Medicaid, the country’s 60-year-old health insurance program that covers over 70 million Americans, primarily those of limited financial means and who live with disabilities, is suddenly in jeopardy of losing up to $2.3 trillion in funding over the next decade as part of President Trump and House Republicans’ efforts to slash the federal deficit for the sake of bankrolling tax cuts and border security measures.
If, in fact, legislators pass precipitous cuts to Medicaid, which has been a cornerstone of the American health care system ever since President Lyndon Johnson signed it into law in 1965 as part of his Great Society program, the adverse effects won’t just be felt by disadvantaged Americans finding themselves bereft of this precious lifeline.
There now appears to be a strong probability that proposed gargantuan changes to Medicaid – namely, a limit on how much the federal government will pay for each Medicaid beneficiary and elimination of the federal match for funding under Medicaid expansion – could trigger long-term pressure on two for-profit entities: health care providers and commercial insurers.
In particular for commercial insurers, this looming prospect comes at a time when they are already in a precarious financial situation due to escalating health care costs outpacing premium gains. In the fourth quarter of 2024, nearly all major carriers reported lower income from their respective insurance plans compared to 2023. As recently cited in the publication Healthcare Dive, CVS’ Aetna division posted an operating loss of $757 million in Q4 2024, whereas during the same period in 2023, the company posted a $266 million profit.
Although commercial insurers may not experience any drastic changes in their businesses for the balance of this year, it remains a distinct possibility that the aforementioned federal spending cuts could eventually – as in later this decade — amplify margin pressures for such insurers participating in the Medicaid program, with possible lower enrollment numbers and revenue challenges.
As noted in the Fitch Ratings report, which was released at the end of last month: “Recent commentary from health insurers that participate in the Medicaid market has highlighted concerns about inadequate rates paid to them per Medicaid beneficiary relative to the average costs of care, resulting in margin pressure on a product that already generates relatively thin margins.” Unfortunately, the trickle-down effect of insurers facing heightened margin pressure is that they could in turn charge all of their participants disproportionately higher monthly premiums.
Though President Donald Trump and House Speaker Mike Johnson have publicly declared that they have no designs on reducing benefits for eligible beneficiaries – they have said that they are merely trying to reduce “waste, fraud, and abuse” in the program, but have yet to offer examples or specifics — the potential for capping federal spending on a per-enrollee basis could compel states to roll back Medicaid coverage, services and provider rates.
It’s noteworthy to mention that Medicaid programs and corresponding expenditures differ by state and hinge on such factors as the number and composition of beneficiaries, consumption of health care, price of services offered by Medicaid, state policy benefits, and provider payment rates.
Naturally, states with the highest populations (California, New York, Texas, Pennsylvania, Ohio) obtain the most federal Medicaid funding. However, if the federal government decides to roll back the federal match for expansion, such states that have broadened the scope of Medicare under the Affordable Care Act (ACA) would find it vastly more difficult to continue offering coverage at current levels without raising taxes or cutting spending on other vital programs, such as education. This scenario could be catastrophic during an economic downturn when the number of uninsured residents spikes amidst rampant unemployment.
In more direct, layperson terms, with the chief culprit behind commercial insurers’ mounting financial woes being the seemingly never-ending series of price hikes for health care services, a severely shrunken Medicaid program would raise the number of uninsured Americans; subsequently, for providers, there would be a significant revenue shortfall stemming from fewer Medicaid reimbursements, leaving many with no choice but to compensate by raising prices on commercial insurers.
For years, hospitals and providers have articulated displeasure that unjustly low Medicaid rates cause them great financial strain. Another byproduct of the financial pressures brought on by lower Medicaid revenue and more uncompensated care is the potential for heightened consolidation among providers, who would thus be emboldened with greater negotiating clout over insurers. Meanwhile, hospitals, in addition to jacking up prices for health care services, could also compensate by lowering administrative spending – i.e., cutting legions of administrative, HR, and other support staff members.
While the overwhelming majority of Americans are not on Medicaid, it is important to recognize that sharp funding cuts to Medicaid would not only affect program recipients, but also the financial wellbeing of countless hospitals and community health centers . . . and even, yes, titans of the insurance industry.
