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One Year In: Implementing the Medicaid Provisions of the Working Families Tax Cut Act
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One year after the passage of the Working Families Tax Cut Act (formerly known as the One Big Beautiful Bill Act), states and providers are continuing to grapple with the biggest changes to Medicaid in a generation. Harsh P. Parikh, Partner, Nixon Peabody LLP, Lloyd A. Bookman, Founding Partner, Hooper Lundy & Bookman PC, and Anne Winter, Senior Managing Director, FTI Consulting, discuss CMS’ June 1 interim final rule related to work requirements, the multi-state lawsuit challenging that rule (Massachusetts v. Oz), new eligibility and coverage requirements, CMS’ May 22 state-directed payment proposed rule, the current status of the Rural Health Transformation Program, and how states are responding to Medicaid cuts.
Watch this episode: https://www.youtube.com/watch?v=NYIU0YqseHY
Watch Harsh, Lloyd, and Anne's episode from December 2025: https://www.youtube.com/watch?v=0vIviLRddzI
Watch Harsh, Lloyd, and Anne's episode from September 2025: https://www.youtube.com/watch?v=JDYg4KZwL0M
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SPEAKER_03Hello and welcome to the AHLA Speaking of Health Law Podcast. Today we're refreshing our deep dive on the sweeping 2025 budget reconciliation law and its transformative impact on the Medicaid program. When we first recorded this broadcast, the law we're talking about was noted widely as the one big beautiful Bill Act, the OBBBA, or simply HR1. Now, almost a year later, the law has been rebranded as the Working Families Tax Cut Act, the name that shows up in almost all government guidance and rulemaking. Whatever you call it, the Medicaid provisions are the same, and they're the largest changes to the Medicaid program in a generation. A quick refresher before we get started on how we got here. The law was passed via budget reconciliation by a vote of 51 to 50 in the Senate and 218 to 214 in the House, signed by President Trump on July 4th, 2025. So we're almost more than a year into its implementation. As I noted earlier, it's the largest Medicaid cut in the US history. Roughly 900 billion, some say almost a trillion. The CBO estimates that 10 million people will likely lose coverage by 2034. That number was reaffirmed just earlier this year. So here's what's different about today's conversation. A year ago, we were reading the statute describing what the law said. Today we're watching it come to life, and implementation is where rubber meets the road. We've got lots of knowns now, and honestly, even more unknowns. Since we last spoke, guidance has come fast and furious. A work requirement interim final rule dropped just last month. A non-citizenship eligibility letter to state health officials went out in April. Six-month redetermination guidance, sweeping proposed rule on state directed payments came out in May. And of course, fifty billion dollars in the rural health transformation program has begun to be doled out across the country. But the biggest new development is the courtroom. We now have one of the first major litigation challenges of the uh challenging these Medicaid provisions from being implemented. And we're going to give that its own segment today. So, a little housekeeping before we get going. This is a non-political conversation. The views you are gonna hear today are our own. They're not of our firms or our clients. And the standard disclaimer applies: nothing we say here today is legal advice. And with that out of the way, let me introduce myself and have our my co-panelists introduce themselves. My name is Harsh Koreek. I'm a healthcare partner at the law firm Nixon Peabody, where I focus on healthcare regulatory and transactional matters, much of them focused on government reimbursement and stakeholders and providers that take advantage of government healthcare programs. Lloyd, Ann, maybe Lloyd, we'll start with you first. Sure.
SPEAKER_01Uh good morning, everybody. I'm Lloyd Bookman, founding partner of Hooper Lundy and Bookman, where we just celebrated our 39th year. Hard to believe.
SPEAKER_03That's going to be key to our discussion today. Thank you, Lloyd. Ann?
SPEAKER_02Hi, good afternoon, everybody. My name is Ann Winter. I'm a senior managing director at FTI Consulting. I have a long history working in and around Medicaid programs at the state level, at MCOs, at PBMs, and at a provider. So I hope I can bring a multifaceted view to some of the issues we're going to be talking about today.
SPEAKER_03Excellent. We're extremely lucky to have Ann and Lloyd be part of our discussion today. So let's get started to where the action is, which is the community engagement requirement, or as everybody now calls it, the work requirement. This is the centerpiece of the of one of one of the centerpieces of the law. And it's now an issue in 43 jurisdictions, effectively 44 if you include District Columbia. And here's the deal for beneficiaries: expansion adults, those states that expanded Medicaid to adults between 19 and 64, now have to show 80 hours a month of qualifying activity. That can be work, education, community service, some mix of three, and states have to verify it. Not just when someone enrolls in the Medicaid program, but on an ongoing basis. Why does Washington care so much? Follow the money. This provision alone is projected to save about $326 billion over 10 years. And the CBO pins roughly 5.3 million individuals that may lose coverage as a result of these requirements. And CMS has spelled out that 1115 waivers are not going to be a way to get around these new requirements. Now, if the requirement is the engine, the exemptions is where the real fight is. And I want to keep these two words in your back pocket because Anne and Lloyd are going to be discussing this all the time, which is medical frailty. It's at the heart of where the litigation is and where the nuances and the uh guidance that's come out is. So who's exempt? There's a mandatory list of folks that are exempt: pregnant women, parents of caretakers of kids over 14, um, ex uh certain foster youth, Native Americans. And then there is a second tier, disabled veterans, caregivers of disabled dependents, and certain hardship cases. On paper, the medical frail exemption is huge, and a generous 10% at least. Blind, disabled people, people with physical or intellectual disabilities, substance use disorder, disabling mental illnesses, other complex conditions. But on paper, although that looks big, as we'll talk about with Ann and Lloyd, that may not be uh actually how the law is implicated. So the headline from our last episode is that the interim final rule has actually dropped. On June 1, 2026, uh the Centers for Medicare and Medicaid published uh the community engagement requirements with an interim final rule that is going to be effective at the end of this month, July 31, 2026. Comments are due the same day, and states must implement these requirements no later than January 1, 2027. The statute mandates the rule that the rule was be promulgated by June 1, and CMS hit that deadline. And were you surprised by that, the fact that CMS came out with this rule when um it was supposed to?
