Medicaid Cuts Could Shift Up to $1.1 Trillion in Costs to States

If federal Medicaid spending per enrollee is capped, states will have to make up for an estimated $700 billion to $1.1 trillion in funding reductions from the federal government over the next ten years, according to a new analysis by the Urban Institute, supported by the Robert Wood Johnson Foundation.

Researchers warn that implementing per capita caps and eliminating the enhanced federal match through the Federal Medical Assistance Percentage (FMAP) would make it difficult for states to sustain their Medicaid programs.

To balance out these cuts, states would need to raise taxes, reduce funding for programs like education, lower payments to Medicaid providers or cut benefits for enrollees, the analysis found.

“This proposed policy amounts to a wholesale transfer of financial responsibility to states because the need for healthcare will not change, just the means to pay for it,” said Kathy Hempstead, senior policy adviser at the Robert Wood Johnson Foundation. “The consequences will be most drastic in our poorest states, which will be very hard-pressed to close this massive funding gap.”

The analysis was released shortly after the House passed a budget resolution expected to result in major reductions in federal Medicaid funding.

While the specifics of tax and spending cuts are still being negotiated, the budget plan includes tax cuts ranging from $4 trillion to $4.5 trillion over the next decade.

The plan also calls for federal spending cuts of between $1.5 trillion and $2 trillion over the same period.

House Speaker Mike Johnson said in a CNN interview that was aired Wednesday that per capita caps on Medicaid were "off the table" and that the federal share of Medicaid expenditures — he used the commonly used acronym, FMAPs — would not be reduced.

Johnson said budget cutters could achieve spending reductions by eliminating fraud, waste and abuse and putting work requirements on Medicaid eligibility.

When pressed about whether those efforts would produce enough savings, Johnson spoke about revenues from tariffs, Elon Musk's DOGE efforts identifying trillions of dollars of fraud, waste and abuse, and the gold card program President Donald Trump has proposed that would grant U.S. citizenship to people who invest $5 million in the United States.

The Urban Institute’s findings highlight how capping federal Medicaid contributions would shift hundreds of billions of dollars in healthcare costs to individual states.

Researchers examined the impact of both per capita caps and the elimination of the enhanced FMAP.

Their analysis found that if per capita caps are implemented while maintaining the enhanced FMAP, federal spending would still decline significantly.

If per capita caps are not enacted but the enhanced FMAP is eliminated, federal spending would still decrease by hundreds of billions of dollars.

“The combination of reducing the 90% federal match for expansion populations and a per capita cap policy would reduce federal spending by between $1.2 and $1.7 trillion, depending on the policy details,” said John Holahan, a fellow at the Urban Institute. “The responsibility for the healthcare of the most vulnerable populations would shift to states and individuals.”

States with lower-than-average incomes, including Arkansas, Kentucky, Louisiana, Mississippi, New Mexico and West Virginia, would be most affected by these funding reductions.

According to the analysis, these states would need to increase their Medicaid spending by more than 40% to balance out the most extreme federal cuts.

Additionally, pharmacy benefit manager (PBM) reform is expected to play a role in budget negotiations as policymakers look for cost-saving measures.

The House Energy and Commerce Subcommittee on Health recently held a hearing on increasing competition in the PBM industry and reducing costs for patients.

Members of Congress noted that the previous legislative session included over a dozen hearings on PBM reform, resulting in provisions in the end-of-year spending bill aimed at increasing transparency in PBM business practices across Medicare, Medicaid, and the commercial insurance market.

As lawmakers continue to debate tax and spending cuts, the potential impact on Medicaid remains a key issue, with the most vulnerable populations at risk of losing access to essential healthcare services.