Medicaid: What does the first month of the Trump administration portend for the next four years?

The Trump administration’s initial month in office has brought about immediate and consequential actions affecting all aspects of healthcare in the United States.

On his first day in office, President Trump revoked a Biden-era executive order aimed at “protecting and strengthening” the Medicaid program. Since then, executive branch agencies have moved to implement this policy change and initiate a federal funding freeze among the many health policy initiatives being targeted.

As the federal government's funding deadline approaches, republican lawmakers and the president have laid out ambitious reconciliation plans that require significant cost savings targets to achieve.

Medicaid cost savings targets

Specifically, the House Energy and Commerce Committee, which has jurisdiction over the Medicaid program, has been tasked with identifying US$880 billion in savings. President Trump has been clear that cuts to Medicare and Social Security are off the table, leaving Medicaid as the primary source for achieving the cost savings necessary to address the enormous funding gap.

Congressional republicans are revisiting various policies and proposals from the first Trump administration to reduce federal Medicaid spending. These include:

• Block grants and per capita caps
• Ending Medicaid expansion funding
• Lowering the Federal Medical Assistance Percentage (FMAP)
• Limiting state-directed payments
• Increasing scrutiny of Medicaid supplemental payment programs
• Increasing Medicaid work and community engagement requirements

Although these issues are not new, the potential for severe reductions in how states currently secure additional federal funding—particularly through state-directed payment—is now under intense scrutiny. Recently, there has been consideration of significantly reducing the provider tax level permitted by statute, or even reevaluating the provider taxing mechanism itself, which some members of Congress have referred to as a "loophole."

Such reductions in Medicaid funding would impact all states and could significantly harm hospitals and physicians who provide care to Medicaid populations, as well as the beneficiaries who rely on these services.

While many of the early executive actions affecting healthcare are being examined by the courts, the question is not whether the administration and the 119th Congress will reform Medicaid but how they will reform Medicaid. In this client alert, we consider what these early actions suggest about how the Medicaid program will fare over the next four years: Will we see a resurgence of the Medicaid proposals from Trump’s first administration? What impacts and transformations might be ahead and what could these developments mean for the future of the Medicaid program?

Block grants and per capita caps

Implementing block grants and per capita caps raises serious concerns over potential reductions in federal Medicaid funding and their impact on state budgets, beneficiaries and healthcare providers. Currently, the federal government reimburses the states for a portion of their Medicaid expenses without capping the funds they receive.

During the first Trump administration, Congress and the Centers for Medicare and Medicaid Services (CMS) considered reforms to the Medicaid program that included block grants and per capita caps. These reforms were anticipated to provide the states with greater control over their Medicaid programs but with less federal funding.

Under the block grant model, states would receive a fixed amount, while per capita caps would limit spending for each enrollee. Consequently, states would be responsible for covering any costs exceeding these fixed amounts.

CMS approved the TennCare demonstration, which would have provided block grant funding for Tennessee’s Medicaid program. While the program never took effect, the Trump administration demonstrated a willingness to accommodate block grant demonstrations. We anticipate that certain states will again propose similar demonstration projects under Section 1115.

Limits on state-directed and supplemental payments

In November 2019, the Trump administration proposed regulations restricting how Medicaid supplemental payments are financed and to require states to report on the use of federal funds under the Medicaid Fiscal Accountability Regulations (MFAR). Key proposals included improved reporting on supplemental payments, reaffirming that intergovernmental transfers must be derived from state or local tax revenues and clarifying that healthcare providers must receive and retain 100 percent of Medicaid payments.

These changes were anticipated to significantly impact state Medicaid budgets and potentially result in substantial funding cuts and decreased benefits for persons dependent on Medicaid services. After extensive controversy, CMS withdrew the proposed rule in 2020. However, some argue that CMS proposals during the Biden administration continued to push for the policies outlined in MFAR.

This was notably demonstrated through the publication of a February 2023 Information Bulletin, the 2024 Medicaid Managed Care Final Rule and the April 2024 Information Bulletin, which lacks statutory authority. Consequently, there are concerns that such policy initiatives may still be pursued.

Work and community engagement requirements

The Trump administration previously used Section 1115 waivers to allow states to impose Medicaid work and community engagement requirements. These requirements mandated that nondisabled adults demonstrate work or participate in qualifying activities as a condition for program eligibility or coverage.

CMS has a history of approving a wide variety of Section 1115 demonstrations that promote the objectives of the Medicaid program. Such demonstrations enable states to study and investigate innovative methods for providing Medicaid coverage. By the end of President Trump's first term in office, 13 states had received Section 1115 waiver approval from CMS to implement Medicaid work requirements. However, under the Biden administration, CMS subsequently withdrew all of the approved waivers.

The Medicaid work requirement waivers faced repeated and successful legal challenges and adverse rulings, with the notable exception of Georgia. In this case, a federal court allowed the state to implement the work requirement waiver because it covered a previously uninsured population.

However, Georgia’s Pathways to Coverage demonstration has experienced low enrollment, providing further ammunition to critics who argue these demonstrations undermine coverage rather than promote the program's objectives.

Finally, after reviewing appeals from Arkansas and New Hampshire, the US Supreme Court returned both cases to the lower courts, leaving the door open for reconsideration in the future. It remains an open question whether work and community engagement requirements will ultimately be found to promote the objectives of the Medicaid program.

Looking ahead…

The Trump administration's initial actions and policy goals underscore the vital relationship between states and the federal government concerning Medicaid funding. The current uncertainty surrounding these actions and their impacts reveals that all states, regardless of political affiliation, rely on federal Medicaid funding to ensure access to and delivery of care for children, low-income families and elderly adults who depend on Medicaid for healthcare and community services and support.

Significant changes to the Medicaid program are likely on the horizon, and the only remaining questions are the extent of these changes and the speed at which they will be implemented.