SPEAKER_02I really wasn't. I think they were gonna give themselves all the time that they had, you know, to work through it. Um there's a lot of changes and a lot of nuances in it. So um I'm not surprised, and I'm not surprised that um this lawsuit occurred because of you know the obvious hardship that this presents to states.
SPEAKER_03Yeah, so and you've been living in the weeds of uh implementation and how different states have uh begun uh taking steps to meet these mandates. Uh tell us what's actually changed between when the law was passed and the rule and why that matters for states, healthcare providers that see Medicaid patients, as well as beneficiaries across the country.
SPEAKER_02Well, it's interesting. Um, on the medical frailty, you listed the five conditions, but then they said, we're gonna layer on some other things related to functional impairment and significant functional impairment. And so the rule really, you know, re redefines what functional impairment, significant functional impairment really means. Um, so I think one way of thinking about this regulation, this isn't just about work requirements. It's really a fundamental change in eligibility for Medicaid. You know, we're not we're moving away from the ACA completely income-based eligibility to income-based plus, like a lot of other eligibility categories are. So, for example, pregnant women and uh SSI. So, you know, really thinking about how states are going to implement this. So in the preamble, there's some examples that they give on how what significant means and how they're really expanding and retracting the a person's ability to be exempt through the definition. So, for example, they talk about people suffering from substance abuse abuse disorder. It used to be, it had to be stable recovery. Now it's initial recovery, you know, all the way from if as long as you get potentially if you have an opioid dependence and you're on methadone or some other um, you know, medication for it, you may be deemed stable right away, you know, and so it's not like you have to be in recovery for five years. So so they are chipping away at that. Another one is they talk about um cancer or HIV, and you know, you may be in different phases of recovery from treatment for cancer, and you may be able to go back to work. So there's gonna be a real burden now on showing that you have significant impairment in order to be exempt, and that's gonna put a lot of burden on um providers. And so providers are already talking about okay, what am I gonna have to do? And we can't just look at a diagnosis. I think initially they thought we can just, you know, go into health plan encounter data or fee for service data, pull out the diagnosis, and we can exempt them and we can do that very quickly. That's not gonna count anymore. Diagnosis doesn't, it will not be the factor. So they're gonna have to pull medical records, uh, etc. So there's gonna be a lot more complicated than I think folks. It's gonna be way more complicated. And I think that that's really one of the bases for the lawsuit.
SPEAKER_03Yeah, and before we get to the lawsuit, you know, there there is this idea in the regs about self-attestation, right? The statute preserves, you know, individuals saying, Yes, I have this condition that prevents me from finding community engagement, whatever. Um, but the problem with that is that can only be used once per enrollment. So maybe, right, a beneficiary can say, uh, you know, self-attest, but essentially the rules are requiring more. And as you're saying, Ann, it's complicated. You can't just say, well, if this diagnosis appears in the medical record, this individual has satisfied um, you know, these obligations uh or is exempt from these work requirements. Um so Lloyd, maybe this is this is a good sort of pivot to talking about the lawsuit, right? Um, it's really the biggest new development since we last spoke. Uh so let me just lay the groundwork really quick. On June 29th, 2026, it looks like a broad coalition marched into court and challenged these work requirements. They didn't wait around until you know January 1, 2027. Um, and we're talking about, I think, 26 states to um plus maybe the District of Columbia. Uh so Lloyd, give us uh an overview. What exactly is going on here?
SPEAKER_01Yeah, you've got um uh 24 states and uh the District of Columbia and a couple of other plaintiffs who are ticked off. Um obviously they're concerned with the restrictions on coverage, but they're also thinking that CMS has led them down a primrose path. Um, the states have been in constant contact with CMS concerning the implementation of the eligibility requirements, significant uh revamping of state eligibility um uh processes. Uh and when the interim final regs came out, they had the rug pulled out from under them, and all of a sudden they have to revamp everything. And notices are due to the beneficiaries on August 31st. So the states are extraordinarily concerned about the uh impact of this on just their ability to do the work that they have to do. Um, the lawsuit challenges three things, three components of the interim final rule. Uh we talked a little bit about the frailty rules, and was and and Harsh both described them a bit. Um, the interim final rule, in addition to showing that you are frail, that you meet a condition that would be defined as medical frailty, they have to also show that that frailty under the interim final rule significantly impairs the patient's ability to comply with the community engagement requirement. The lawsuit alleges that that last um gloss on the frailty exclusion is impermissible. It's inconsistent with the statute, which doesn't have that clause, and as we'll discuss in a minute or two, is also in the plaintiff's view, arbitrary and capricious. So they're really concerned about that. Um the interference rule also uh adds the same type of gloss to um areas in which the president has declared that there's a um national emergency, a disaster, kind of in a if you're in a disaster zone, you can um be excluded from the work requirements. Well, they said only if you can show that the fact that you're in that disaster zone or there's a disaster declared by the president also impacts your ability to comply with the work requirements. So the um the plaintiffs are saying that goes further than the statute. You can't do that. Um, last, um, for states that are using claims data, at least in the first year or two, to determine eligibility, they're saying, well, you can use that data, but it's only but it but only for the past 12 months. Um, and so the allegation is again that goes beyond the statute, arbitrary and capricious. The um plaintiffs are saying, wait a minute, you'll have people with permanent disabilities. An example given in the papers was a quadruple, who might not necessarily need frequent medical interventions and may not have a claim submitted for them for the past year, but clearly, you know, they are suffering from a condition that ought to exclude them from the work requirements. So those are the three things uh that the states are um attacking.
