What Lies Ahead For Medicaid In Budget Reconciliation?
Health Affairs
By Sara Rosenbaum and Alison Barkoff
February 11, 2025
President Trump recently stated, “We will love and cherish” Medicaid, promising that budget cutting would be limited to finding waste and abuse. But that sentiment is not likely to prevail as Congress moves forward with massive budget cutting efforts, to be carried out in either one or two phases. (The strategy is not yet clear.). Indeed, given the proposals that have surfaced, it is evident that tens of millions of people face a high risk of losing Medicaid coverage and services, either through significant cuts to federal funding or imposition of a work mandate with complex reporting requirements as a condition of eligibility, or a combination of the two.
Should Congress pursue a wide range of possible budget-cutting strategies, all Medicaid populations, from the youngest infants to the most vulnerable older adults, inevitably will feel the effects. Moreover, the safety net health care providers that disproportionately serve the poorest and highest-need patients, and indeed the health care system as a whole, will be at risk. The changes under consideration, if enacted, would shake Medicaid’s very structural foundations and imperil its future as the nation’s largest public health insurer.
Some have claimed that older adults, those with disabilities, pregnant women, and children will all be protected. There have even been claims (especially in the case of cuts to working age adults) that these changes are necessary to protect these populations. Obviously these claims are not simply wrong but completely disingenuous. There is simply no way to protect any beneficiary from the impact of far-reaching Medicaid spending reductions. Medicaid is perhaps the nation’s most complex federal health care program, and each element of the program is inextricably connected to the other. Taking unprecedented sums out of Medicaid would hurt everyone. Period.
Public health experts have raised alarms over these developments. Equally breathtaking for a health insurance program that currently insures over 80 million children and adults and represents nearly 20 percent of all national health expenditures, proponents of deep reductions have narrowly cast their efforts as “cost savings” in an attempt to deflect public attention from the real plan—to fundamentally shift Medicaid policy to advance an agenda put forth by people who, for philosophical reasons, have long trained their sights on unraveling Medicaid. Indeed, massive Medicaid restructuring was a principal element of Project 2025, the policy blueprint that fueled President Trump’s campaign.
The Budget Reconciliation Process
Senate Budget Committee Chairman Lindsay Graham has now released the text of his committee’s draft FY 2025 budget resolution , which is expected to be the first of two such resolutions in the Senate. The House is still struggling to assemble a single gigantic resolution rather than moving two separate bills. Regardless of the process used, both the House and Senate are expected to instruct their respective authorizing committees (Energy and Commerce in the House, Finance in the Senate) to significantly cut Medicaid spending. Whatever the resolutions’ final numbers, they are merely a starting point or floor; based on all reports, spending reductions are expected to go far deeper.
The process of altering actual spending, including spending on “mandatory” programs like Medicaid, to reach the target number is known as the budget reconciliation process. A key check on budget reconciliation in the Senate is known as the Byrd Rule, which is designed to keep the fast-track legislative process used for reconciliation (requiring only a simple majority in the Senate rather than a filibuster-proof 60-vote threshold) focused on raising revenue or cutting outlays. As a result, the Rule, in effect since 1985, offers some safeguards against legislative changes that may have an indirect outlay effect but nonetheless are so speculative as to not to be able to generate predictable, measurable savings. For example, simply reauthorizing a program is considered extraneous because without actual funding, reauthorization has no budgetary impact.
Importantly, changes considered tangential to the task of saving money—for example changes that may involve a policy whose budgetary effects are speculative at best—would be considered extraneous. But these are calls for the Senate Parliamentarian and the Congressional Budget Office and it is impossible to know what ultimately could qualify for inclusion. (This deliberation process is known as the “Byrd Bath.” History shows crucial behind-the-scenes battles over what is in and what is out).
Thus, any discussion of potential Medicaid cuts will be inevitably influenced by the budget process itself, which is designed to focus on achieving measurable spending reductions that at least meet the budget targets. The Medicaid target floors remain fluid at this point; nor do we know how CBO will score a specific proposal or which proposals might be considered extraneous in the Senate. Nonetheless, given the white-hot focus on the nation’s largest means-tested entitlement program—further intensified by the OMB’s federal spending stoppage that initially included closing off the federal Medicaid payment system on which states, providers, and beneficiaries depend—it is possible to describe the preliminary changes on the table and t]heir implications.
Importantly, in any effort to cut Medicaid spending, negotiations are really a four-sided table, including the House, the Senate, the White House, and the states. States not only bear a significant proportion of total Medicaid expenditures but also face major challenges in generating that share; they depend deeply on Medicaid as the single most important federal funding source and a bedrock within their economies.
