Federal Medicaid cuts would wreak havoc on the state budget — and the lives of 230,000 Minnesotans

Yahoo

01-05-2025

Thousands of protestors gathered at the Minnesota State Capitol as part of the nationwide "Hands Off" protests condemning several actions of the Trump administration Saturday, April 5, 2025. (Photo by Nicole Neri/Minnesota Reformer)
Gov. Tim Walz and the Legislature are busy working on the state's budget for the next two years.
Their efforts to reduce state spending, however, are focused on two other realities: the state budget deficit forecast in 2028-29, and what is happening in Washington, D.C.
The chaos in Washington is the bigger wild card.
The actions of the Trump administration create two problems for the state budget. First, an increased risk of a recession. And, second, direct cuts of federal funds to the state.
The funding cuts have already started, with reductions impacting public health, behavioral health, food shelves, transportation, housing projects and more.
Whether it's DOGE or Congress, there is no sign the cutting will stop any time soon.
The biggest budgetary threat for Minnesota — and most states — is cuts to federal Medicaid spending.
The U.S. House budget plan proposes to reduce funding for Medicare and Medicaid by $880 billion over the next ten years. Most observers expect Medicare will be held harmless and the bulk of the cuts will come from Medicaid.
Medicaid, called Medical Assistance in Minnesota, serves about 1.3 million Minnesotans. It provides health coverage to low-income families and individuals, and long-term care for seniors and people with disabilities.
Minnesota spent $18.5 billion on Medical Assistance in fiscal year 2024. Sixty percent of that funding — $11.1 billion — came from the federal government.
Medical Assistance is the largest program in the state budget, and it is growing fast: Due to the rising cost of health care and the aging of the population, spending will exceed $26 billion in fiscal year 2029 — a 42% increase over five years according to the Department of Human Services. If the $880 billion federal reduction is spread proportionately across all states, DHS estimates Minnesota would lose about $1.4 to $1.6 billion per year in federal Medicaid funding.
The actual impact depends on what policy changes Congress adopts.
One of the most likely changes is adding work requirements for some Medicaid enrollees. Work requirements are a bad idea for a variety of reasons, as nicely summarized in this space a few weeks ago.
It's a bad policy, and it also doesn't save a lot for the federal budget. A similar proposal in 2017 was estimated to save $109 billion over ten years, only a fraction of the $880 billion Congress is now pursuing.
It's not clear where Congress will look for additional Medicaid savings, but targeting the expansion population — a new group of people that were added to Medicaid coverage as part of the Affordable Care Act — is a definite possibility.
The 'expansion population,' as it is called, consists of adults without children. Prior to the Affordable Care Act, which enacted the Medicaid expansion, health coverage for these low-income adults was a significant gap in our nation's health care system. Some states — including Minnesota — cobbled together some basic coverage, but it is difficult for a state to provide broad access to health care coverage without federal funding.
Dismantling a part of the ACA — aka, Obamacare — may be politically appealing to the GOP-controlled Congress. There would also be no impact on the 10 states that do not cover the expansion group — nine of which are solidly Republican, including Florida and Texas.
KFF, an independent source for health care research and news, says one prominent proposal is to end the enhanced 90% federal funding match for the expansion population. States could continue to serve the expansion population but would get their normal rate of federal reimbursement.
That normal match rate for Medicaid is called the Federal Medical Assistance Percentage, or FMAP. These rates vary by state based on per capita income, ranging from 50% to 77%. Minnesota's current FMAP is 51.16%.
If all states continued to cover the expansion population at the lower rate, KFF estimates the federal government would save $656 billion over the ten-year horizon.
But it is likely many — probably most — states would discontinue Medicaid coverage for the expansion group because they could not afford to make up the lost federal funding.
It would cost Minnesota about $1.2 billion in fiscal year 2026 to continue covering the adults without kids expansion group. It is hard to see how the state could afford $1.2 billion a year under normal budget conditions, much less with the looming deficit and the threat of a recession.
In Minnesota, 230,000 people would lose coverage.
This population is one of the most marginalized groups in our society. Access to Medicaid has been particularly helpful in providing better access to mental health and substance use services.
If this coverage goes away, it puts pressure on counties and underfunded community resources; many people will simply lose access to health care and behavioral health services. Uncompensated care — when people without insurance receive care in an emergency room, for instance — would increase, impacting community hospitals and shifting costs onto people who have insurance.
The need for health care doesn't go away — it just gets delayed, more serious and shifted to other budgets.
Federal funding cuts across the state budget will force hard choices. The usual default is to say that the state can't plug holes from federal cuts.
And you can't plug all the holes. But if the cuts are deep and broad, the state may need to reprioritize its own funds to fill the most crucial gaps.
In this instance, recreating full Medicaid coverage is probably fiscally impossible. Some cobbled together gap filler, maybe.
Progress is not a straight line going up — it is often two steps forward and one step back.
But this would be a deeply harmful step back.
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