SPEAKER_03Um the point, Lloyd, here is that the the challenge is actually surgical, and it's not it's it's not like the whole interim final rule is being challenged, and there is a chance that it's all going to be overturned and maybe come January 2077, there won't be this new obligation across the US. It it sort of sounds like it's more nuanced than just sort of a broad swath attack on the entire step, entire rule.
SPEAKER_01Yeah, that's that's exactly right, Harsh. When you first read the papers, it starts out as a broadside attack, as this is terrible, they've gone way beyond what they should be doing, this is awful. But then you're absolutely right, it ends up being a surgical attack on these three issues. So even if the plaintiffs prevail, they'll prevail as to these three points.
SPEAKER_03And before we get to the counts, Lloyd, and uh, you know, you were talking about, you know, when the rule came out, the reaction from um from state Medicaid agencies. Um, and and and this was, you know, folks were caught off guard, right? That they completely caught off guard.
SPEAKER_02Completely. They were not prepared for this. And you know, there's varying levels of um state preparedness to implement by um January 1st. However, even particularly for states that were well along the way, they have to redo all their systems. They had already been working on systems, they had already been, you know, preparing, you know, memos and you know, to everybody in the in the ecosystem to identify where people are gonna be able to support the um community engagement requirements, but now there's this whole other layer that we've been talking about. Um, and so that's gonna, that's one piece of the harm in the argument. Another piece is just um the deadlines are too tight. Like I think you pointed out, they have to get materials out at the end of the month, you know, and this rule came out. I mean, it takes time to develop the materials, get them in the right reading level for Medicaid members, you know, get the right staffing, disseminate it, mail it, figure out where people are. It's just, you know, impossible. And then potential coverage loss, reputational harm, and you know, it it just you know creates burdens that you know are difficult for samplement. Just simply that.
SPEAKER_03It's just impossible. So Lloyd, let's let's note out. Tell tell us about the the legal bases that the that the the states are using to challenge these three provisions of the IFR.
SPEAKER_01Yeah, there are three counts in the complaint. Um by the way, the plaintiffs are seeking a preliminary injunction, and that hearing is at the end of this month, July 31st. The preliminary injunction focus papers focus on two of them. Um excuse me. One is that the, as I indicated, these three um aspects of the rule that they're challenging um are consistent with the governing statute. The governing statute doesn't put a gloss of significantly impairment, significant this the impairment significantly impacts the ability to comply with the work requirements on either the um frailty requirement or on the emergency requirement. It's not there. Uh the uh statute doesn't preclude going back more than one year on data. It's not there. So they're arguing it's inconsistent with the statute. Relying to an extent on the Supreme Court's overturning of Chevron uh in the Lowerbright case, saying basically there is no deference, or no, at least not the uh Chevron level of deference, maybe for those of you who are into this world, the Swift versus Skidmore level of deference. Um, but it's basically a more open season on challenging agency interpretations, uh, even when the agency goes through rulemaking. Uh the arbitrary compricious count has a number of different aspects to it. It's the familiar relevant factors test that goes way back to Citizen versus Overton Park in the 70s, uh, where you argue that the agency has failed to consider important aspects of the problem. And they're arguing the agency has failed to consider the fact that some of these rules are, particularly the ones that are being challenged, are likely to keep uh of the people that are deemed ineligible as a result of the application of these rules, about 43% would really be eligible if they could have all of the documentation. That's CMS's own data. And so they're saying that this these stringent rules don't take that into account and they and they and they fail to, and they're also arguing that it's arbitrary that they've switched um the the way they're you know, they've switched from what they were telling the states to where they are now. And there's a uh concept under administrative law that if you change your agency changes its path, it owes a duty to really to give a good explanation as to why it's changed path. And they're arguing that explanation is not there. There's a one last count in the complaint that I won't spend much time on. Uh, they're arguing that this is spending clause legislation, uh, since we're talking about Medicaid. And when you're dealing with spending clause legislation that puts additional burdens on the state, the uh the federal government has a higher elevated level of responsibility to uh demonstrate a basis for why it's doing what it's doing.