Fundamentally Altering The Federal/State Financial Relationship
For sixty years, states have participated in Medicaid based on certain basic promises about the federal funding to which they are entitled. Decisions about program scope and size are inextricably tied to states’ near- and long-term projections about the funding they will receive. They have been able to do this because for over six decades the contours of Medicaid funding have remained fundamentally stable, with periodic temporary adjustments to deal with exceptional costs such as the federal spending increase during the Covid pandemic. These rules of the game are the bedrock on which Medicaid rests.
A Three-Part Deal: An Open-Ended Federal Payment Share
As part of Medicaid’s 1965 enactment, the federal and state governments entered into a basic three-part deal. First, states would be given considerable latitude to determine the size and scope of their programs within certain federal parameters, the most notable being coverage of certain populations for a wide range of medical assistance services. Once a state chose to cover a population, those beneficiaries would be entitled to covered services. States, in turn, would be entitled to payment of the federal share for services provided, with open-ended financing available to enable states to meet the cost of medically necessary care.
This structure—federal contributions to state expenditures on an open-ended financing basis—represents the crucial promise on which Medicaid was founded. Given who depends on Medicaid – infants, children, pregnant women, the poorest working-age adults, children and adults with disabilities, and a large aging population—the promise of open-ended financing is crucial.
A Three-Part Deal: A Sliding Federal Share Based On State Income Levels
Second, depending on population income levels, participating states are entitled to federal reimbursement of between 50 and 83 percent of their medical assistance expenditures furnished under its approved state plan, as well as at least 50 percent of program administration costs. States are also entitled to certain payment enhancements, which may be temporary or permanent. For example, during the COVID pandemic Congress temporarily increased federal Medicaid funding levels to help states meet the cost of continuous eligibility for coverage. The Affordable Care Act Medicaid expansion was predicated on a highly enhanced permanent federal financing level of 90 percent and is basic to states’ participation decisions.
A Three-Part Deal: An Obligation To Spend State Funds
Third, a state would be expected to spend its own funds to partially fund its Medicaid program—at least 40 percent of total non-federal expenditures, with the remainder coming from local governmental contributions (e.g., county expenditures for publicly supported hospitals and clinics; health care revenues generated by local taxing authorities). To meet their expenditure requirements, virtually all states today employ, among other tools, their authority to impose broad based provider taxes. Such taxes can make up a considerable proportion of total state expenditures, with the rest coming from general revenue sources.
Republican Ideas For Altering The Federal-State Deal
The most obvious way to cut hundreds of billions, if not trillions, of dollars in Medicaid outlays is to make fundamental changes to this longstanding deal. Below are concepts that Republicans in Congress have already put on the table for consideration.
Capping Federal Spending
Congress could impose either block grants or per capita caps (spending limits per person) that restrict total federal contributions to state programs. Both of these proposals would renege on the time-honored promise of how the federal government funds Medicaid and would translate to significant cuts in Medicaid funding over time. Per capita caps, which have received more attention, have been projected by the Congressional Budget Office to cut more than $900 billion over a decade, depending on how the cap is set.
Budget experts assume that per capita caps would result in deep federal payment reductions below what states otherwise would be entitled to receive. Per capita caps also would shift considerable costs to states, thereby necessitating either new state revenues to fill the hole or, more likely, major reductions in coverage of costlier optional populations and services, especially low-income seniors and people with disabilities; institutional and community-based long term services and supports for children and adults (including older adults) with significant disabilities would be on the chopping block. Per capita caps would particularly penalize states that attempt to more comprehensively support their sickest and highest-need populations, states whose demographics skew older and high need (think Rust Belt states), and states with the highest health care costs.
Eliminating The ACA’s Funding Enhancement For Working Age Adults
In a much-discussed move, Congress could eliminate the enhanced funding levels paid to states for coverage of low-income working-age adults made eligible for Medicaid under the Affordable Care Act (ACA). The ACA’s expansion of Medicaid to all adults with household incomes up to 138 percent of the federal poverty level specifies an initial incentive of full federal funding for the expansion population, reduced over time to a 90 percent federal financing level. (The 2021 American Rescue Plan provided additional, temporary incentives for states to expand Medicaid.) This increased federal match has considerably eased the cost of covering millions of poor working age adults and has acted as a powerful coverage incentive in all but 10 states.
