Medicaid is the nation’s largest health insurer, providing over 70 million children, parents, people with disabilities, and low-income seniors with health coverage. It’s clear that the major cuts to Medicaid funding currently under consideration in Congress would impact the health care system as a whole – health providers would have fewer insured patients, lower payment rates, and higher uncompensated care costs. But reports also show that cutting federal Medicaid payments to states would cause other ripple effects across the economy – resulting in job losses across multiple sectors, reducing state and local tax revenue, and jeopardizing state credit ratings as my colleague Andy Schneider has described.
The impact of Medicaid cuts on state economies will vary from state to state, and even within a state. Health spending as a share of a state’s gross domestic product (GDP) shows the importance of the health care sector in the state’s economy. According to the Centers for Medicare & Medicaid Services (CMS) National Health Expenditure (NHE) data, as a share of GDP, health care ranked highest in West Virginia (28.7%) and lowest in Washington (11.7%) in 2020. The National Association of State Budget Officers (NASBO) reports show that Medicaid comprises over half (56% in 2024) of all federal funds to states, with a range from about 28% in South Dakota to about 74% in Arizona. The Century Foundation (TCF) recently compiled analyses by various organizations of the state-specific impact of Medicaid cut proposals currently under consideration. Pointing to research from The George Washington University, TCF found that the states that would be hardest hit by a reduction in state GDP include Kentucky, New Mexico, Louisiana, Mississippi, and Oregon. While New Mexico, Kentucky, Louisiana, West Virginia, and Alabama would be hardest hit by potential job losses.
Some state agencies and local organizations have also started to analyze the economic impacts of federal Medicaid cuts on the state and local economy. Let’s see what they’ve found.
The Illinois Department of Healthcare and Family Services estimated the economic impact on spending and jobs, finding that the state could lose $7.5 billion in annual economic activity and between 55,000-60,000 jobs statewide if the Medicaid expansion were eliminated (based on estimates from the effort to repeal and replace the ACA in 2017). Looking at the economic impact of major Medicaid cuts on local governments, Illinois highlighted Medicaid’s critical role in paying for school-based services for kids – about 244,000 Medicaid-enrolled students benefit from school-based services with about $267 million Medicaid dollars flowing to local education agencies. This echoes the findings from the Healthy Schools Campaign, showing widespread concern over children’s access to school-based health services if Congress cuts Medicaid.
The Arizona Chamber Foundation issued a report warning of significant job losses and higher health care costs if federal Medicaid cuts move forward. The report finds that for every $1 billion reduction in Medicaid spending, Arizona would experience a loss of more than 36,000 jobs, $1.7 billion in reduced labor income, a $3.7 billion contraction in overall economic activity, and a $138.1 million decline in state and local tax revenues. They write, “For context, the economic impact on the state of Arizona will fall somewhere between a significant recession and the Great Recession that cause massive fiscal trauma for multiple years.”
These national and state analyses make it clear that states cannot manage their way out of large federal Medicaid cuts by finding efficiencies or going after fraud and abuse, as some have misleadingly suggested. States will be forced to make incredibly difficult decisions within Medicaid – limiting Medicaid eligibility, cutting benefits, reducing already low provider payments – and likely outside of Medicaid too – cutting other state expenditures like K-12 education and/or trying to raise revenue. Here’s what a couple of states have had to say about how they would manage this enormous cost shift:
“Unique to Colorado, in addition to a balanced budget requirement, is that Colorado’s constitutional Taxpayer Bill of Rights (known as TABOR) constrains growth in state spending and also limits our ability to increase revenues from taxes. If significant federal Medicaid cuts were realized, options available to other states such as raising taxes in response are likely not feasible here.” Colorado Department of Health Care Policy & Financing
“While reducing federal spending and taxes is essential to the nation’s economic stability, critical programs like Medicaid require thoughtful consideration and a longer transition period for states to assess impacts and collaborate with the federal government. Medicaid not only provides care for the most vulnerable Nevadans but also drives significant economic activity within the state’s health care sector. Sudden funding reductions would disrupt this balance, making it difficult for Nevada to responsibly plan for and manage these changes. … If Congress rolls back enhanced federal funding for this expansion population, it will have serious consequences for Nevada’s budget. This change alone could result in a $1.85 billion loss in federal funds over the next two years, putting at risk the state’s capacity to maintain coverage for approximately 300,000 Nevadans. Nevada could not absorb a federal funding loss of this magnitude without major cuts to Medicaid and other state programs.” Nevada Governor Joe Lombardo
“The New Jersey Department of Human Services has modeled the impact of proposals put forward by Congressional leadership, and these potential changes to Medicaid could significantly reduce access to health insurance through eligibility changes or procedural barriers, affect provider pay in our health care sector that employs over 1 in 10 New Jerseyans, and diminish the range of covered benefits. The State could lose as much as $10 billion in funding – and 700,000 working-age Medicaid enrollees are at risk of losing health insurance coverage. … NJ FamilyCare has an annual budget of $24 billion. The cost is shared between the State and the federal government, with $14 billion in federal funds and $10 billion in State funds. … However, reductions in federal funding — whether through cuts to matching rates, elimination of federal support for programs, or eligibility restrictions — would jeopardize access to care, create difficult choices in provider payments, force hospitals and healthcare providers to shut their doors, and undermine the state’s public health system.” New Jersey Governor Phil Murphy