Cutting Federal Medicaid Funding: 8 Key Consequences That Everyone Should be Talking About

Authors: Patti Boozang & Cindy Mann

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tl;dr;

What’s New 
The next Trump administration and new Congressional leadership are considering cuts to federal Medicaid funding that by several estimates could exceed hundreds of billions of dollars over eight years.  

Discussions about the size and nature of Medicaid cuts are being debated now and once key decisions are crafted and baked into a budget process, it will be difficult to undo them. As this funding debate heats up, we’re highlighting eight key consequences of Medicaid cuts for the health and economic stability of states, their residents, and their health care delivery systems: 

1. Cuts to federal Medicaid funding shift costs to state budgets and taxpayers. 

2. Defunding Medicaid would create a major hole in state budgets. 

3. Cuts in Medicaid would disproportionately affect children, older Americans, and disabled Americans. 

4. Defunding Medicaid would strike a blow to Americans who need help paying for long-term care and community support services and to their providers. 

5. A cut to Medicaid is a cut to Medicare. 

6. Cuts to Medicaid would undermine behavioral health care coverage and access while the Nation is in the middle of a mental health/SUD crisis. 

7. Medicaid is a lean, efficient health coverage program; defunding it will lead to eligibility, benefits, and provider payment cuts. 

8. Stripping states of federal Medicaid funding would impact the health care workforce and state economies. 

Cutting Federal Medicaid Funding: 8 Key Consequences That Everyone Should be Talking About 

1. Cuts to federal Medicaid funding shift costs to state budgets and taxpayers. 

Nearly 68% of total state expenditures for Medicaid come from federal sources. Deep cuts to federal Medicaid dollars would force states to either increase their own spending to make up for the shortfall or cut Medicaid program services, eligibility, or provider payments or some combination of all three.

2. Defunding Medicaid would create a major hole in state budgets.  

Medicaid represents $1 of every $6 in U.S. health care spending and a major source of financing for health care provider delivery systems. It is the largest single source of federal funds to states – 45% of total federal dollars – and a driver of state economies. That’s true for all states – red, blue, and purple: Medicaid is the backbone of health care coverage and care delivery throughout the country.

3. Cuts in Medicaid funding would disproportionately affect children, older Americans, and disabled Americans.    

Two-thirds of total Medicaid spending annually pays for services for children, aged adults, and people with disabilities. The other one-third covers pregnant women, parents, and other adults including individuals with physical and mental health conditions. Cutting federal Medicaid funds would require states to increase state general funds or reduce services and provider payment, leading to poorer health outcomes and increased financial strain for these Americans. 

4. Defunding Medicaid would strike a blow to Americans who need help paying for long-term care and community support services and to their providers. 

Medicaid is the primary source of coverage and payment for Long-term Services and Supports (LTSS) in the United States, accounting for nearly 45% of all LTSS funding in 2021. Medicare, private insurance, and employer sponsored insurance don’t cover most long-term care services. Without Medicaid, millions of people would be left without access to LTSS and face health and financial consequences, with the impact growing as the population continues to age. Providers such as skilled nursing facilities, home care agencies, direct care workers and others providing community-based long-term care would lose a critical source of revenue, undermining their ability to continue to deliver services. 

5. A cut to Medicaid is a cut to Medicare. 

Three out of every ten dollars spent by the Medicaid program support care and access for Medicare beneficiaries. This includes the cost of most LTSS that Medicare beneficiaries need as well other health services. Medicaid also promotes access to care for Medicare beneficiaries by defraying their out-of-pocket costs. 

6. Cuts to Medicaid would undermine behavioral health care coverage and access while the Nation is in the middle of a mental health/SUD crisis. 

Medicaid is the single largest payor for mental health and substance use disorder services in the United States, covering 27% ($81 billion) of all behavioral health spending ($297.6 billion) in 2022. In 2020, Medicaid covered 23% of nonelderly adults with mental illness, 26% with serious mental illness (SMI), and 22% with substance use disorder (SUD) even though Medicaid accounts for coverage for just 18% of the total nonelderly adult population in the country. 

7. Medicaid is a lean, efficient health coverage program; defunding it will lead to eligibility, benefit, and provider payment cuts. 

Medicaid spending levels are driven by the number of people it serves and spending per person in Medicaid has grown much more slowly compared to other payers. From 2008 and 2022, spending per enrollee in private insurance jumped by 61.6%, compared to 40.8% in Medicare and just 21.7% in Medicaid. Low program administrative costs – averaging 5% – also help keep Medicaid lean. 

8. Stripping states of substantial federal Medicaid funding would destabilize the health care workforce and state economies. 

The Medicaid “multiplier effect” means that federal Medicaid dollars to states drive health care provider revenue, job creation, employment, business and economic opportunity and tax revenue. Deep cuts to federal Medicaid dollars to states would directly impact not just the Medicaid program, but also states’ health care providers, and the economic ecosystem that health care systems support including local vendors, employees, and small businesses. These effects would be most deeply felt in communities where hospitals and health systems are primary employers. 

The Bottom Line

As the debate about Medicaid cuts continues we’re focused, as many are, on how these cuts would impact state Medicaid programs and the 80 million people who are served by Medicaid – many of whom are our neighbors, families, and friends. But the impact would ripple through to state budgets, health care systems and providers and the communities and economic ecosystems they support across the country. These eight takeaways are intended to center the conversation in facts about Medicaid’s essential role in the nation’s health care system, state by state, and community by community.  

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