The ACA expansion states include both blue and red states, and some 20 million additional poor adults ages 18-64 have been able to gain coverage as a result. Taking away this enhancement and returning to the standard federal funding rate would, according to recent CBO estimates, cut nearly $670 billion over a decade. (CBO would, of course, update these estimates as part of the reconciliation process.) Among states that would automatically or likely eliminate expansion were enhanced funding to end, millions of people are at risk: Over 3.6 million adults face almost immediate coverage losses if the enhancement ends. Of course, the figure could be far higher as more states find that they simply cannot replace lost enhancement funding as other deep federal Medicaid cuts take effect.
Opponents claim that enhanced federal funding for this population somehow disadvantages the traditional population of children, pregnant women, very poor parents and caretakers, people with disabilities, and older adults. This claim is absurd. Nothing about the ACA expansion implicates the strong entitlement rights of traditional beneficiaries. In fact, data from a recent KFF report explicitly contradicts this argument, finding that per-person spending for the traditional Medicaid population (particularly disabled people and older adults) is higher, not lower, in ACA expansion states.
As KFF notes, the size of the ACA adult population is enormous: 30.8 percent of total Medicaid enrollment in expansion states. In states such as Louisiana, where eligibility standards for traditional parents stood at less than 20 percent of poverty, virtually all working-age adults, other than those eligible based on pregnancy or disability, are insured through the ACA expansion—including not just young, healthy adults but older, sicker adults ages 50 and higher, in later middle age and facing heavier health burdens.
Reducing The Minimum Federal Contribution Rate Below 50 Percent
Reducing the minimum federal medical assistance percentage (FMAP) below the 50 percent minimum has been put forward to target the most economically well-off states. These states, of course, tend to have larger and more comprehensive programs and could face over $600 billion in lost federal funding under this proposal according to CBO. The effects on state programs likely would be immediate in terms of states having to reduce the scope of higher-cost services they offer and the provider payment rates they set. Particularly at-risk would be people with disabilities and older adults who use long term services and supports, adults in addiction recovery, and other higher-cost, optional populations and services.
State Generated Revenue Requirements And Provider Tax Constraints
Congress also could alter the rules on how states can generate the non-federal share of Medicaid spending by placing new restrictions on where the revenues financing this spending can come from. For example, Congress could increase the minimum state (as opposed to local government) share from 40 to 50 percent of total non-federal spending—a 25 percent increase over the current 40 percent minimum now in place, placing enormous strain on states as they attempt to generate the needed funds to qualify for federal payments. States that could not replace these funds would effectively forgo substantial federal financing. Congress also could place severe constraints on the use of broad-based provider taxes by limiting the total state revenue that such taxes could be used to generate.
Fraud And Abuse
Congress could impose stiff penalties for states that fail to meet “fraud and abuse” targets. While there certainly may be steps needed to strengthen anti-fraud safeguards, these changes may require additional spending and likely would be impossible to meet in an environment of cuts in funding.
Furthermore, as CMS has long pointed out, what is labeled “fraud and abuse” often simply results from a reviewer being unable to determine whether a payment was proper because of missing data from a provider claim or a missing eligibility verification element. It is unclear what fraud penalties might look like or the types of policies and practices that would be labeled as “fraud.”
Taking Direct Aim At Working-Age Adults
Poor working-age adults have emerged as a major target of Congressional action. Aside from eliminating the FMAP enhancement for the ACA expansion population, both chambers of Congress appear to be coalescing around a federal work mandate as a condition of eligibility as well as a condition of federal funding. The precise contours of such a mandate have yet to emerge. But it is clear that the target group is enormous: A comprehensive analysis of work mandates undertaken by the Center on Budget and Policy Priorities (CBPP) estimates that over 36 million people (whether traditional Medicaid enrollees or members of the ACA expansion group) fall into the risk group of adults ages 18 to 55 who previously were targeted in 2023 legislation that passed the House.
Not all of these people would lose coverage. Indeed, two thirds of all poor adults work either full-time or part time according to a new KFF report, while 10 percent don’t work because of disability (even among people with disabilities, KFF also reports that 37 percent are working), and another 22 percent are caring for family or in school. But as CBPP points out, the real risk of work requirements comes from the failure to recognize and apply certain exemptions and the extreme difficulties of navigating the red tape of reporting requirements. Navigating reporting systems is especially problematic for lower-wage earners because work hours can change so frequently and work may come in seasonal cycles, leaving workers temporarily short of the minimums they must meet and unable to keep up with reporting rules. The complex reporting system has also meant that disabled people, older adults and caregivers who are on paper excluded still end up losing their Medicaid coverage.