SPEAKER_03Yes, I mean when we talked last time, I we we spoke about technology and and and ways that technology can uh be a solution to these additional paperwork obligations. And uh it sounds like the the way CMS um sort of articulated some of these exceptions, for example, the significantly impaired standard, that's super subjective. Like whether someone is significantly impaired, I mean, maybe two reasonable people can disagree on on that on that standard, and there probably isn't clear data that you can lean on to say, well, especially right, and to your point, you can't say, like, oh, this person has this diagnosis, therefore he or she is significantly impaired, you have to actually look at their condition and and sort of maybe do a more holistic subject-by-subject, fact-by-fact analysis. And that's super burdensome. Essentially, you're multiplying the burden that was going to be already, you know, on stakeholders here.
SPEAKER_02Totally. Um I think, you know, as we think about implementation and all the efforts that have gone into it, and then you have to do a U-turn, U-turn is too strong, but you have to make a major left, you know, to be able to get this implemented. Um, states are gonna have to retrench. Um, and you know, there's even the early adopters like Montana and Nebraska. The the the this proposed interim rule was not contemplated by them, you know. So even those that have begun the process, you know, they're gonna have to retrench on this too. Um speaking of implementation, I know California has a lot of activity going on.
SPEAKER_03Yeah, so so California, I think similarly, right, um the Department of Healthcare Services um has sort of, like many state agencies, They put out an implementation plan. Here is what the state is going to do to implement the requirements of HR1. And the plan really focused on automation, communication, and finding ways to minimize loss coverage. And so to the point you made earlier, Ann, this was, you know, essentially a roadmap for how California's Medicaid agency was going to try to soften the blow. And essentially, the way the law or the regulations have been promulgated, it allows the state to not solely lean on automated data or existing data sets or et cetera. And rather, essentially, as you said, Ann, we do or we vigor the framework that the state had already thought about. So, Lloyd, going back to the lawsuit before we uh uh turn away, what what are the states seeking? Um, I mean, I think we alluded to earlier, it's not going to be, you know, um the entire rule being thrown out, but what what is it exactly that the states are seeking to recover as a result of the illegal action?
SPEAKER_01Right. They're they're seeking to uh enjoin the uh application of the additional gloss on the frailty and emergency um declaration requirements, again, to show that there's a tie to the ability to comply with the work requirements. I think that those determined to be illegal and to have those enjoined. Uh they're seeking to have enjoined the limitation and going back on data for three years. I mean, for excuse me, for for 12 months. They'll uh this they're arguing again that that's illegal and they're seeking to have that enjoined. And then in one aspect of it that might have um broader impact, a little broader impact beyond these three substantive areas, is they're seeking to have the August 31 um deadline for notifying patients, notifying enrollees um set aside or at least pushed back, because they can't say we really can't comply with that given the surprises in the interim final rule and the provisions of the interim final rule that we contend uh are unlawful.
SPEAKER_03I have a question. Oh, sorry.
SPEAKER_02I was just wondering, you know, for some of the states, say uh Nebraska that's already down the path, and and Montana, even though this was filed, are they able to continue to go down, you know, with implementation?
SPEAKER_01Really great question. Um it depends on what a court does, I suppose. Um courts, there's um one of the areas of law that's been under development for the last couple of years is whether courts can issue nationwide injunctions and what the impact of a nationwide injunction is. It seems that in the APA context, if you argue that something is unlawful under the Administrative Procedure Act, the court has the ability to set it aside. And that setting of aside has nationwide impact. So if this court were to exercise APA uh kind of authority, uh the court could say that this is all unlawful, and I'm in but but I'm and I'm declaring it to be unlawful. Um what that does to a state that's moving forward with the CMS approved program, man, that's a really great question. I don't have a great answer. It's a great question. Uh-huh. Harsh, have any thoughts? I just think it's a great question.
SPEAKER_03I mean, I don't know. I I guess you could have a class action like the court was suggesting, is the is the workaround around nationwide injunctions, right? Um uh but if the rule is state or or if parts of the rule are deemed to be illegal, um yeah, I guess to your point, Lloyd, like if if there's a state eager to sort of move forward in earnest with some of these obligations. I mean, right, before this was law of the land, and I mean we talked about this in the prior podcast. I mean, states had right experimented with these ideas, right? So um, can they move forward notwithstanding uh a federal decision? Might be an open question.
SPEAKER_01I suppose that might turn into where the state whether the states can implement more harsh more harsh, I tease your name again.
SPEAKER_03Not the first time.
SPEAKER_01Well, worse restrictions that go further than the federal restrictions of the interim final rule. If they can't, and the court says these new restrictions are no good, maybe that means the states can't that have gone forward really can't go forward. I don't know. Yeah, it's just it's an interesting point.
SPEAKER_03Definitely. So I I guess Lloyd, uh, bring us home and and please please chime in. Um we talked about some of this already, but why does this case matter so much for our audience? Um the states, providers, health system beneficiaries, what do you sort of see as the you know thing to be watching if you're a stakeholder in this or and and impacted by this?
SPEAKER_01Yeah, I mean, obviously you have an August 31 deadline coming up. Um if I'm a state, I'm really concerned. Do I do I keep moving forward and try to comply with the new rules? Do I do do I do I veer to the left? Do I veer to the right? What do I do? So that I think that's the number one issue. And that they're not gonna, at the earliest, they'll see a court ruling on July 31st. Not a whole lot of time before August 31st if they actually have to go out. I think that's the most immediate impact and concern. There's obviously substantive concerns for people who, you know, uh meet the frailty conditions but don't have how but may not be able to show that they can't work, or how is the state gonna decide that the impairment significantly impacts the ability to work? I mean, those substantive issues I think are there and I think are very important. But I think the most immediate thing is how in the world are what in the world are the states supposed to do now?
unknownYeah.
