding programs like transportation for medical appointments or adult day care. This shift has prompted debates among state officials and healthcare advocates.
“While the law aims to streamline spending, it risks cutting off support for innovative care models that address social determinants of health,” said Dr. Lisa Nguyen, a health policy analyst at the University of Michigan. “Many SDPs have been instrumental in reducing hospital readmissions and improving patient outcomes.”
The KFF analysis estimates that up to 15% of current SDP funding could be affected by the restrictions, though exact figures depend on how CMS interprets the law. States are now reviewing their 2026 budgets to align with the new requirements, with some exploring partnerships with private insurers to fill gaps.
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What Comes Next for Medicaid Funding?
As the 2027 implementation date nears, states face a critical juncture. The KFF report recommends that policymakers prioritize transparency in SDP approvals and establish clearer guidelines for compliance. It also urges federal agencies to provide technical assistance to states with limited administrative capacity.
Meanwhile, advocacy groups are pushing for legislative amendments to expand SDP eligibility. “The current framework is too rigid to address the diverse needs of Medicaid beneficiaries,” said a representative from the National Association of State Medicaid Directors. “We need a balanced approach that ensures fiscal responsibility without sacrificing access to care.”
The outcome of these discussions could shape Medicaid’s role in addressing healthcare inequities for years to come.