One Big Beautiful Bill: Slashed Budgets Will Disrupt the Medicaid Program

The new federal budget law, the One Big Beautiful Bill Act (the Act), enacted on July 4, 2025, makes dramatic changes to the Medicaid program. Health care providers, plans, patients, and other stakeholders that work with Medicaid populations should prepare for these changes.

Restrictions or Limitations on Medicaid Eligibility or Coverage

Although the Act does not expressly limit Medicaid eligibility categories, it makes several changes that will impact the ability of individuals to maintain or demonstrate Medicaid eligibility. As a result, the Congressional Budget Office estimates that 7.8 million individuals will lose their Medicaid coverage and become uninsured. Stakeholders across the industry should be aware of these pending changes. 

These Medicaid eligibility and coverage changes fall within three main categories: (1) changes applicable to the adult, non-family populations enrolled under the Medicaid Coverage Expansion (MCE) under the Affordable Care Act, (2) changes applicable to all Medicaid populations, and (3) changes applicable to coverage for non-citizens. 

New Requirements for the MCE Population. 

Community Engagement / Work Requirements. The Act requires all states to impose new “community engagement” requirements (generally, 80 hours of work, community service, or education per month) for the MCE population, effective January 1, 2027. MCE individuals who are not exempt and who are unable to demonstrate adequate community engagement will be notified that they will lose Medicaid coverage. Some individuals, including the “medically frail,” are exempt. States may also choose to make exceptions for “short term hardship events” (including a hospital admission during a month of demonstration). Review of the community engagement requirements must occur at least during every redetermination of eligibility. 

More Frequent Eligibility Redeterminations. The Act requires states to conduct redeterminations for the MCE population every six months, starting January 1, 2027. For other populations, redeterminations are required every 12 months. MCE individuals who are exempt from community engagement requirements are also exempt from more frequent redeterminations.

MCE Cost Sharing. The Act requires states, beginning October 1, 2028, to impose deductibles or cost sharing for individuals in the MCE population with income between 100% of the federal poverty level and 133% of the federal poverty level. States may choose the appropriate amounts, but the amounts must be above US$0 and below US$35 and less than 5% annual income. Cost sharing is not permitted for inpatient services or emergency services and certain other services. Providers are permitted to condition services on payment of the deductible or cost sharing amount.  

Requirements for all Medicaid Populations

Moratorium on Biden-era Enrollment Regulations. The Act directs that regulations intended to streamline enrollment into Medicaid, the Children’s Health Insurance Program (CHIP), and the Basic Health Program may not be implemented, administered, or enforced until September 30, 2034. 

Enhanced Eligibility Verifications. The Act requires states and the federal government to develop extensive new bureaucracy to oversee and verify information submitted by Medicaid enrollees, including processes to obtain address information, social security numbers (if the individual has one), and other information determined necessary by the U.S. Department of Health & Human Services (HHS). The Act grants new authority for HHS to obtain this information from identified sources. In addition, states will be required to review a “Death Master File” or successor system to determine whether anyone enrolled for medical assistance is deceased. 

Limiting Retroactive Medicaid Coverage. Medicaid coverage currently extends retroactively to cover services provided as early as the third month before the month in which an individual enrolls, allowing the program to cover expenses incurred prior to the submission of the application. The Act reduces this time frame to one month prior to the month of enrollment for MCE individuals and two months prior for all other enrollees. These changes apply to applications submitted on or after January 1, 2027. 

Restrictions on Medicaid Coverage for Non-Citizens

Restatement of Prohibition on Medicaid Coverage for non-qualified aliens. Under the Act, effective October 1, 2026, unless an exception applies, federal Medicaid funding will not be available for Medicaid expenditures furnished to an individual, unless the individual is (1) a resident of one of the 50 states, D.C., or a territory, and (2) a citizen or national of the U.S., a lawfully admitted alien for permanent residence, or certain Cuban citizens or nationals. This language will replace and restate language currently in the Medicaid law. The Act retains exceptions for state coverage of emergency services, as well as a state option to cover pregnancy services for lawfully admitted aliens. 

New Limitations on Medicaid Payments and Financing

Separate from the restrictions on Medicaid eligibility, the Act imposes new requirements expected to remove billions of dollars of funding from the Medicaid program. These funds stem from new limitations on or reductions in the ability of states to make supplemental payments to support their Medicaid providers. 

