Federal Medicaid cuts loom, but states can act sooner

Recently enacted federal cuts to Medicaid are scheduled to begin in future years, but some states could act on them sooner.

The One Big Beautiful Bill Act (OBBB) included more than $1 trillion in Medicaid cuts. However, federal Medicaid spending will still increase over the coming 10 years by 7%, instead of the 19% growth it would have had without the cuts, according to projections by the Congressional Budget Office (CBO).

The largest of the OBBB cuts don’t go into effect until 2027. For instance, at the start of 2027, both work requirements and more frequent beneficiary eligibility checks begin.

However, states have the option to implement OBBB earlier, including:

• Work requirements
• Eligibility determination frequency
• Retroactive coverage limitations

The OBBB will require able-bodied, pre-Medicare, adult enrollees to work, volunteer, obtain training or volunteer — called community engagement — for a combined total of at least 80 hours per month to retain coverage. States will need to build the compliance systems to implement to requirement. States can request a two-year delay of implementation past the Jan. 1, 2027 start date if they can’t create the compliance systems in time. Or they can implement the work requirements earlier.

The law provides $200 million in implementation funding to states for FY26 and $200 million to HHS that year.

“One of the biggest implementation challenges is going to be around community engagement and that’s because of all of the different work streams that states are going to have to establish that look different from how they are determining eligibility now,” said Hemi Tewarson, executive director of the National Academy for State Health Policy.

Some states will be interested in launching their work requirements earlier than 2027 but the logistical challenges of setting up verification systems may prevent that, said policy watchers.

In recent months, several states have submitted 1115 waiver requests to CMS to implement work requirements. However, it is unclear whether those will be approved because their details may not conform the specific requirements of the law, said policy watchers.

“Each state is going to respond differently to the law and to the administrative burden, not only on hospitals but also state departments of Medicaid,” said Shawn Stack, a policy director for HFMA. “As states can trim those budgets, they’re going to, because they’re going to be hurting for funds on a lot of these programs.”

The law requires states to conduct eligibility redeterminations at least every six months — instead of annually — for Medicaid expansion adults. But states can implement that provision before Jan. 1, 2027, said Andrew Donahue, a director of healthcare finance policy at HFMA. The law provides $75 million in implementation funding for FY26.

Similarly, states can implement earlier the 2027 reduction in retroactive coverage for Medicaid enrollees from 90 days to one month for expansion enrollees, he said. Retroactive coverage of two months will be available for traditional Medicaid enrollees. The law provided $15 million in FY26 implementation funding.

“It would be foolish of us to think that there aren’t near-term impacts,” said Susan Feigin Harris, co-head of healthcare for Norton Rose Fulbright US. “If you have uncertainty going forward, why would healthcare systems deploy capital and engage in hiring, along with everything else that’s going on?”

The looming OBBB cuts come amid other Trump administration initiatives that affect healthcare finance, such as cuts to NIH research funding impacting many academic medical centers. 

Hospital impact by state varies

Each state’s approach to the law’s Medicaid changes and the flexibilities it allows could be driven, in part, by the disparate impact on its providers.

A Manatt Health estimate of 10-year Medicaid hospital cuts under the bill found:

• 20% ($611 billion) cut in expansion states
• 9% ($54 billion) in non-expansion states

“When someone asks, ‘How will it impact my state,’ the first thing you do is look at ‘Are you an expansion state or a non-expansion state?’” Feigin Harris said. “And how will that impact the population in that state who have become reliant on receiving healthcare services — preventive healthcare services — through these programs.”

The largest hospital cut, $119 billion, will hit California hospitals, while the smallest cut, $61 million, will occur for Wyoming hospitals, according to the estimates.

State reaction

Most state responses around the bill as it moved toward passage were focused on looking to make up for lost federal Medicaid funds.

Colorado Gov. Jared Polis, a Democrat, said at a May news conference he planned to reconvene the legislature to address lost federal Medicaid dollars. Colorado will lose $18 billion in federal Medicaid funds over 10 years, according to Manatt estimates. Other states also are discussing special legislative sessions this year, according to healthcare policy watchers.

On July 3, Wisconsin enacted a new budget to increase its Medicaid provider tax from 1.8% to the maximum 6% in order to garner an additional $1.5 billion in annual federal matching funds. However, it was unclear whether the increase would be approved by CMS, since the OBBB established new limitations on such federal matches, according to policy watchers.

Meanwhile, New York, which was estimated by Manatt to lose $107 billion over 10 years for both its Medicaid program and its so-called Essential Plan, which is a state-run insurance program for people whose income is too high for Medicaid. Federal fund cutoffs for that plan included in the new law, will go into effect at the beginning of 2026 and were expected to cut 730,000 enrollees out of its 1.6 million, according to multiple news reports. A new coverage plan, required by state law, for 500,000 of those disenrolled will cost the state $2.7 billion annually and will require action by the legislature.

Minnesota and Oregon are the only two states that operate such state-run insurance programs funded with federal dollars. State leaders in those states have not yet said what their plans are.

Feigin Harris expects other states will start looking to dial back their Medicaid spending in anticipation of the cuts.

States are not expected to change overall eligibility, but they are expected to target provider rates.

“The least-likely [cut] is to remove coverage and that’s why providers tend to take the hit,” Feigin Harris said. “Because it’s not popular to remove coverage completely.”

Other most-likely cuts include:

• Drug coverage
• Number of covered visits
• Care coordination services
• Housing
• Transportation
• Behavioral health

Legislators were expected to target social determinants of health programs, which are “the kinds of things that help elevate someone’s life and health to prevent them from becoming sick. Those have been investments that have been made that would be the first to go,” Feigin Harris said.

States also may look for more time to provide their rural health plans, which are required to obtain some of the $10 billion in federal rural provider assistance provided for 2026 by the law. Those detail “rural health transformation plans” are currently due by the end of September in order to obtain funds for FY26.

Some states that are hoping there is some flexibility from whatever they submit, as of the end of September, so that in 2026 they can update them with more details and a fully fleshed out rural health transformation plan, said policy watchers.