The changes to Medicaid outlined in Trump’s One Big Beautiful Bill Act (OBBBA) are still coming into view – and so are the policy adjustments that states can make to maintain enrollment.

The Congressional Budget Office (CBO) estimates that the federal government will save $911 billion over 10 years from enacting these changes to Medicaid and that 10 million people will lose health insurance as a result. 

As I wrote last week, the OBBBA requires able-bodied Medicaid beneficiaries with incomes currently above the poverty line but under different thresholds by family size — $22,025 for an individual or $45,360 for a family of four — to navigate a maze of red tape and reporting requirements twice a year to remain enrolled. Disabled people on Medicaid will have to provide documentation that they are too disabled to work in order to waive the work requirement and remain on Medicaid. These reporting requirements are expected to remove people who meet Medicaid’s eligibility requirements from the Medicaid rolls.

States can hire navigators (as they did for the Affordable Care Act exchanges) to help able-bodied people navigate the work reporting requirements. They can assist those who are disabled and unable to work in gathering and providing documentation that they are medically fragile and thus not required to meet the work requirements. Navigators also educate the community about changes in Medicaid and other safety net programs that affect them and help with obtaining these benefits. 

The advantages to states are clear. When states spend money on Medicaid, the federal government must reimburse the state by providing its share of matching funds. Medicaid is the largest overall source of federal funding for nearly all states. As eligible people lose Medicaid because they have difficulty meeting administrative requirements, this will reduce federal spending on the program, creating pressure on state budgets. If navigators assist eligible people and keep them from being dropped, the federal government will have to pay its share of health care costs for these individuals and the holes in the budgets of states and hospitals/providers that treat Medicaid patients will be much smaller.

There is already evidence of policy movements in this direction. Crain’s New York reports that the New York City health department estimates that the OBBBA threatens to reduce access to Medicaid for at least 500,000 New Yorkers, and will cause 233,000 residents to lose access to the city’s Essential Plan, a no-cost health insurance plan for poor people who do not qualify for Medicaid.  New York City is addressing this challenge by including $3 million in its proposed fiscal year 2027 budget to hire an additional 46 community health workers to act as navigators. They will enroll residents in Medicaid and  keep them on the Medicaid rolls. The community health workers will also connect families to SNAP, WIC, EITC and other benefits they have earned.

Other states have taken steps to offset the loss of state revenue due to anticipated reductions in Medicaid enrollments, but not all have provisions to hire navigators and thwart efforts to unfairly disenroll Medicaid beneficiaries. In its fiscal year 2025 budget, New Mexico legislators created a Medicaid Trust Fund that will be used to hire navigators and to provide healthcare for residents that lose Medicaid coverage. Connecticut’s proposed fiscal year 2027 budget includes an emergency state response reserve to help respond to federal cuts to health and human services. Pennsylvania officials anticipate that the state could lose roughly $20 billion in federal funding for its Medicaid program over the next decade. The governor has proposed increasing funding to the state’s Department of Human Services in fiscal year 2027 by more than $1 billion. And Michigan officials expect a roughly $1.8 billion funding gap for fiscal year 2027, citing declining tax revenues and the effects of federal Medicaid changes under OBBBA. 

OBBBA and State-Directed Payments 

Another challenge comes from the reduction in state-directed payments, which are intended to compensate providers for low Medicaid reimbursement rates. They enable states to maintain quality patient care and keep rural and safety net hospitals from closing. Medicaid adopted these payments as a way to increase what states pay for care of Medicaid beneficiaries. States are allowed to tax health providers and use the funds to supplement payments for Medicaid services. The federal government matches these payments for Medicaid services, as, by law, it does all state payments to the Medicaid program. These increased federal payments are a major source of revenue for Medicaid providers.

The OBBBA places severe restrictions on states’ ability to collect Medicaid provider tax revenue. It prevents states from enacting new provider taxes or increasing existing provider taxes. In fiscal year 2028, the law reduces existing provider taxes for the states that expanded Medicaid eligibility to near-poor people with incomes above the poverty line. The Congressional Budget Office (CBO) expects these restrictions on provider taxes to reduce the Medicaid rolls because states would have fewer resources for state-directed payments to hospitals and other safety net providers.

The effects of lower Medicaid payments will be even more extreme because of the increase in uncompensated care as people lose access to Medicaid. The loss of federal matching funds as Medicaid enrollment declines will exacerbate states’ difficulties balancing their budgets, especially if there is a downturn in the economy.

Taking the Profit Out of Medicaid

The CBO assumes that restrictions on provider taxes would leave states with few options: raise general taxes, reduce spending on other programs, or reduce Medicaid spending through lower payment rates to providers, fewer covered services, or more restrictive eligibility.

But there is one more option: Reducing the profit and administrative costs of privatized Medicaid, thus freeing up funds to support healthcare for Medicaid beneficiaries. Connecticut has shown the way.

From its inception, Medicaid was able to contract with private companies (then called HMOs) to manage the care of patients. However, states were slow to do this. In 1980, 15 years after Medicaid was established, just 1.3 percent of the approximately 2.1 million Medicaid eligible beneficiaries were in managed care, a form of privatized Medicaid. In the 1990s, when states faced budget problems, they turned to managed care organizations, now called MCOs, expecting this to reduce program costs and save the state money without hurting patient access or quality of care. By 2021, 74 percent of beneficiaries were in MCOs owned by insurance companies.

In the 2010s, Connecticut faced demands for higher payments from insurer-owned MCOs. The state asked for greater transparency about costs and expenditures to justify the higher payments. Many insurers withdrew from the state rather than provide this information. This created a crisis for the state as the remaining insurer-owned MCO plans were in an even stronger position to raise rates. The crisis was resolved on January 1, 2012, when Connecticut de-privatized Medicaid and created a public system to manage health services for Medicaid beneficiaries.

Insurer-owned MCOs receive a fixed payment from the state for each person enrolled in their plan adjusted for the person’s age and health status, with higher payments for older or sicker enrollees. The MCOs control spending on the care of Medicaid beneficiaries by limiting the doctors they can see to a narrow network of providers and by requiring preauthorization for procedures, thus delaying and often denying needed care. The MCO gets to keep the part of the fixed payments not spent on patient care — up to a maximum of 15 percent — of what the state pays them in order to cover administrative costs and profit. The MCOs pay the clinicians and others that actually provide health services on a fee-for-service basis.

By contrast, Connecticut’s public payer system does not contract with MCOs and has no role for health insurance companies. It pays clinicians directly on a fee-for-service basis. Its overhead costs are 5 percent, a third of the costs of the privatized program. It uses this cost saving to improve the program and there is evidence of success in a number of quality indicators: there is greater participation of primary care doctors and specialists, higher rates of preventive care of beneficiaries, and lower rates of emergency admissions.

Faced with the funding squeeze created by the OBBBA, more states could look to Connecticut as a model. Of course, this will take some time to plan and implement. Fortunately, the limits on supplemental payments in the OBBBA are backloaded and mainly take place in the years 2029 to 2034, giving states three years to make the necessary changes.