$880 Billion Potential Federal Medicaid Cuts? What to Know

The U.S. Senate and U.S. House of Representatives agreed to a framework for budget reconciliation negotiations — the framework is the starting point for the larger task of addressing the debt ceiling, extending tax policies, reducing federal spending, and more. Talks in Congress are ongoing and no formal decisions on Medicaid have been made or are expected to be made for several weeks, if not months.

If you’ve heard references to $880 billion in spending reductions, that number originated in the House, and many are concerned the Medicaid program could be the primary target.

Nursing homes, hospitals, and federally qualified health centers (FQHCs) could be significantly impacted if Congress makes changes. Since Medicaid is a joint federal-state program, any changes could also impact state budgets — potentially leading to health care reimbursement cuts, eligibility reductions, or both. Another option would be for states to raise taxes.

Medicaid policy changes or cuts could impact state budgets — potentially leading to health care reimbursement cuts, eligibility reductions or both.

Potential impacts of Medicaid changes

Various Medicaid changes have already been floated during early Congressional conversations. Nothing has been decided, but a few examples are:

1. Reduce FMAP rates for certain Medicaid populations or for states
2. Limit use of health care provider taxes
3. Require work for able-bodied adults
4. Establish per capita caps on certain Medicaid populations

It’s too soon to know whether any of these options (or others) will move forward, but we can begin to assess the potential impacts by highlighting two examples — reduced FMAP rates and limits on provider taxes.

Reduced FMAP matching rate for expansion population

All states receive federal dollars to fund their Medicaid program, but how much each state receives is based on many factors — a unique Medicaid matching rate (see chart), additional federal payments for certain populations or services, plus state-specific eligibility, reimbursement, or policy decisions. States have latitude, within broad federal parameters, to decide their Medicaid eligibility levels and establish provider reimbursement rates.

California’s FMAP is 50%. The federal government pays 50% of Medicaid costs and the state 50% — a dollar-for-dollar match.

Mississippi’s FMAP is 76.9%. The federal government pays more than 75% of costs, the state pays less than 25%, or the federal government pays more than three times what the state pays.

One idea being discussed relates to an optional population of individuals states can cover under Medicaid — the adult “expansion population.” Forty states chose this option and now receive an enhanced 90% FMAP for this population. More than 22 million individuals receive Medicaid coverage under this option.

If the 90% matching rate is reduced to a state’s regular FMAP, the federal government estimates savings of at least $600 billion. However, 40 states will face significant Medicaid budget shortfalls.

These states may then limit or eliminate coverage for the “expansion population.” In fact, multiple states have “trigger” laws that automatically require ending coverage if federal matching rates fall below certain levels. The result would likely be higher rates of uninsured and higher levels of uncompensated care felt most by safety-net hospitals, community health centers, and even nursing homes.

On the flip side, the 10 states that did not expand their Medicaid coverage — Alabama, Florida, Georgia, Kansas, Mississippi, South Carolina, Tennessee, Texas, Wisconsin, and Wyoming — would see no impact under this potential change.

Limiting health care provider taxes

Another proposal relates to use of health care provider taxes.

States typically fund their Medicaid share by using state general funds (tax revenues), health care provider taxes, local funds, or intergovernmental transfers.

All states but Alaska use provider taxes to fund a portion of their Medicaid program. Hospitals and nursing homes are most frequently taxed — 47 states tax hospitals and 46 tax nursing homes — but others are taxed as well. As such, provider taxes are a part of how states reimburse health care providers.

Hospitals and nursing homes are most frequently taxed — 47 states tax hospitals and 46 tax nursing homes — but others are taxed as well. As such, provider taxes are a part of how states reimburse health care providers.

If Congress were to limit or eliminate the use of provider states, it would save the federal government up to an estimated $600 billion. However, it would create a Medicaid shortfall for states. Since provider taxes are frequently used to reimburse for health care services, any reduction could result in hospitals, nursing homes, or other providers facing reimbursement cuts.

How CLA can help with health care policy changes

Changes to the Medicaid program could impact hospitals, nursing homes, FQCHs, physicians, patients, and states depending on Congressional decisions. Understandably, advocacy efforts are in full force and a potent tool.

Medicaid policy can be tricky. If you have questions or need help analyzing the landscape as negotiations continue, reach out today. We have the deep financial, reimbursement, and policy knowledge to assist.

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