SPEAKER_02A little bit of a state perspective, I think, is states, a lot of states have built an infrastructure, you know, multi-agency infrastructure in order to comply with the regulation, right? Or the law and then now the regulation. I don't think given those efforts, the teams, the committees, the steering committees are not gonna stop. They just can't, you know. I mean, I I I don't think that that's what, you know, if I were still working at the state here in Arizona, I would say, we got to just go as if this is not gonna, you know, go through that, you know. Otherwise, if you stop, start, stop, start, it just makes it even worse. Absolutely. Absolutely. Yeah.
SPEAKER_03Yeah. And we as we talked about, right? The lawsuit doesn't hit pause on all of the other aspects of the law we're talking about. Yeah. Um so okay, so let's turn briefly to eligibility changes. Um, and um let me lay the uh lay the ground briefly. So work requirements are really grabbing the headlines, but that's just one piece. The law, as we discussed last time, makes several changes to eligibility and coverage, and these really add up, right? So, first, um, there's now a six-month redetermination period starting in January 1, 2027, meaning um beneficiaries have to show that they were eligible every six months. And that showing of eligibility now includes the new community engagement requirements. Um that's about uh so this is a new obligation on expansion adults. Uh second, retroactive coverage gets crimmed. So starting in January 2027, expansion adults go from three-year, three months of look back coverage down to one. Um, and there's also similar changes to certain chip populations. So that just means more financial exposure right when someone needs like an urgent hospital or medical need. And third, and Lloyd will get you on this one, is the immigrant eligibility piece, which now moves into a tier two system starting in October 1, 2026. So what that means is certain immigrant categories don't get sort of the eligible are not no longer eligible for this safety net program. Uh so Ann, why don't we start with you? Why don't you walk us through various guidance that has come out regarding these new statutory obligations on Medicaid agencies?
SPEAKER_02Yeah, I mean, I think you summarized um them well. I one thing I do want to point out on the look back period only being limited to one month from three, that's gonna have, again, we're we we're gonna be talking a lot about provider burden, but that's a lot of provider burden because somebody, you know, with presumptive eligibility might say, hey, I have a pregnant woman who came into my emergency room, you know, she's low income. I'm gonna assume, you know, that we're gonna have Medicaid coverage once you know we get her through the eligibility and enrollment process. That is now gonna be extremely limited. So that could potentially, depending, you know, how presumptive eligibility is treated. And I haven't heard a lot on that particular case of providers again having uncompensated care. And I'd be interested, and Lloyd, if you have any perspective on that.
SPEAKER_01Well, first on presumptive eligibility, um, as uh presumptive eligibility, and as you and Tosh know, is based on the hospital making the eligibility determination up front, and it's often based on self-attestations. How's that gonna play with the provisions limiting self-attestations going forward? We don't know. Um, we're hoping that presumptive eligibility remains in place. Nobody's, you know, there aren't provisions getting rid of it, but seems to run in head-on into a conflict with the interim final rule on um self-attestations. So I think that well, we'll we'll see how that that plays out.
SPEAKER_02I didn't mean to bring up a can of worms here.
SPEAKER_01That's a whole can of worms. That's another can of worms. I yeah, we've just been talking about that with some hospital association representatives like yesterday.
SPEAKER_03So there are lots of worms in cans uh with with these laws. Um and and sort of the key question, Ann, you were asking, is like, something's gotta give, right? I mean, Lloyd, you made this point on our last podcast. Like, people need healthcare, you know, when they need them. And so not having insurance coverage sort of leads to who's holding the bag? Is it you know the healthcare provider that's at the point of care that in some situations has to or should provide medical services because the person needs it? And then if it's not that healthcare provider, is it the state? Is it state but not the federal government? Is it the man, is it the managed care plan that's at you know, taking financial? It's those questions are really at the central, right? We're gonna lose all this financial support, but people still need health care. So who is holding the bag if that's the case?
SPEAKER_01I think it's gonna be hospitals, most uh hospital emergency rooms, because that's where patients are gonna end up who have no coverage, unless the states can figure out a way to step up, and some states are. Um the hospitals are gonna be left hold in the bag, adding to the additional pressures that the hospitals are already gonna feel from all of the other cuts. So um it's gonna be So on that topic, Lloyd.
SPEAKER_03Let's talk about the immigrant uh side, right? So I I briefly touched on it, but why don't you, you know, I I think it's the same issue, right? I mean, it's a category of individuals that no longer have coverage. And who's left to look at the back? I think the company's like, yeah.
SPEAKER_01Yeah, and from a public health perspective, this is also not not a really good thing to have people deferring care until they have to go to the emergency room. Um, one of the things that we talked about last time, we should mention again, is if you have a family, you can have a family that's not divided, uh, where some of some of the folks have an immigration status that allows them to enroll and some don't. And the entire family may just be afraid and and may not enroll. Um, and I think this goes a little bit beyond um necessarily the medic the new Medicaid eligibility and coverage requirements. It goes to the whole immigration enforcement um mechanism in the US. That's uh you know, we we see a lot of immigrants who either have uh who are completely undocumented or have uh another kind of status, they're just afraid. They're afraid to go, heck, they're afraid to go to one of their designated appointments with um, you know, to to to to do one of their required check-ins because they might get picked up. So they're but they're really afraid to go to a hospital unless they absolutely have to go to the ED. Um, and we see ICE coming into hospitals. Uh, and so you have that whole overlay and to the um reduction of eligibility, uh, you know, elimination of certain categories of lawful immigrants from the eligibility category. So it's just gonna create an underclass that has even less and less access to healthcare, except in dire circumstances.