This was the lesson of the Arkansas Medicaid 1115 work experiment, the only such experiment to be fully studied. In that experiment, launched in 2018 and shut down by the courts in 2019, 97 percent of the people losing coverage were either exempt or unable to meet reporting rules. No measurable increase in employment occurred, and the percentage of workers without any health insurance grew significantly. Georgia’s work experiment, approved under the Trump administration and permitted by a federal court to take effect despite Biden administration efforts to halt it, has yielded only a fraction of the projected enrollment (5500 out of nearly a quarter million potentially eligible). The red tape even to simply apply, high administration costs, and application backlogs are perhaps the Georgia experiment’s most prominent features.
The bottom line is that work requirements inevitably would lead to major reductions in current enrollment and deter millions of people from ever applying in the first place—not because those individuals aren’t employed or don’t qualify for exemptions but because the whole process of seeking and maintaining coverage becomes incredibly complex and a real deterrent to health care access. The evidence shows that requirements would yield no changes in work or access to workplace coverage and would instead trigger widespread uninsurance, threatening worker health and in particular the ability of workers with disabilities to continue working.
The implications are especially severe for older working-age adults. The ACA expansion has made health insurance accessible for the first time to impoverished members of this group; while young adults certainly take advantage of Medicaid, the ACA expansion likely has yielded its greatest benefits for older adults too young for Medicare but in poor health and in need of significant medical care. This certainly is the experience of community health centers, which care for nearly one in five Medicaid beneficiaries and are primary care providers for approximately 9 million of the 36 million beneficiaries at risk of coverage loss as a result of work mandates.
Immigrants In The Bulls-Eye
Immigrants have emerged as the other major targeted population. It is possible that the White House and at least some members of Congress will advocate for eliminating nonemergency Medicaid coverage for certain legal immigrant populations, including people granted asylum or paroled into the country. Effectively these populations would be treated as undocumented immigrants eligible only for emergency health care, with full Medicaid limited to citizens and green card holders. The effect would be felt not only by newly excluded populations but also by citizens and permanent legal residents fearful of doing anything to threaten the safety of others in their households. The lessons gleaned from the first Trump administration’s public charge rules, designed to punish legal immigrants for seeking the Medicaid benefits to which they were entitled, apply doubly here. The rule’s chilling effect, was shown to be enormous. The health of entire communities would be placed at risk, including children and adults who remain fully eligible for assistance.
The threats to immigrants do not end here. Senator Mike Lee has sponsored the America First Act , which would, among other punitive matters, bar community health centers from all federal health care programs (Medicaid, Medicare, CHIP, ACA subsidy coverage) if they provide nonemergency care to immigrants—in particular asylees and immigrants paroled into the US—other than the those allowed under the bill. Others have proposed not simply excluding many legal immigrant classes from Medicaid but also barring federal Medicaid funding entirely in the case of any state that uses its own funding to cover immigrant care.
Whether these types of indirect-impact proposals would survive a Byrd Bath is open to question, but then again the test of extraneousness is highly subject to subjective judgment.
People With Disabilities, Older Adults And Caregivers
Medicaid is vital to the wellbeing of people with disabilities, older adults and their caregivers. More than half of Medicaid spending is on services for disabled people and older adults. More than one in three disabled people have Medicaid, and a majority of older adults on Medicaid have disabilities. Medicaid is the primary payor for LTSS for disabled people and older adults who need home and community-based services and nursing home care, and it helps support family caregivers of disabled people and older adults.
But because of the optional nature of eligibility pathways and of home and community based services, there are already more than 700,000 people on waiting lists. All of the proposals discussed above would lead to the same result: significant cuts in states’ Medicaid programs. States would have no choice but to reduce or eliminate these optional populations and services. Despite promises from members of Congress otherwise, there simply is no way to “carve out” people with disabilities, older adults and their caregivers from the impact of these proposals.
Concluding Thoughts
Whether the effort to reduce Medicaid spending comes in one or two waves is unclear, and how big each wave could be is also unclear. What is clear is that what is driving the discussion right now is an aggressive quest for dollar offsets, not a vision of a stronger Medicaid program that ensures good, stable health insurance for the poorest Americans with the most significant health care needs, or a vision of a Medicaid program that continues to underpin the health care system’s extraordinary capability to respond to public health demands, the COVID pandemic being only the most recent example.
As a wise person once wrote, Medicaid is the workhorse of the American health care system. If we weaken Medicaid, families, the health care system, and state economies will pay the price.
Sara Rosenbaum, JD is the Harold and Jane Hirsh Professor of Health Law and Policy and founding chair of the Department of Health Policy at the Milken Institute School of Public Health, George Washington University.
Alison Barkoff, JD led the Administration for Community Living in the Department of Health and Human Services (HHS) from January 2021 to October 2024.