PROVIDER TAXES
Medicaid is jointly financed by the federal government and the states. The federal government provides certain matching payments based on the state share of Medicaid spending. In general, states can finance the nonfederal share through state general funds, healthcare-related taxes, and local government funds. In 2025, all states (with the exception of Alaska) used provider taxes, accounting for approximately 18% of total state Medicaid spending (i.e., $98.6 billion).
The One Big Beautiful Bill Act (OBBBA) prohibited new or increased provider taxes to finance the state share of Medicaid spending with limited exceptions. See ‘One Big Beautiful Bill Act’: Key Final Medicaid Changes Explained for a detailed summary. The Act also reduced existing provider taxes through an annually decreasing cap in the 41 states that have adopted Affordable Care Act (ACA) Medicaid expansion.
The Congressional Budget Office (CBO) projected that the changes would result in an estimated $191 billion in cuts to federal Medicaid spending by 2034.
Such changes may have significant effects on state budgets and may make it difficult for states to maintain current Medicaid spending. If states are unable to fund their portion of Medicaid, they will be unable to draw down matching federal funds and may have to reduce provider payment rates and/or benefits to compensate for the reduced funding.
STATE-DIRECTED PAYMENTS
Medicaid managed care organizations (MCOs) enter into risk-based contracts under which they receive capitated per-member-per-month payments and assume responsibility for the cost of their enrollees’ covered services. MCOs are generally able to negotiate rates through private contracts with a network of healthcare providers.
However, in limited circumstances, states may direct MCOs to provide certain payment rates (e.g., minimum/maximum fee schedules, uniform increases, or bundled services), often with the goal of increasing payment rates to improve access or quality of care.
The OBBBA reduced the upper limit for state-directed payments to managed care providers from the average commercial rate to 100% of Medicare payment rates for expansion states and 110% for nonexpansion states, with a phase-in for certain approved grandfathered payments.
The CBO projected that the changes would result in an estimated $149 billion in Medicaid cuts by 2034. See CMS Proposes Significant Limits on Medicaid State Directed Payments for a detailed summary.
The majority of states use average commercial rates to establish a benchmark payment level for state-directed payments to hospitals and nursing facilities. At least 37 states have Medicaid state-directed payments for hospital services, approximately $60 billion of which are above the new limits and are set to be reduced.
WORK REQUIREMENTS
Work requirements were implemented during the first Trump administration and halted by the courts in 2019. At that time, 13 states obtained approval under Section 1115 waivers to condition Medicaid coverage on reporting time spent in qualifying work activities.
In Arkansas (the only state to implement the requirements with disenrollment consequences), more than 18,000 individuals lost Medicaid coverage for failure to meet the work or reporting requirements. Subsequent research found that the requirements did not increase employment over an 18-month follow-up period, demonstrating that the policy resulted in substantial coverage losses without achieving its stated employment objective.
The OBBBA required 44 states to implement work requirements for nonexempt adults demonstrating at least 80 hours of participation per month in qualifying activities, to be verified by the state during redeterminations at least twice per year.
The CBO projected that the changes would result in an estimated $326 billion in Medicaid cuts by 2034. Projections also estimated that approximately 5.3 million individuals could lose Medicaid coverage by 2034.
On November 5, four states (Oregon, Minnesota, New Mexico, and Washington) filed a complaint seeking injunctive relief. The plaintiffs allege that the overhaul will lead to “irreparable sovereign, fiscal, and public-health harms,” and that the administration does not have the authority to force states to implement these changes.
With an impending start date of January 1, 2027, it is unclear whether the lawsuit will successfully delay the work requirements. In a previous lawsuit (decided on October 29), a federal judge denied the preliminary injunction sought by 26 state attorneys general, the District of Columbia, and two state governors. See Medicaid Work Requirements Remain on Track Despite Partial Vacatur for a detailed analysis.
OTHER OBBBA PROVISIONS
While the above provisions represent the largest Medicaid cuts, Democratic lawmakers may also reconsider provisions of the OBBBA by:
- Revising differences in funding and eligibility rules between ACA Medicaid expansion and nonexpansion states;
- Restoring retroactive coverage to 90 days for all Medicaid beneficiaries;
- Removing cost sharing of up to $35 per service for the expansion population;
- Restoring Medicaid eligibility for lawfully present immigrants (e.g., refugees, individuals who have been granted asylum, and trafficking victims);
- Restoring the two-year 5% increase in federal matching funds as an incentive to adopt Medicaid expansion;
- Restoring federal funding for Emergency Medicaid offered to undocumented immigrants who are otherwise eligible for expansion coverage;
- Removing the reduction in federal funding for states exceeding a 3% payment error rate; and
- Rejecting the requirement for the Chief Actuary for the Centers for Medicare and Medicaid Services (CMS) to approve Section 1115 Demonstration Waiver budget neutrality.
Collectively, these provisions present opportunities for legislative changes aimed at preserving coverage, reducing administrative burdens, and protecting healthcare providers and state Medicaid programs from additional financial strain. However, any efforts to repeal or modify these provisions will require congressional action and potentially lengthy legislative negotiations, making significant changes uncertain.