SPEAKER_03Yeah, and and question whether that really leads to lower overall costs for uh the system. Um so speaking of of costs, uh let's sort of move on to the financing side, Lloyd. Um, I know this is your your home turf. Um uh so maybe you can, uh Lloyd, uh, give us a quick overview of provider taxes 101, why they matter, and then we can sort of go into what the law does and and updates uh that you've seen over the last uh several months um with respect to Medicaid funding.
SPEAKER_01Sure. I'm gonna talk about three things. Um I'll talk about provider taxes and the restrictions under uh HR1 and the CMS's proposed rule. Uh I'll talk about the state-directed payments, which are often financed by uh provider taxes and the uh rule that just the proposed rule that recently came out, and we'll talk very briefly about the uniformity rule, which affects only about nine programs. So it's of lesser impact, but in my home state, it's of near and dear to our heart because we have taken advantage of that quote loophole. Um, so let's start with provider taxes. What we all, you know, what's a provider tax? Well, states over the years have wanted to use less of the general funds to support Medicaid. So somebody you have to come up with a um non-federal share from someplace. One place to come up with the non-federal share from is to tax the very providers that are going to benefit from program financed by that provider tax. Uh, so we have 49 states that have implemented provider taxes, um, many of which have been implemented in the last 10 or 15 years. It's it's it's a fundamental way that Medicaid is uh funded today. Whether it's a good good idea, bad idea, it is in, and I experienced this in California, that was the only way we were going to get additional non-federal share money to support um uh a decent increase or uh to Medicaid rates or supplemental Medicaid rates. So important, critical. Most states use them. If we didn't have provider taxes, we'd have much lower rates and we'd have much more uh problems for providers that are um uh benefited through provider taxes. Um there what the in our final rule, not the inner final rule, what what CMS has done or or Congress has done and then CMS has uh implemented is they've set a limit, I'm gonna start with provider taxes, they've set a limit on uh provider taxes, but CMS doesn't like them. Congress doesn't much of Congress doesn't like them except when they benefit their own district. Um so for non-expansion states, states that have not expanded Medicaid under the ACA, uh the statute sets a limit on the percentage of has set a limit for years on the percentage of net patient revenue that a provider tax can uh encompass. Um for expansion states under HR one, uh it's the lower of the uh uh percentage of net patient revenue on enactment of HR one on July uh uh 4th, 2025, that a state's existing provider fee program had is a limit. You can't go higher than that um if you're an expansion state. For non-expansion states, there's that same limit. You can't again increase the size of your uh provider tax program. But um you if if um if you are in excess of um, let me say it this way, the percentage of net there's a cap, you can't increase the program, but there's a cap on the percentage of net patient revenue that goes down from the current cap of 6% to um 3.5 percent by 0.5% uh per year from federal fiscal year 2028 to federal fiscal year 2032. In other words, states whose current net patient revenue provider taxes in excess of uh uh now uh uh let's say 3.5% of net patient revenue is gonna are gonna experience a decline uh in the size of their provider taxes. But I think the other the limit of provider taxes to the existing uh net patient revenue percentage as of the date of enactment is a really big deal, and that's impacted a lot of states. So states basically the idea is that provider taxes won't increase, level won't increase, uh, and for some states they're gonna decrease uh between now and 20 and 2032. CMS's uh CBO estimated $182 billion savings as a result of the provider tax restrictions. And since provider taxes typically feed um supplemental payments and state directed payments, that's gonna lead to a reduction of those. Um the second piece uh in this area that uh has come out is the uh uniformity provision. Some states, uh, including California, have taxed Medicaid activity at a higher rate than non-Medicaid activity. CMS calls this a big loophole and has sought to close the loophole. Um in the um the uh statute HR1 required CMS to close the loophole. It gave CMS some flexibility on the effective date. Uh there's a transition period for MCO taxes, and there are basically there are seven MCO taxes that are implicated by this, uh, one hospital provider fee and one nursing home provider fee that are implicated by the uniformity rule. Uh MCO taxes approved on and after April 4, 2024, um, must comply uh by the uniformity rule that has a you that is not tax Medicaid L uh utilization higher than other utilization by January 1, 2027. Um, for other types of taxes like taxes on hospitals, they've got until the end of the state fiscal year ending in 2028. So they've it's been kicked out a little bit. What my state is doing on the MCO tax, which is definitely problematic under this rule and brings in billions of dollars to the state, is we have legislation to implement, pending to implement a uniform MCO tax. So it'll so we need money. The state legislature is reacting. We'll see, we'll see how that that goes as as it moves forward. But the third and perhaps the the most dramatic uh changes deals with state directed payments. Um the we we um effective uh uh with the um excuse me, HR1 uh provides that expansive uh state directed payments a couple of ways. If you're in expansion state, it's capped at 100% of the um uh of really the rate that Medicare would pay. If you're in a non-expansion state, you're capped at 110%. Uh but existing state directed payment mechanisms uh are grandfathered from this limitation until January 1, 2028. Um, and then the and then their state directed payment pots have to be reduced by 10% annually until you get down to the um either 100% or 110% uh Medicare limit. Um, this rule applies to hospitals, nursing facilities, academic medical centers, and CBO estimated 149 billion savings over 10 years. But then we get the proposed rule that came out on May 2026 that provides um uh some heartburn to a lot of states and providers. Uh one thing it does, it extends these caps to beyond state-directed