Medicaid’s Next Chapter

The next chapter of the Medicaid program will be characterized by growing fiscal pressures at the state and territory level and by efforts to effectively and efficiently implement the Medicaid provisions of H.R. 1 – the One Big Beautiful Bill Act (OBBBA).

Budget pressures are not new to the Medicaid program, but they are reemerging as a central reality. As we discussed in a recent blog, most states are experiencing a slowdown in state revenue growth and navigating the expiration of federal pandemic-era funding. At the same time, national health care costs continue to trend upward and grow more rapidly than the rest of the economy, putting pressure on all payers, including Medicaid.

In FY2024, Medicaid program costs were nearly 30 percent of state budgets, representing the single largest budget item for states. Despite the fact that Medicare and commercial insurance have higher cost growth trends than Medicaid, health care cost growth continues to pressure Medicaid spending and squeeze out state investment on other priorities.

As we enter this period of state budget pressure, Medicaid programs are beginning the significant work of implementing the Medicaid provisions of OBBBA and aiming to do so as efficiently and effectively as possible. This bill will reshape many aspects of the Medicaid program over the next decade: from how states pay for their share of program costs to what conditions a person must meet to be eligible for Medicaid coverage. Some policies will apply to all Medicaid programs, but most will impact the subset of Medicaid programs that expanded Medicaid coverage to childless adults under the Affordable Care Act.

State and territory Medicaid leaders will be at the helm of implementing these changes in Medicaid, and they will be working to do so in a way that ensures the effective use of each taxpayer dollar spent on Medicaid. Doing so will require new and deepened partnerships between Medicaid programs and the federal government, contracted health plans, IT vendors, and community partners. It will also require a deeper level of cross-functional collaboration within each Medicaid program, including between finance, policy, and operations as each program translates the new policy into programmatic change.

As this work begins, there are three immediate operational realities that are top of mind for state and territory leaders:

1) Clarity and Engagement with the Centers for Medicare and Medicaid Services (CMS). As with any major legislative change, CMS will need to examine the statutory text and provide guidance to states and territories on how they should interpret and implement the policy. This clarification will take the form of rulemaking and guidance. It will, of course, take time for CMS to answer the array of policy and interpretive questions from the statute, and resources for CMS to do this work are limited. Nevertheless, states will need CMS direction to inform key aspects of implementation, including state budget development. Medicaid programs anticipate engaging with CMS in an applied, regular, and collaborative way to surface high priority areas for clarification, provide rapid cycle feedback on policy and systems matters, and assist federal partners with spotting emerging issues. Medicaid leaders are also eager to partner with CMS in maximizing the impact of available federal funding for state implementation. This includes $200 million in grant funding that Congress designated for state implementation of work/community engagement requirements, as well as enhanced federal matching funds that are available for certain Medicaid IT expenses.

2) State budget development. Medicaid leaders are currently developing their budget requests for FY2027. They are crunching the numbers to project how much funding they need to deliver Medicaid services and benefits, along with implementing the provisions of OBBBA that apply to their state. These budget requests will soon be submitted to the governor’s budget office, released by governors in early 2026, and considered by state legislatures next year.

Two policies, for example, that Medicaid leaders in Medicaid expansion states are factoring into budget development for FY2027 are the more frequent eligibility checks and work/community engagement requirements for expansion adults. These policy changes take effect on December 31, 2026. Medicaid leaders must make budget assumptions now about:

• How these policies will change the number of people covered by the program ongoing (Medicaid caseloads) and the health care needs of those who will remain enrolled;
• The costs of making IT systems changes and/or procuring new systems solutions;
• Whether new staff and contractors will be needed, such as eligibility workers and call center staff; and

Whether the state anticipates the need for (and whether they would be granted) a “good faith effort extension” outlined in OBBBA, which allows HHS to grant up to a two-year extension to the implementation deadline for work/community engagement requirements. Making Medicaid budget assumptions is always a difficult exercise, but it is doubly challenging this year as states contend with interpretive policy questions related to OBBBA.

3) IT Systems: Addressing First Dollar Investments and Delivering More Value. Medicaid agencies rely on large IT systems to process applications and renewals for Medicaid eligibility, to pay providers’ claims for services delivered to members, enroll providers, and many other functions. Medicaid programs that expanded coverage to childless adults under the Affordable Care Act will need to make significant changes in their IT systems and/or adopt new IT solutions to implement the Medicaid provisions of OBBBA. The law will also require Medicaid programs to leverage new sources of data for program operations.

1.  To maximize the value of taxpayer dollars, it is of the utmost importance to Medicaid leaders and their CIOs to disrupt business as usual. Under the current model, each state typically pays “first dollar” costs for IT systems, meaning that each state pays a vendor to individually design, build, and launch their IT system changes, even when multiple states are making the same set of changes with the same vendor.
2. The first dollar model for IT systems is no longer tenable. Medicaid leaders believe there are better ways to drive value, despite the need for tailoring of IT solutions at the state level and intersections with other human services programs. This is particularly important as states and territories face growing budget constraints: each dollar spent on IT systems is a dollar that Medicaid programs cannot spend on needed health care services for Medicaid members. Medicaid Directors and CIOs are eager to partner with CMS and IT vendors to disrupt business as usual to get more value for the taxpayer dollar.

As we enter the next chapter for the Medicaid program, Medicaid leaders must grapple with growing state budget pressures and the need to ensure program sustainability. At the same time, Medicaid programs will be implementing the changes required by OBBBA and working to do so as efficiently and effectively as possible. Three operational considerations will be top of mind as this work begins: seeking policy clarity from CMS, navigating state budget development, and anticipating state Medicaid IT system needs.

This work will be a marathon, not a sprint, and there are many pages yet to unfold. Medicaid leaders will need the sustained collaboration of each and every partner who plays a role in the program to write the next chapter: from contracted health plans to IT vendors and community-based organizations.