Limitations on Medicaid Health Care-Related Taxes. The Act makes two significant changes that limit the ability of states to rely on taxes imposed on health care providers or affiliated entities in order to develop a source of the non-federal share for Medicaid payments. Currently, every state except for Alaska uses taxes on health care providers or managed care plans to generate revenue for supplemental Medicaid payments. The taxes are most commonly used to benefit hospitals and other institutional providers, but in some states, they fund targeted rate increases, such as for primary care, behavioral health, or emergency room services. 

• Restructuring required. Effective immediately unless a transition period is enacted by HHS, the Act requires all new and existing health care-related taxes to meet a new test that prohibits the tax from being used as the non-federal share of Medicaid payments if the tax is imposed at a higher rate on Medicaid taxable units or on a group defined by its higher volume of Medicaid taxable units. The health care-related taxes in nearly every state will need to be restructured to meet this requirement. If they cannot be restructured, the state will lose a significant source of funding for Medicaid payments.
• New Limitations on the Size of Health Care-Related Taxes. In addition, the Act will apply heightened scrutiny to a health care-related taxes that exceed a reduced threshold. Currently, most health care-related taxes are structured to produce revenue that is less than 6% of the revenues received by taxpayers. For all states, the threshold is limited to the percentage approved as of the date of enactment. If a state proposes a new health care-related tax on a class of providers or services that were not previously taxes, the applicable limit is 0%. Further, for states that have adopted the MCE expansion under the Affordable Care Act, the 6% limit is reduced by 0.5% each fiscal year beginning on or after October 1, 2026, until it reaches 3.5% in fiscal year 2032. 

Reductions in Managed Care Supplemental Payments. For states with a high Medicaid managed care penetration, states have increasingly relied on a mechanism to ensure Medicaid plans provide supplemental financial support for certain classes of providers. Under rules issued by the Biden Administration in 2024, directed payments for inpatient or outpatient hospital services, nursing facility services, or professional services in an academic medical center, were permitted to be increased to amounts up to, but not exceeding, the average commercial rate for the same services. These increases were part of an effort to support access to care in the Medicaid program, recognizing that Medicaid managed care plans had to compete with commercial plans when establishing provider networks. 

• State directed payments will now be limited to the Medicare equivalent rate. The Act requires HHS to revise its regulations to remove the average commercial rate limit and replace it with a limit equivalent to Medicare payment rates, or, in states that did not adopt the MCE expansion under the Affordable Care Act, 110% of Medicare rates. Although there is geographic variation in rates, in most cases, Medicare rates are significantly below the average commercial rate. 
• Existing State directed payments will be grandfathered. Although the Act will reduce the ability of states to propose new state directed payments, it grandfathers existing state directed payments at their current levels until the start of rating periods on or after January 1, 2028. After that date, the amount of the directed payment is required to be reduced by 10% each year until total payments no longer exceeds the Medicare limit. 

Other Reductions in Federal Support

• Emergency Services for Non-Qualified Aliens. Effective October 1, 2026, the Act will remove states’ ability to claim applicable enhanced matching rates for emergency services provided to non-qualified aliens. This provision is a direct transfer of support from the federal government to states, particularly in those states that have implemented MCE expansion under the Affordable Care Act. 
• Reduction of Incentive for States to Adopt the Medicaid Expansion. The Act also removes legislation that would have permitted states to claim heightened federal matching funds for the first eight quarters after it adopted MCE expansion. 

No extension of the Medicaid DSH Cuts. The Act does not extend previously-scheduled reductions to Medicaid disproportionate share hospital (DSH) payments, which are scheduled to be reduced by US$8 billion dollars a year for three years, starting in October 2025.

Key Takeaways

The changes made by the Act were designed to reduce federal expenditures for the Medicaid program and will prompt states to redesign their programs to meet the requirements while maintaining access and addressing local needs. Significant legislative and policy changes will occur in every state, including revisions to Medicaid taxes, supplemental payments, and enrollment processes and requirements. 

Stakeholders who work with Medicaid populations should monitor these changes and develop strategies to influence them. They also should update their financial forecasts to account for the changes to account for the new environment. Foley attorneys can help you analyze the impact of the requirements on your business and develop strategies to work with state, local, or federal entities to mitigate the potential impact.  

At Foley, we actively advise health care companies and providers across the country on how to respond to this evolving legal landscape. From policy development and compliance strategy to enforcement defense, we are here to help. Please reach out to the author, your Foley relationship partner, or to our Health Care Practice Group and Health Care & Life Sciences Sector with any questions.