payments to fee-for-service payments made on a targeted basis to different classes of providers. So the Medicare limits will now apply uh to those payments. Secondly, it reaches all provider types on state-directed payments, not just the, you know, not just hospitals, not just nurse uh hospitals, academic medical centers, and the uh provider types that were subject to HR1, but it extends it to virtually any kind of provider type. So that that's an expansion that wasn't in the statute. CMS said we think this is just something we can do and we're gonna do it. Um but here's the one of the big questions on the Medicare limits on state directed payments is how are you gonna compute that? How you can apply the Medicare limit? Um, we have, for those of you who are in this area, there's the UPL, the upper payment limit, on the fee-for-service side of the world. That's uh also a Medicare limit, but it's computed in the aggregate. Will the state's aggregate spending under Medicaid be under what it would have spent under Medicare rules in the aggregate? It seems that under this interim, under the proposed rule, that's not the case. Under the proposed rule, it appears that they're going to apply this on a service by service provider by provider basis. So, for example, if you're talking about an inpatient service, it looks like they're going to say, Well, what would Medicare have paid for that particular service to that particular provider, including the DRG base rates, um, you know, IME, GME add ons, and the like. What would have been paid, and that's the limit for that particular service, 100% or 110% Medicare. Sounds pretty unworkable to me. Sounds terrible. And then they have another provision that's really important for the those states that have existing state directed payment programs that will meet the grandfathering requirements. But you have to lose 10% of your state directed payments each year up until uh 2032, until you excuse me, each each year until you actually hit the Medicare 100%, 110% limit. The question is, how's that grandfathered amount going to be computed? And what the proposed rule says is we're going to take basically the amount of your state-directed payment pool, the the entire dollar amount of it, as of July uh 4, 2025. Uh, let's say it's a billion dollars, and then once we start implementing uh the grandfather in 2028, when the grandfathering period reductions start, we're gonna reduce that um, in my example, $1 billion by 10%, or $1 billion, or excuse me, or $1 million $100 million each year until you get to Medicare. So it's a much more accelerated reduction in the size of state directed payment pools than was anticipated. Um, so we're gonna see significant declines in state-directed payments until before HR1 and before this proposed rule, state-directed payments could go up to the average commercial rate, which gave states a lot of room, and a lot of states took advantage of that room, and that's gonna start tumbling down, and states are gonna see uh significant reductions in their ability to make state-directed payments. One other point of harsh really quick. Uh, reminded the initial HBO uh CBO estimate was $149 billion reduction. It's uh based on the proposed rule, it is now a $520 billion federal reduction. Uh, we somehow basically just more than triple tripled the estimate.
SPEAKER_03That that's staggering. That that's exactly what I was gonna ask you about, Lloyd, right? So so that you know, initially when the law was passed, CBO said, well, this is gonna lead to about $150 billion in savings. The way the proposed rule now is being scored, it looks like, and maybe the you were sort of talking about some of this, the uh the agency is really flexing its muscle and arguably going beyond what Congress had contemplated in terms of these cuts. And it's staggering. I mean, just this I mean, you know, in some ways, right, these mechanisms to draw more federal matching revenues are seen as being perhaps abusive, but the dollars are going to healthcare. And so this sort of goes to the point that we've been harping on all session that we're gonna see less and less federal revenues going towards healthcare. So, what what's the reaction been to you know folks seeing the proposed rule and sort of seeing that it's even more aggressive than the underlying legislation?
SPEAKER_01Uh we uh we have a comment period that's coming up in about a week and a half. Um we have most of the healthcare providers are up in arms, uh scared, concerned, um uh are gonna see, you know, they're gonna attempt to submit comments that argue that this goes well beyond what Congress intended. Um that and then it's how do we plan for the for this disaster? Um that's it's sort of fear and loathing, I think is what I'm seeing from from.
SPEAKER_03Yeah, and your your thoughts. What what does this mean from a state financial advisory perspective?
SPEAKER_02Yeah, you know, it's interesting because um I almost feel like because a lot of this is going to be coming out in the next couple of years, it's like tomorrow's problem a little bit. And I've you know been researching a lot of state budgets for clients, and states are extremely distract distracted with um SNAP error rates, payment error rates, you know, because you know, the error rates today impact how much the state may have to um kick in on SNAP benefits, right? And so, and those are in the hundreds of millions for some states. So they were like, what do we got to do? So again, getting back to technology, eligibility systems, so much focus on really shoring that up, um, looking to hire hundreds of people, you know, to do this. Um, the other distraction that they've had this year is on um tax conformity. And a lot of people don't really talk about that and the impact of state budgets of whether or not a state has quote rolling tax conformity. So when the Working Families Tax Act or um was passed, you know, how much of those tax cuts, you know, tips on, you know, taxing tips, et cetera, how much are they going to conform? And for example, Colorado is was a full um rolling conformity state, and they had a special session to change that so they could pick and choose what. So the that you know, the combination of what to do around snap error rates, which impacts the majority of states, you know, tax conformity, you know, was really the front and center. And so if you, you know, this whole issue about funding backfilling some of the uh funding losses, I think are really going to be addressed in the next budget year.
