As Governors Meet in D.C., Possible Federal Medicaid Cuts Loom as Big State Funding Issue

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As the nation’s Governors convene in Washington, D.C., the future of federal Medicaid funding is in flux, looming as a big potential challenge for states with Republican and Democratic leaders. Republicans in Congress are considering options to pay for extending expiring tax cuts, and Medicaid cuts of $880 billion or more over ten years are on the table (down from earlier plans floated that were as high as $2.3 trillion).

Federal cuts to Medicaid have direct implications for state budgets. Medicaid is a spending item but also the largest source of federal revenues for state budgets. As a result of the federal matching structure, Medicaid has a unique role in state budgets. According to data from the National Association of State Budget Officers (NASBO), Medicaid accounted for 30% of total state spending for all items in the budget. However, Medicaid accounted for only 15% of expenditures from state funds (including state general funds and other state funds) and over half (57%) of federal funds to states.

While some critics say that the matching structure incentivizes states to spend more on Medicaid than they otherwise would, states pay a share of their costs and have an incentive to control Medicaid spending. Research shows that federal matching dollars from Medicaid spending have positive effects for state economies and studies show that states with the ACA Medicaid expansion have realized budget savings, revenue gains, overall economic growth, and observed positive effects on the finances of hospitals and other health care providers.

Many specific proposals could cut federal Medicaid funding including capping federal spending on a per enrollee basis, lowering the match rate (such as by eliminating the enhanced match for the ACA expansion group, lowering the FMAP floor), or restricting or eliminating the use of provider taxes, which states use to fund their share of Medicaid spending, thus reducing federal matching funds. Other policy proposals, such as imposing work requirements for Medicaid enrollees, could reduce federal Medicaid spending by lowering enrollment, but could increase state administrative costs.

In the face of reduced federal funding for Medicaid, states could be left with difficult choices – raise revenue or cut spending. Cuts to Medicaid could mean eliminating coverage for children, parents, working adults or those who might need long term care; limiting benefits; or cutting payment rates for health plans or providers. These choices could come at a time when state revenue growth is slowing, and most states face requirements to pass balanced budgets.