States, providers face brunt of GOP Medicaid cuts plan

Modern Healthcare – Thursday, May 15, 2025
By Michael McAuliff 

States will struggle to make up hundreds of billions in federal Medicaid cuts congressional Republicans are attempting to speed to President Donald Trump, leaving local leaders facing tough decisions on benefit cuts, provider payments reductions or tax increases.

Exactly how those choices get made will vary dramatically among the states, and could take years to play out depending how federal and state officials interpret certain portions of the bill the House Energy and Commerce Committee advanced Wednesday, which aims to cut $625 billion from Medicaid over 10 years.

The Medicaid cuts are just part of the massive tax-cutting bill that House Speaker Mike Johnson (R-La.) hopes to pass by the end of the month to extend the Tax Cuts and Jobs Act of 2017, which Trump enacted during his first term.

The primary cost-cutters in the health legislation are stricter eligibility and enrollment standards in Medicaid, including work requirements and increased enforcement of longstanding rules barring undocumented immigrants from benefits.

New restrictions on the provider taxes, which nearly all states use to fund their share of the joint federal-state program, stand out from a state budgetary perspective. The nonpartisan Congressional Budget Office estimates these provisions would reduce federal Medicaid spending by $87 billion over 10 years.

“These cuts destabilize the state-federal Medicaid partnership,” Federation of American Hospitals President and CEO Chip Kahn said in a news release Wednesday. “Strictly limiting provider taxes and state-directed payments will inevitably result in degraded access due to closures of services or even hospitals; the health of all Americans, regardless of their coverage, will suffer.”

States would respond to cuts in a variety of ways, reflecting the structures of their respective Medicaid programs and prevailing local ideologies.

“You’re going to see a multitude of different things, depending on what the political landscape is and how many people they have on Medicaid, and what their budget comfortability is, and what their comfort is of bringing in new revenue,” said Jennifer Ungru, director of government relations at the law and lobbying firm Jones Walker.

But one thing that is clear is that, given the scale of the bill’s proposed cuts, state leaders and Medicaid administrators will be faced with hard calls.

“They have only three basic choices,” said Edwin Park, a professor at the Georgetown University Center for Children and Families. “They have to increase general funding, which is income and sales taxes. Most likely, they’re going to have to cut other parts of their budget, which is principally education, or they’re going to have to cut their Medicaid programs.”

Exactly how states pull those levers is hard to precisely predict, and analysts said the legislative text complicates matters further by being vague in some places and by prohibiting actions that states have taken when faced with funding shortfalls in the past.

The vague part is exactly how much provider taxes will be restricted, as well as the state-directed payments that states order Medicaid managed care organizations to make to providers.

States split the cost of Medicaid with the federal government. And since expenses are not capped, the federal government pays more when Medicaid costs rise. States use provider taxes, usually with the blessing of health systems, to reduce general fund spending while still tapping the maximum amount of federal money. Providers tend to get more back in Medicaid reimbursements than they pay in provider taxes.

While some critics call that “money laundering,” there are federal laws and regulations governing how states can use provider tax revenue, and the Health and Human Services Department decides periodically if those rules are met. One key requirement is the taxes must be broad-based. Another is that subsequent payments back to states cannot exceed 6% of a provider’s revenue.

In the case of state-directed payments, states get waivers that allow them to tell health insurance companies with Medicaid contracts how much to pay providers. A Centers for Medicare and Medicaid Services regulation implemented under President Joe Biden allows states to mandate payments akin to commercial insurance rates, which are generally higher than Medicaid and Medicare reimbursements.

Park said the point is to make sure providers are paid well enough to be willing or able to serve Medicaid beneficiaries.

The tax-and-spending-cuts bill has three provisions that could make that difficult. One bars new provider taxes. Another says state-directed payments will have to be capped at Medicare rates. A third tightens standards for evaluating whether a provider tax is legal.

The first provision would have a clear impact on states that might want to use provider taxes to offset cuts. They would be forbidden to create new ones at a time when they would be directed to ramp up administrative efforts to intensify eligibility checks and enforce work requirements.

“They can’t raise other provider taxes because that’s prohibited,” Park said. “So they’re going to have a hole.”

Energy and Commerce Committee aides who briefed reporters on the bill Monday said the other two provisions would not affect existing taxes.

But Park and Ungru said the language is ambiguous enough that it’s not clear how long existing taxes would be “grandfathered” or whether renewing current provider taxes would be permissible. Ultimately, HHS would be able to decide, and CMS proposed its own rule to tighten standards on Monday.

Ratcheting up limits on provider taxes is already likely to curb some existing ones, and Park said stringent interpretations from HHS could wipe out more.

That means not only are states forbidden from turning to new provider taxes to cover lost federal funding, they won’t know until after the bill is enacted and implemented whether they might lose some of their other funding streams.

Energy and Commerce Committee ranking Frank Pallone (D-N.J.) especially ripped the provider tax limitations for punishing states that want to ensure fewer people lose health coverage.

“If a state like New Jersey says, ‘Okay, we want to increase our provider tax so that we want to provide better coverage or have more people be eligible,’ you can’t do that,” Pallone said during a call with reporters Monday.

While states may not be able to tell in advance what all their funding mechanisms would be if this bill becomes law, they know they would have to carry out new eligibility requirements.

Julian Polaris, a partner at the law and lobbying firm Manatt, Phelps & Phillips, said states’ choices in how to implement the new eligibility checks and work rules are likely to differ considerably, be difficult to implement smoothly and be expensive.

“You need to do [information technology] infrastructure. Often, you end up hiring staff, and so it’s a costly undertaking for the state,” Polaris said.

Georgia, for example, has spent at least $80 million building a verification system for its work requirement program while signing up only about 5,000 people for health coverage.

States where political leaders are more concerned with costs than coverage may also build systems that are less sensitive to disenrolling people improperly simply because of bureaucratic problems.

“Because it is so costly and because other elements in the bill are adding significant new procedural requirements for states, we could see some states just putting a lot more effort into implementing work requirements in a humane way than others that just don’t have the capacity to be as thorough about it,” Polaris said. “We may also see states with varying levels of commitment to their expansion programs.”

Varying levels of commitment tend to be related to the political leanings of a state, but Park said some general responses states are likely to take can be anticipated by how they have responded to other budget crunches, such as economic recessions.

And it’s not good for patients or their caregivers, Park said. “They try to cut provider rates first, and they go after benefits and they do eligibility last, but they eventually make cuts to all three,” he said.

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