Medicaid is the largest source of federal money flowing to state governments and one of the biggest items in every state budget. It covers roughly one in five Americans, including low-income children, pregnant women, people with disabilities and many nursing home residents. In 2026, state lawmakers are confronting a difficult combination: slower revenue growth, rising Medicaid costs and federal changes that will reduce the money Washington sends them over the next decade [1].
The federal changes
The 2025 budget reconciliation law, often called the One Big Beautiful Bill Act, is projected to reduce federal Medicaid spending by about $911 billion, or 14%, over the next 10 years, according to KFF [1]. The effects will vary widely by state. The reductions come from several provisions [1][2]: • Work requirements for adults in the Affordable Care Act's Medicaid expansion group, starting January 1, 2027, which the Congressional Budget Office projects will reduce federal spending by about $326 billion over 10 years and leave about 5.3 million more people uninsured.
•
More frequent eligibility checks for expansion adults.
•
New limits on which immigrants qualify for federally funded coverage.
•
Restrictions on "provider taxes," a financing tool states use to raise their share of Medicaid funding by taxing hospitals and other providers, which the federal government then matches.
•
Limits on "state-directed payments," which let states boost what Medicaid managed care plans pay hospitals and nursing facilities. Some of these provisions are already in effect, while others phase in over several years. KFF notes that some of the cuts will not begin until fiscal 2028 or later [1].
States were already under pressure
Even before the federal cuts take full effect, state budgets were tightening, and news reports described most states expecting Medicaid shortfalls in 2026 [3]. After record growth during the pandemic, state revenue growth has slowed, and rainy-day funds, while still above pre-pandemic levels, are declining from all-time highs [1]. At least 14 states had already forecast budget gaps for fiscal 2027, including Arizona, California, Colorado, Delaware, Maryland, New Mexico and Rhode Island [1]. Medicaid costs, meanwhile, keep rising. KFF's survey of state Medicaid programs projected that total Medicaid spending would grow 7.9% in fiscal 2026 even with flat enrollment, driven by higher payment rates for providers and managed care plans, sicker enrollees and rising costs for long-term care, prescription drugs and behavioral health [1].
How states are cutting
States have several tools to control Medicaid spending, and many are using them [1]: • Provider payments: Idaho imposed a 4% across-the-board cut to Medicaid provider rates, and Colorado reversed a planned 1.6% increase. Colorado has proposed setting provider rates at 85% of Medicare rates and capping dental benefits.
•
Weight-loss drugs: California, New Hampshire, Pennsylvania and South Carolina stopped covering GLP-1 drugs such as Wegovy for obesity in January 2026, and Rhode Island has considered doing the same.
•
Eligibility: California reinstated asset limits for Medi-Cal long-term care for older and disabled adults, and Washington, D.C., lowered income limits for certain enrollees.
•
Immigrant coverage: Some states that used their own money to cover immigrants regardless of status have rolled that coverage back.
•
Delayed projects: Some states have canceled or postponed planned initiatives, such as coverage for people leaving prison and continuous enrollment for young children. Home care is a particular concern. Nearly a third of states planned new strategies to contain home care costs in fiscal 2026, and KFF notes that, historically, states have reduced home care spending during every period of fiscal stress [1]. In Idaho, lawmakers have even discussed repealing the state's voter-approved Medicaid expansion [1].
New administrative costs
At the same time, states must spend money to implement the new federal rules. Building systems to verify work requirements and conduct more frequent eligibility checks is expensive. Proposed fiscal 2027 budgets included about $16.5 million in Utah, more than $50 million in Colorado, $35.6 million in Kentucky and $7.4 million in Wyoming for these eligibility changes [1].
The rural fund
The same 2025 law created a $50 billion Rural Health Transformation Program, giving every state at least $100 million a year for five years [2]. KFF estimates, however, that about $137 billion of the 10-year federal Medicaid reduction will fall on rural areas, so the fund offsets only about 37% of the rural cuts [2]. And because the fund ends after 2030 while most of the Medicaid reductions come later, states face a growing gap in the 2030s [2].
The debate
Supporters of the federal changes argue that Medicaid had grown too large and too expensive, that some financing arrangements such as provider taxes inflated federal spending, and that states should have stronger incentives to manage costs. They say work requirements and more frequent eligibility checks will focus the program on those who need it most. Critics, including hospital associations and many governors, warn that the cuts will shift costs onto states, hospitals and patients, and that provider rate cuts can lead doctors to stop accepting Medicaid, making it harder for enrollees to find care even when they remain covered.
Federal relief and its limits
Some of the federal provisions phase in gradually, giving states time to adjust. Limits on state-directed payments and provider taxes, for example, are scheduled to tighten over several years, and some of the largest cuts will not take effect until fiscal 2028 or later [1]. That timing gives states a window to plan, but it also means many of the hardest budget decisions will fall on governors and legislatures elected in the coming years rather than those in office today.
Why it matters
State budget decisions about Medicaid rarely make national headlines, but they directly affect whether a child can see a dentist, whether an older adult can get help at home or whether a hospital in a small town keeps its doors open. As the federal changes phase in, the most consequential Medicaid decisions of the next few years may be made not in Washington, but in state capitols.
Sources
- 1. Akash Pillai, Elizabeth Williams and Robin Rudowitz, "Medicaid and Upcoming State Budget Debates," KFF, January 23, 2026. https://www.kff.org/medicaid/medicaid-and-upcoming-state-budget-debates/
- 2. "A Closer Look at the $50 Billion Rural Health Transformation Program," KFF, updated September 18,
- 2026. https://www.kff.org/medicaid/a-closer-look-at-the-50-billion-rural-health-transformation-program/
- 3. "Most states expect Medicaid shortfalls in 2026 as federal cuts loom," Scripps News, 2026. https://www.scrippsnews.com/health/most-states-expect-medicaid-shortfalls-in-2026-as-federal-cuts-loom Information in this article is current as of October 10, 2026. Bracketed numbers refer to the sources listed above.