CMS Proposes Medicare Based Caps on Medicaid Supplemental Payments

Goldman Sachs analyzes CMS's proposal to cap Medicaid supplemental payments at Medicare levels, which validates their thesis of a multi-year downturn in Medicaid margins.

Key Takeaways

• 1.CMS proposed replacing the Average Commercial Rate framework for Medicaid supplemental payments with explicit Medicare-based caps, which is expected to generate $775 billion in savings over 10 years.
• 2.Hospitals such as HCA and UHS are significantly impacted, with Medicaid supplemental payments accounting for 40% and 52% of their FY2025 adjusted EBITDA, respectively.
• 3.Managed Care Organizations (MCOs) Centene (CNC), Molina (MOH), and Elevance (ELV) are exposed to second-order effects of state funding constraints and increased provider pressure for base rate hikes.

Table of Contents

• Bridging the CMS SDP Proposal Back to Our Medicaid Underwriting Cycle Thesis
• Key Proposal Elements
• Why The CMS Proposal Is More Restrictive Than Prior Policy
• Implications for the Medicaid Ecosystem — Providers & Medicaid MCOs
• Implementation Timeline and Why Timing Matters
• Investor Takeaway: Remain Disciplined Despite Improved Near-Term Sentiment
• What Changed vs. Prior OBBBA Framework

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