Medicaid Cuts a Likely Result of Congressional Budget Negotiations

As Congress begins its process of figuring out the rest of the budget for fiscal 2025, Medicaid spending cuts will almost certainly be on the table, although how those cuts will be achieved isn’t exactly clear, according to health policy experts.

Currently, the budget resolution passed by the House Budget Committee — which gives instructions to the various House committees on how much money they need to cut or add to their various areas of jurisdiction — says that the House Energy & Commerce Committee needs to cut at least $880 billion in spending over the next 10 years. “When you look at what’s in their jurisdiction, what the debate has been, and the ideas [already] circulated, it all points in the direction of deep, deep Medicaid cuts,” said Allison Orris, JD, senior fellow at the Center on Budget and Policy Priorities, a left-leaning Washington think tank, in a phone interview. “And $880 billion is just a floor, so it could be deeper than that.”

Neither the full House nor the full Senate has passed a budget resolution; once each chamber does that, they then need to work on a budget reconciliation bill that will be acceptable to both houses of Congress, each of which is controlled by Republicans. This year’s budget battle is further complicated by the fact that House Republican leaders want to pass a single reconciliation bill, while Senate Republicans want to see two bills. The first Senate budget bill that passed out of committee — which touched very slightly on Medicaid — only includes $1 billion in cuts, Orris explained, adding that the second bill may well include some very deep reductions.

What Medicaid cuts might be under consideration? According to a House Budget Committee document, here are a few of the possibilities:

Institute Per-Capita Caps. “Currently, states receive open-ended federal Medicaid matching funds based on the costs of providing services to enrollees,” the document notes about this proposal, which would save up to $900 billion. “Under Medicaid today, for every dollar a state spends on Medicaid services, it gets $1 to $3 of federal support (richer states get $1, poorer states get $3) … With a per capita cap, the federal government makes a limited payment to the state based on a preset formula, which does not increase based on actual costs. States exceeding the ‘cap’ for enrollees would thus need to find other revenues to maintain spending levels or explore innovative ways to reduce excessive costs.”

Analysts see several problems with this approach. Policies like per capita caps “always sound better rhetorically than they can work politically, let alone in practice,” Tom Miller, JD, resident fellow at the right-leaning American Enterprise Institute, in Washington, said in an email. “Their main appeal to some federal officeholders is that they delegate all the difficult choices to someone else at the state level, even though the latter do not have any better ideas, let alone desire to implement them … Do not expect different results by trying to reuse old playbooks that have failed to get anywhere before.” However, he added, “Given the substantial growth in recent years in state-level reimbursement to Medicaid providers — in some cases now exceeding Medicare payment levels — some cutbacks on that front are inevitable and overdue.”

The proposal “produces federal savings because it’s less federal funding that’s provided under current law” and the amount of the cap would increase each year by less than the expected growth in healthcare costs, Edwin Park, JD, research professor at Georgetown University’s Center for Children and Families, in Washington, said in a phone call. And even though the cap may hit some Medicaid enrollees harder than others, “from a budgetary perspective, the state will calculate the total shortfall that results … and it’s going to have to make cuts across the board.”

Establish Medicaid Work Requirements. This policy, which would yield an estimated $100 billion in savings, “would restore the dignity of work by implementing work requirements for able-bodied adults without dependents to qualify for Medicaid coverage,” the document says. “Certain populations would be exempted, such as pregnant women, primary caregivers of dependents, individuals with disabilities or health-related barriers to employment, and full-time students.”

But Park said that adding work requirements could spawn unintended consequences. “The reason it produces savings is because people who are working — people who should be exempt under such proposals — are simply unable to navigate the red tape that’s required under a work requirement, as we saw in states like Arkansas,” which tried to implement a work requirement. “They get people disenrolled … not because they’re not working, but because they can’t meet the paperwork requirements.”

Miller agreed. “Based on previous experience under the first Trump administration, those work requirement initiatives achieve most of their limited ‘savings’ simply by removing beneficiaries from the Medicaid rolls more due to paperwork administrative glitches than due to work incentives,” he said in an email. “Legal barriers to enforcing those work requirements remain a further problem, but the generic proposal ‘works’ politically among Republican-leaning voters and officeholders who lack the imagination to propose much else.”

Limit Medicaid Provider Taxes. Under this provision, which is estimated to save $175 billion, “States increase the amount of federal Medicaid funding they receive by levying taxes on providers and then increasing their reimbursement rates,” according to the document. “This policy would lower the Medicaid provider tax safe harbor from 6% under current law to 4% from 2026 to 2027 and 3% in 2028 and after.”

The federal government has long given states flexibility on how they generate their share of the cost of Medicaid, Park explained. “States use income taxes. They use sales taxes. They sometimes use dedicated taxes, like tobacco taxes. And they also use taxes and assessments on hospitals, nursing homes, managed care plans, other providers, to generate a portion of their state share.” But this proposal would mean the state would collect less money to spend on Medicaid, which in turn means they’ll get less in “matching funds” from the federal government. “That means Medicaid cuts … It also makes it even harder for states to mitigate some of the federal funding cuts” because they won’t be able to raise taxes on providers.

Orris agreed. “Proposals to restrict and eliminate provider taxes all go in the same direction: cut federal support for Medicaid and shift costs to states,” she said, pointing out that unlike the federal government, state governments have to balance their budgets each year. “States will have to consider cutting eligibility and cutting provider rates” or reducing spending in other areas like public safety and corrections to make up for the loss in funding.

Remove Additional Matching Funds for the Medicaid Expansion Population. The Affordable Care Act’s Medicaid expansion provision “gives preferential treatment to able-bodied adults over children or individuals with disabilities with a set 90% [federal match] for the Obamacare adult expansion population,” the document says. This option, which would save about $561 billion, would set reimbursement for Medicaid enrollees in the expansion program to whatever the state’s normal federal matching rate is.

Although states may try to compensate for the cost shift that would result, “that’s highly unlikely,” said Park. Instead, he predicted, “they’re going to drop the expansion over time.”

Overall, said Orris, any Medicaid cuts would have several negative consequences. “It could have providers needing to close their doors, which hurts the provider, the local economy, and the enrollees,” she said. When people hear about cuts to provider reimbursement, “you think, ‘OK, well, maybe they can make it up.’ But they’re going to have more uncompensated care. People are still going to have healthcare needs. And a lot of hospitals and other providers operate with very thin margins and may not be able to make up that difference, and the state may not be able to make up that difference.”

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