When Washington Hands Out Lemons: How States Can Cushion Medicaid Cuts

Turning cuts into lemonade – states scramble to protect patients as Medicaid funding dries up.

No family should have to worry about losing health care because of federal government cuts. Yet here we are, handed lemons we never asked for and states scramble to make lemonade to keep their residents alive and well.

The cuts to health care funding, like those we highlighted in the “One Big Beautiful Bill Act” and the probable expiration of enhanced subsidies for ACA premiums, are likely to precipitate a health care crisis in this country. If the subsidies are not extended, coupled with the OBBA changes, there will be 16 million more people without health insurance by 2034.

Additionally, the nearly $1 trillion cut in funding for Medicaid has put more than 300 rural hospitals nationwide at risk of closure and will leave states both red and blue with budget shortfalls. Louisiana will see a 20% cut in the federal funding it typically receives for Medicaid leaving a $27 billion gap over the next ten years while California will see a 17% cut and a $150 billion gap. This is a break glass moment for state governments who must use all tools in their emergency kits to protect patients. These tools include removing private insurance companies from their Medicaid programs, embracing global budgets for hospitals, and regaining control of their Medicaid pharmacy benefits.

The first tool states have to rescue their health care systems is to remove private insurance companies from their Medicaid programs. What many may not realize is that, even though Medicaid is a publicly-funded program, 40 states use private insurance companies such as UnitedHealthcare to act as “managed care organizations” to administer Medicaid benefits. Physicians for a National Health Program (PNHP) recently released a bombshell report showing that by moving away from private insurance companies and directly administering their Medicaid programs, states could save almost $34 billion every year. Over the ten year period of impending Medicaid cuts, that amounts to $340 billion, which is more than one-third of the funding cuts states will face.

This probably sounds too good to be true, but examining the high overhead costs of all programs that private insurance companies run demonstrates how these savings can be achieved. PNHP’s report shows that states spend an average of 13% of their Medicaid budgets on overhead costs paid to the managed care organizations and that states moving away from using these private companies could decrease those overhead costs to just 4-6%. For those still skeptical, Connecticut conducted the experiment of deprivatizing its Medicaid program in 2012 and has saved $4 billion in taxpayer funding since then. The state also saw a 4.7% increase in early cancer detection and 8% higher survival rates compared to New Jersey, which has maintained its privatized Medicaid model. If New Jersey de-privatized its Medicaid program it could save up to $11 billion over the next ten years, which is roughly 38% of the budget shortfall that state will experience from the OBBBA cuts.

Another tool states have to keep their health care systems afloat during this crisis is global budgeting for hospitals. Throughout decades of experiments to lower health care costs, global budgets have stood out for their ability to reduce costs and stabilize hospitals.

Under a global budget model, hospitals are paid a lump sum prospective payment for the coming year based on the populations they serve. This model creates dependable revenue for hospitals, which is especially important for hospitals in rural communities with a high percentage of Medicaid beneficiaries. Me. For example, the Pennsylvania Rural Health Model has demonstrated that by switching to global budgeting, crucial rural hospitals in the state have become more stable with positive operating margins in all cohorts in the model. The Maryland All-Payer Global Budget Model saved the federal government close to $1 billion during its first implementation period from 2014-2018. This model combines global budgets with all-payer uniform pricing, increasing the ability for savings. The recently announced Rural Health Transformation Fund through the Centers for Medicare and Medicaid Services will provide funding to states that can be used to implement global budgets to support their hospitals that could be facing risks of closure due to the OBBBA funding cuts.

Pharmacy benefit managers (PBMs) present another opportunity for states to save on their health care costs while supporting rural and independent parts of the health system. It is well-documented that PBMs are forcing small pharmacies to close while driving the costs we pay for prescriptions to unprecedented levels. In Ohio, led by a Republican governor, state legislature, and attorney general, the Department of Medicaid stopped using Optum Rx, owned by UnitedHealth Group, and CVS Caremark as their PBMs and switched to its own PBM, which they work with directly. By doing this, Ohio was able to increase the dispensing fees paid to pharmacies by more than 1,200% and save $140 billion in just two years. Ohio proves that states can remove large insurer-owned PBMs from their Medicaid programs and not only save billions of dollars but also save critical independent pharmacies. In the aftermath of OBBBA, this is a key way for states to protect their health care systems.

In case it needs to be said, states should not be in the position of needing to backfill huge holes in their health care budgets. There is a lot wrong with our health care system, but cutting Medicaid funding for individuals rather than targeting the systemic abuses and profiteering by Big Insurance is not the way to fix it. That said, the above solutions have all been tested by a few model states and have shown that they hold the ability to save money, improve patient care, and support struggling rural hospitals and independent pharmacies.

Rachel Madley, PhD, is Director of Policy and Advocacy at the Center for Health & Democracy. She previously worked for Congresswoman Pramila Jayapal. She received her PhD from Columbia University and has written for publications including The New York Times.