Every state will have to tell the federal government, once a year, what percentage of its Medicaid payments for homemaker, home health aide, personal care and habilitation services ends up as pay and benefits for the people doing the work. The Centers for Medicare & Medicaid Services explained how that number must be calculated in State Medicaid Director Letter SMD 26-005, dated Oct. 9, 2026, and posted version 1.0 of the matching reporting technical specifications.
The requirement itself isn't new. It was finalized in the 2024 Medicaid access rule at 42 CFR 441.311(e). The letter answers questions states and providers have raised since then, and CMS now calls it "direct care worker compensation reporting" instead of the old "payment adequacy" label.
Which programs and services are covered
The reporting applies to home and community-based services delivered under sections 1915(c), (i), (j) and (k) of the Social Security Act and under section 1115 demonstrations that include HCBS, in both fee-for-service and managed care. It does not apply to section 1905(a) state plan services, such as state plan personal care, home health and case management.
States must report a separate percentage for each of the four services. Within each service, they must also report self-directed services separately, along with services delivered in a provider-operated site whose facility costs are built into the rate. States decide which of their own services fall into each category, and CMS encourages them to line their definitions up with the 1915(c) core service definitions and the HCBS Taxonomy.
Who counts as a direct care worker
The rule names registered and practical nurses who provide nursing services, nursing assistants working under nurse supervision, direct support professionals, personal care attendants, home health aides, and anyone else paid to help people directly with daily living tasks, behavioral supports, employment supports or community integration. Nurses and other staff who provide clinical supervision also count.
Supervisors and administrators count only for the time they spend delivering services themselves. Staff who oversee business operations don't count. CMS also warns providers not to shift unrelated administrative work onto direct care staff to inflate the compensation figure, although time spent on tasks tied to the job, such as filling out timecards, can be counted.
What counts as pay
| Counts as compensation | Excluded costs (removed from total payments) |
|---|---|
| Wages and salary, including overtime | Costs of required training, such as trainers and materials |
| Benefits such as health and dental coverage, life and disability insurance, paid leave, retirement and tuition reimbursement | Travel costs, such as mileage reimbursement or transit subsidies |
| Employer share of payroll taxes for workers delivering 1915(c) services | Personal protective equipment |
| Paid time spent in training or traveling for the job |
Insurance that protects the employer, such as liability coverage, is not compensation.
How the percentage is calculated
The numerator is total compensation paid to direct care workers for the four services during the year. The denominator is total Medicaid payments for those services, minus the excluded costs above. Payments mean money actually collected, including base and supplemental payments, minus recoupments, chargebacks and bad debt. In managed care, it means what the plan pays the provider, including state directed payments, not the capitation rate the state pays the plan.
For bundled rates, the letter gives worked examples. In one, a residential habilitation day rate of $200 includes $120 for habilitation (60%), $50 for personal care and $30 for homemaker services, so the state may report all of it under habilitation. In another, only the day habilitation part of a day program rate is covered, so the state prorates the program's costs and payments by habilitation's 60% share.
Two groups are left out entirely: self-directed services in which the participant sets the worker's pay rate, and Indian Health Service and Tribal health programs covered by 25 U.S.C. 1641. Services delivered through remote supports, assistive technology or telehealth are not exempt. CMS acknowledges that their equipment and administrative costs can lower a state's reported percentage.
Key dates
| Date | What happens |
|---|---|
| Calendar year 2027 | First measurement period |
| July 9, 2027 | States email CMS a readiness report on how they will comply |
| By Sept. 1, 2027 | CMS expects to post the reporting form in its Medicaid Data Collection Tool; the form also goes out for public comment in the Federal Register |
| July 9, 2028 | Fee-for-service reporting applies; managed care follows with the first rating period starting on or after that date |
| About Sept. 1 to Dec. 31, 2028 | First annual reporting window, repeated each year |
States can get a 90% federal match to upgrade their Medicaid claims systems for the reporting and 75% for running them.
What the letter doesn't do
SMD 26-005 is about reporting only. It doesn't set a minimum share and doesn't address the separate 80% minimum-spending rule at 42 CFR 441.302(k), which is covered in our wage pass-through explainer.
Why this matters for providers and DSPs
Calendar 2027 is the first year measured, so the payroll and Medicaid revenue your agency books next year will feed the first state reports. CMS expects providers and managed care plans to be the main data sources and says states can use tools like provider surveys, so expect state data requests well before 2028.
For I/DD provider agencies, the key word is habilitation: residential and day habilitation are covered, so accounting systems need to separate DSP wages, overtime and benefits from administrative time, training materials, mileage and PPE. Track the direct-service hours of house managers and other supervisors who pick up shifts, because only that time counts.
Once the reports start, every state will have a published figure for how much of its HCBS spending reaches workers. That number is likely to come up in future rate studies and wage debates.