Study details how OBBBA Medicaid cuts will restructure state budgets

A handful of states may gain financially because of the Medicaid provisions legislated in the 2025 reconciliation bill known as the One Big Beautiful Bill Act (OBBBA), according to a new study.

Results of an analysis by RAND Health include the finding that state Medicaid budgets will fall by $664 billion between 2025 and 2034, while state general funds will lose $87 billion. The federal government will save $714 billion over the decade.

The analysis distinguishes between the impact of work requirements and other OBBBA provisions that will reduce the size of state Medicaid programs and, conversely, policies that will not directly affect program scope but will curtail funding.

Provisions in the former category will represent savings for some state general budgets. Those in the latter category, such as limits on provider taxes, will require states “to either find other funding sources to bridge the gap or reduce Medicaid spending by reducing eligibility, covered services, provider payment rates or some combination of those,” the report states.

But states with limited exposure to such provisions could come out ahead in their overall budgets from the influx of funding made available through the OBBBA.

Projected enrollment decline in the millions

The report projects a Medicaid enrollment decrease of 7.6 million as of 2034, a comparable estimate to that of the Congressional Budget Office (CBO), which anticipates a drop-off of 7.5 million. The decline would amount to 10% of 2025 enrollment.

As forecasted in the RAND report, major enrollment impacts will stem from the work requirement (5.3 million), restrictions on provider taxes (1.5 million), and the requirement to conduct eligibility checks every six months instead of annually for the expansion population (923,000). Those numbers were not deduplicated, meaning some enrollees would be affected by multiple provisions.

Enrollment reductions are projected to exceed 20% in expansion states where, demographically, a high percentage of Medicaid beneficiaries are subject to the work requirement. Among such states are New Mexico, Oregon and West Virginia, along with Washington, D.C., according to RAND.

States facing the largest Medicaid budget reductions

Budget-wise, the report cites Arizona, Iowa and Nevada as examples of states where the legislation will have a significant impact, given their status as Medicaid expansion states and their substantial use of provider taxes and state-directed payments (SDPs).

Medicaid budgets in each of those states are projected to drop by more than 15% in combined federal and state spending through 2034. West Virginia also could be in store for a big percentage reduction because its relatively low per capita income leads to a higher federal medical assistance percentage (FMAP), thus making provider taxes a bigger source of revenue.

A total of 20 states are projected to lose at least 5% of their Medicaid budgets. On a dollar basis, the largest estimated cuts are for California ($112 billion) and New York ($63 billion).

Reductions to SDPs are projected to total $169 billion and especially will be felt in states with robust SDP programs, such as Georgia, Mississippi, South Carolina, Tennessee and Texas, according to the report.

“If the [SDP] reductions lead to fewer providers accepting Medicaid — and therefore decreased access to care for Medicaid enrollees — states could consider other actions that they could take to improve access,” the report states.

The Rural Health Transformation Program and uneven offsets

Nebraska and North Dakota are expansion states where the budgetary impact could be relatively minimal because they have limited provider-tax and SDP programs and the OBBBA’s Rural Health Transformation Program (RHTP) could offset most of the losses.

In non-expansion states such as South Dakota and Wyoming, that same dynamic could increase Medicaid budgets. Non-expansion states likely will see lesser losses in general because the work requirement and increased eligibility checks do not apply, while changes to provider taxes are less restrictive.

“Several less populous states (particularly non-expansion states, such as Wyoming and Alabama) are not likely to affected by much other than the RHTP,” the report states, estimating Wyoming could see a budgetary increase of more than 10%.

The five-year, $50 billion RHTP distributed its first $10 billion across the 50 states for 2026. Per RAND’s analysis, Wyoming’s allocation amounts to 25% of its Medicaid budget, while California (0.2%) is at the low end of the spectrum proportionally.

The RHTP can help in many ways, such as by allowing more providers to set up telemedicine programs, Andrew Racine, MD, PhD, president of the American Academy of Pediatrics, said Feb. 24 during a congressional hearing.

“[But] it will not change, essentially, the infrastructure that is going to suffer when people who are paying the bills for those hospitals can no longer pay those bills because they’re no longer on the Medicaid program,” he said.

Pediatric hospitals and NICU revenue at risk

Among other impacts at the provider level, Medicaid cuts could affect the viability of pediatric hospitals and units, according to Racine’s testimony.

“The function that Medicaid serves is sometimes underappreciated,” Racine said during the hearing of the House Ways and Means Committee’s Subcommittee on Health. “It is the underpinning of all pediatrics care in the United States.

“If you are looking at trying to get a child taken care of in a NICU in this country, and half the revenue of that NICU comes from the Medicaid program, cuts to the Medicaid program will impact the ability of that hospital to offer a NICU at all. No matter how much money you have and how rich you are, without a NICU, your child can’t get the care that they need if [for example] they have congenital heart disease.”

In the weeks before passage of the OBBBA, a report by the left-of-center healthcare policy group Families USA concluded that 55 rural hospitals in 26 states would be newly exposed to negative net incomes as a result of the work requirement and the increased eligibility checks. Overall, more than 700 rural hospitals are at risk of closure due to financial duress, according to a January report by the Center for Healthcare Quality and Payment Reform.