Paying for Tax Cut Extensions: Medicaid

A contentious topic in tax reform discussions is whether — and to what extent — Medicaid spending cuts will be used to pay for extensions of the 2017 Tax Cuts and Jobs Act.

The House-passed budget resolution setting up tax reform (along with immigration, defense, and energy policy changes) calls on several congressional committees to come up with savings from programs under their jurisdiction. Those savings will help offset part of the $4.5 trillion allotted to the House Ways and Means Committee to extend the TCJA and enact other campaign trail tax promises.

Among the directed cuts is an instruction to the Energy and Commerce Committee — under which Medicaid falls — to reduce deficits by $880 billion over the 10-year budget window. While the measure doesn’t specifically call out Medicaid, Democrats, health care and patient groups, and others are concerned that such large cuts cannot be achieved without slashing the program.

And a Congressional Budget Office report from earlier this month confirms that some of the $880 billion would very likely need to come from Medicaid. CBO indicates that mandatory spending programs under Energy and Commerce’s jurisdiction, other than Medicare, are projected to total just $581 billion for 2025-2034.

Medicaid proponents speak out.

House Minority Leader Hakeem Jeffries (D-NY) is accusing Republicans of proposing “the largest Medicaid cut in American history.” Speaking at a press conference on March 18 — which Democrats and advocacy groups declared as a Medicaid Day of Action — Jeffries contended that it is not a “privilege” to have health care in America, it is a “right.”

Congressional Black Caucus Chair Yvette Clarke (D-NY), speaking at the same event, cautioned of the “cascading effect of cutting $880 billion out of health care.” Beyond health impacts, Clarke predicts “higher unemployment” and “the closure of hospitals and federally qualified health care institutions.” To Clarke, who serves on the Energy and Commerce Committee, the budget resolution’s instructions to make the $880 billion in cuts creates a humanitarian crisis.

Beyond that, Medicaid seems to be popular among Americans. A recent KFF poll found that “nearly all (97%) adults say Medicaid is at least somewhat important for people in their local community, including three-quarters who say it is ‘very important.'” And Medicaid “benefits more than 35 million Americans in states Trump won in the 2024 election,” according to a Reuters analysis.

Refine, rather than cut.

Republicans, however, insist the goal is not to cut benefits for those in need — rather they intend to refine the program and rein in wasteful spending.

Waste, fraud, and abuse. Senator James Lankford (R-OK), speaking at a March 11 Punchbowl event, said a key target will be improper payments. CBO and the Government Accountability Office “come out year after year and say there’s $50 billion in funds that are either fraud, that are waste or improper payments,” he explained. “We’ve never had serious work to be able to deal with some of that.”

Indeed, the Centers for Medicare & Medicaid Services shared that for fiscal year 2023, the “Medicaid improper payment rate (comprised of reviews in 2021, 2022, and 2023) was 8.58%, or $50.3 billion.” That number dropped for fiscal year 2024 to “5.09%, or $31.10 billion” for Medicaid improper payments (comprised of reviews in 2022, 2023, and 2024).

Republicans like Lankford see the potential for billions in savings by going after these so-called improper payments. But the savings might not be there, say others, including the Center for Budget and Policy Priorities’ Maani Stewart. “[T]he improper payment rate is a measure of procedural errors — not a fraud rate, nor is it an accurate count of funds that were misspent,” Stewart contends. “Most” of these payments were made for eligible health services for Medicaid-eligible people, he explains; “the issue is that proper documentation for the payments is missing.”

Medicaid expansion targeted. According to Senator Ron Johnson (R-WI), Republicans “certainly want to provide health care for disabled individuals and moms and children.” For him, the issue is the Affordable Care Act’s Medicaid expansion. Johnson, speaking at a confirmation hearing for CMS Administrator nominee Mehmet Oz on March 14, said that after the expansion, “all of a sudden we’re paying more for single, able-bodied, working-age adults.”

Medicaid expansion allows states to opt in to providing Medicaid for nearly all adults with incomes up to 138% of the Federal Poverty Level. Currently, 40 states and the District of Columbia have opted in, says KFF.

In addition to the broader eligibility pool, the ACA also provides states with an enhanced federal matching rate for this population. The federal match rate is 90% for the expansion population, meaning the federal government pays 90% of costs. Meanwhile, for the traditional Medicaid population, the federal match rate ranges between 50% to 77%, says KFF.

“Literally, the healthy expansion is a much higher rate than it is for the blind and the disabled,” Lankford explained. “We’ve got to look at that at some point.”

During his confirmation hearing, Oz explained that “when you expand the number of people on Medicaid without improving the resources required for those doctors to take care of those patients, you stretch resources very thinly for the people for whom Medicaid was originally designed.” That includes pregnant women, those with disabilities, and “elder people who don’t have resources.”

“They cannot be compromised,” said Oz, “so we have to make some important decisions to improve the quality of care.”

But there is risk in cutting the expansion match, says the Urban Institute’s Matthew Buettgens. States could “drop Medicaid expansion in response” — and if all states did so, this would increase the number of uninsured people by 37.9%.

Provider taxes. A third target is state Medicaid provider taxes. “A vast majority of states use at least one provider tax to help finance Medicaid,” according to a Congressional Research Service report. And many use provider tax revenue “to increase Medicaid payment rates for the class of providers, such as hospitals, responsible for paying the provider tax.”

Lankford explained that states coordinate with hospitals, and say, “Well, if you will give us more money, then we’ll call that a provider tax. We’ll call it our state portion.” States can then claim higher costs and seek more federal reimbursement. To Lankford, provider taxes are “gaming the system.”

But CBPP’s Allison Orris and Elizabeth Zhang contend that “[i]f provider taxes were restricted, states would have to make hard choices about how to pay their share of Medicaid costs to sustain their current programs.” The alternative would be state cuts to Medicaid, such as “eligibility or benefit cuts or provider cuts that harm enrollees by reducing their access to care,” they say.

“Quite frankly, to states, the federal government has a $36 trillion budget gap right now,” said Lankford. “Most states have a rainy-day fund. So how do we balance it out?”