I’ll be honest. Until recently, I couldn’t bring myself to write about Trump’s “One Big Beautiful Bill” (OBBA) and what it means for Medicaid. Put this reticence down to one part disbelief and two parts (wild) frustration. But summer is over, and it’s time to return to some grim realities.
The bottom line? It’s bad. Really bad.
A Gap in (News) Coverage
Since OBBA’s narrow passage this summer, the media has been filled with coverage of its impact on Medicaid. Most reporting has focused on the immediate and visible harms: people losing coverage, families facing higher costs, and states scrambling to plug budget gaps. A recent Washington Post article (“States face massive new costs under Trump Budget Cuts”) exemplifies this approach, detailing the urgent challenge states face as they absorb funding shortfalls and new administrative burdens under compressed timelines.
These consequences are real and devastating. The Congressional Budget Office projects that 7.8 million people will become uninsured by 2034, including 4.8 million losing Medicaid coverage. Rural hospitals are at risk of closure. Administrative burdens will skyrocket for both states and individuals, driving coverage churn and improper denials.
But this coverage (crucial as it is) neatly sidesteps a bigger threat posed by the legislation. The most dangerous provisions of OBBA aren’t the ones in the headlines, but buried in technical financing details. Complicated financing mechanisms like provider taxes and state directed payments may not lend themselves to an “easy” news story – but it does go the root of Medicaid programs for most states.
The Devil in the Fine Print
Let me back up a bit. There are two structural changes in OBBA that stand out for their potential to undermine states’ ability to use Medicaid as a tool for solving system-level challenges (things like stabilizing rural hospitals or addressing statewide behavioral health shortages).
The two changes are:
- Provider tax caps, and
- Limits on state-directed payments (SDPs).
While we are talking about big money tied up with these two provisions, it isn’t just about lost dollars; it’s about lost flexibility and autonomy.
Let’s break this down.
Provider Tax Caps: Nearly every state relies on provider taxes to generate the non-federal share of Medicaid funding. Think of these as fees that hospitals and other providers pay, which states then use to draw down federal matching funds, creating a multiplier effect that brings billions in federal dollars into state health systems. OBBA reduces the “safe harbor” cap on these taxes from 6% of provider revenues to 3.5%, with the cuts taking effect in October 2028 and phasing in over several years.
While Provider Taxes are not without their critics (opponents note concerns around transparency and that they artificially increase state contributions) they have been a cornerstone of Medicaid financing since the 1990s, and represent over 17% of the state share of Medicaid spending nationally.
State-Directed Payment Limits: SDPs allow states to operating under managed care to require that managed care organizations (MCOs) make certain enhanced payments to providers, where that payments is tied to specific state policy or quality goals. OBBA caps these payments at Medicare levels for expansion states and 110% of Medicare for non-expansion states.
Why does this matter? SDPs are one of the few levers states have to stabilize provider networks, strengthen infrastructure, and respond to public health needs.
States like California use SDPs to ensure higher reimbursement for providers in underserved areas or for complex services such as behavioral health. In North Carolina, SDPs power the state’s Advanced Medical Home model, which provides primary care providers with enhanced payments for care coordination and panel management.
Why This Matters
These aren’t just “technical adjustments.” SDPs totaled over $38 billion in 2022. The elimination of provider taxes are estimated by the Congressional Budget Office to amount to $630 billion over ten years . These are big numbers. However, this represents not just reduced funding but a narrower vision for Medicaid’s role. By limiting the flexibility and autonomy States have to leverage funds and direct MCO payments, OBBA restricts and limits the state’s ability to design and test new approaches to systemic health challenges. Without these levers, State Medicaid programs may, going forward, “just” be a payer of health insurance, without the ability to influence and direct the state’s health system on a larger level, whether that’s ensuring rural hospital viability, supporting behavioral health infrastructure, or responding to public health emergencies. OBBA effectively redefines Medicaid from a program that helps shape state health systems to a program that merely pays claims.
Let me put that in context. Without these tools, states will have far fewer options to:
- Keep rural hospitals viable
- Support behavioral health and substance use disorder treatment capacity
- Respond quickly to public health crises
This is a dramatic reversal of federalist principles. OBBA, championed by many who claim to defend states’ rights, strips away one of the most successful examples of federal-state collaboration in American governance.
A Reasonable Conclusion
That brings me back to this week’s Washington Post article. It effectively captured the anxiety among state leaders staring down immediate budget shortfalls. There was another article though, published by the Journal of the American Medical Association (JAMA) by Harvard economist David Cuttler which more effectively captured the totality of the legislation. This article (succinctly titled “the Worst Piece of Health Care Legislation Ever”) doesn’t pull any punches summarizing the impact of the legislation on (in turn) Medicaid recipients and on the stability of health systems, and concluding that “the most sensible policy would be to repeal the OBBA and start over – certainly with changing the health provisions if not the entire law.” Noting that there are reforms and steps that can (and should) be made to control costs. For me, this raises a deeper question. If OBBA is this harmful, it isn’t just about reducing Medicaid spending. It’s about breaking it – destabilizing providers, hollowing out the safety net, and leaving states with fewer tools to protect their residents.
Maybe that is too bleak an interpretation (“never ascribe to malice that which can be adequately explained by incompetence”), but the proof is in the pudding.