Medicaid Cap: A Bad Deal that Gets Worse Over Time

As we’ve explained, the Senate Leadership bill to “repeal and replace” the ACA includes a cap on federal Medicaid payments to states with two budget dials: a limit on annual growth and a separate reduction for states that spend more on their Medicaid beneficiaries.  These dials are designed to lower federal spending, and it turns out that they work as intended.

Consider yesterday’s CBO estimate of federal Medicaid spending under the Senate Better Care Reconciliation Act in the years 2027-2036. You’ll remember that CBO had previously estimated that under the bill, the federal government would spend 26% less in 2026 than it would under current law.  The new CBO estimate is that ten years later, the federal government will spend 35% less.

Why? The bill doesn’t bend the cost curve it just bends the federal government spending downward, shifting costs and risks to states. The Senate Leadership bill dials down the annual growth rate from CPI-M (projected at 3.7%) or CPI-M plus 1 (4.7%) in 2024 to CPI-U (projected at 2.4%) in 2025 and leaves it there each year thereafter, in perpetuity. Over time, those small percentage point changes produce huge swings in funding. The result is a steep—35% drop in federal payments to states in 2036 – down from an already huge shortfall ($160 billion, or 26%, in 2026).

The point is not whether the right number is 35% in 2036. As CBO emphasizes, the estimate is “inherently inexact.” The point is that the annual growth rate of the cap can—and surely will—be dialed down to achieve federal budget targets, just as the Senate Leadership dialed down the House version of the cap in 2025 and beyond.  As Governor Ducey of Arizona wrote to Congress: “this policy change will result in the single largest transfer of risk ever from the federal government to the states.” States will be left to pick up the pieces. Their choices are not good – raise new revenues, find money elsewhere in their budgets, or reduce spending on Medicaid by cutting payments to providers and managed care plans, discontinuing optional services, and/or restricting enrollment.

Of course, what can be dialed down can be dialed up, and then down again. The Senate Leadership may decide, for tactical reasons, that these cuts in federal Medicaid spending are too deep and return to a higher growth rate in 2025 in order to improve their bill’s chances of enactment. But once the cap is in place, it becomes a permanent budget platform that will be irresistible for federal policymakers looking for “savings” to keep their hands off. Just dial down the growth rate next year or the year after as federal budget priorities require.

In short, the only winner from a Medicaid cap is the federal legislator who gets to shift the funding taken out of Medicaid to fund his/her favorite tax cut or spending project. It’s is a bad deal for states, localities, providers, and children and families. Not just in the short term. Not just in the long run. Forever.