SPEAKER_03Yeah. Um we're we're running out of time. So I want to hit a couple of things before we end. Um, and why don't you want to talk briefly about the rural health transformation program? In some ways, this was meant to soften the blow that we've been uh talking about, right? So uh just quick background $50 billion um uh essentially was allocated by Congress, $10 billion a year from fiscal year 26 to 30. The applications were opened end of last year. We briefly touched on this on our last podcast. The money's sort of now being doled out all across the country. Every state, I think, has received something. So give us a quick, quick update um uh on where this program is.
SPEAKER_02Yeah, so first year money came out in January. Um, the states had to get enabling legislation to spend it. So, you know, there's some stasis and there again with state budgets and um and just the legislative process. Um, but there's a flurry of RFPs that states are issuing to um spend the money. And um I would say um this was not intended at all to backfill some of the the cuts to providers and hospitals that Lloyd was just talking about. In fact, there's a limit on the amount of funding that can even go to you know, shoring up rates and reimbursement. It really is more about expanding the use of technology to get into the rural areas. A lot of hub and spoke models are out there, a lot of telehealth. That's where you really see the focus right now.
SPEAKER_03Yeah, and the money is not like this is going to community hospitals in rural America. Um, and we've been talking about hundreds of billions in potential cuts. This is a drop in the bucket. Um, so for the last few minutes, let's talk about how states are responding to all of these cuts. Um uh Ann Lloyd, let's sort of go through. I think we talked about in prep six or seven categories of steps states are taking. Maybe Ann, if you want to take it one step at a time, and and Lloyd, please jump in with any color you have on what you are seeing across the country in terms of state responses to how the bill is being implemented.
SPEAKER_02Lever number one that they have is just cut provider rates, multiple states of cut provider rates and not even targeted rates. Sometimes it's completely across the board, like in North Carolina and Idaho. And what's interesting about this, they're cutting rates while they still are filling up their rainy day funds. So, you know, that's really important from a policy perspective. Um, the second lever is um reducing uh optional benefits. There's mandatory benefits in Medicaid, and there's optional benefits in Medicaid. Um, so for example, prescription drugs are an optional benefit. No states have ever cut up, you know, and so they sometimes nibble around the edges with chiropractic services or adult dental. But a big optional benefit is HCBS services. Um, and that's a concern because that's actually a cost savings, and it's um and I believe there's some, you know, there's some legal guardrails around that as well.
SPEAKER_01Well, real quickly, the almost dead case, DOJ has taken the position, and June in June, uh DOJ took the position that states um um don't have to ensure that patients with disabilities are serviced in the most um um in an integrated uh setting appropriate. So they basically said the courts are wrong and DOJ is not gonna enforce the Armstead provision uh the way that it's been enforced.
SPEAKER_02I was not aware of that.
SPEAKER_01So there you go. So we're gonna I don't know how it's gonna play out.
SPEAKER_03But yeah. And in terms of uh eliminating GLP ones, I've seen across the country a lot of state Medicaid agencies.
SPEAKER_02Restricting, yeah.
SPEAKER_03Right, exactly.
SPEAKER_02Yeah, that's another one. Um, just even restricting, you know, clinical criteria for certain things too. Yeah. Um, another one is just tightening eligibility. Um this law is all about tightening eligibility, but there are some states that are going, you know, have a little some different levers. So, for example, this did not pass in Arizona, but they had all the way to the end of the budget, we wanted quarterly redeterminations, not just every six months. So there are some states that are looking at doing even more frequent determinations in six months. Another one, um, we brought up the hardship exemptions. There are four that are listed. Not every state is exercising everyone. So there's even ways of you know tightening eligibility through a limit by not exercising their um ability to do that. Um cost sharing, um, there's an ability for states to maximize cost sharing, and that usually impacts, you know, whether or not a person is gonna get services and eligibility. Um, and then adjusting the Medicaid financing. I think we've already talked about that and the equalization. Um, and then I think, you know, what are new measures to raise funds? And I I'll defer to you two Californians to talk about the proposed legislation.
SPEAKER_03Um we love direct democracy here in California.
SPEAKER_01Yeah, we have our wonderful billionaires tax on the ballot.
SPEAKER_03Yeah, right, right.
SPEAKER_01Um, and so there's that, there's the LA Counties and a sales tax um to fund healthcare services. Uh, and we've not got the tax. We talked about this in prep, um, that's being proposed in the California legislature on businesses that don't cover their employers, employees who end up in Medicaid.
SPEAKER_03So, really, really great, guys. Um, let's uh sort of leave the audience with with one takeaway. I this we're coming up on an hour. Um, and Lloyd, you know, if you can give one sort of look at the crystal ball where you see things floating, um, maybe Lloyd will start with you.
SPEAKER_01I see things floating to the usual cycle of disaster, then both industry and legislative uh responses that fix it. But I think we go through that unfortunate cycle of disaster and then fixing it.
SPEAKER_02I agree completely. I was gonna say the same thing, and the strains on the safety net are gonna be extreme. You know, we're just there's just gonna be a some form of a collapse.
SPEAKER_03Yeah, and and my my takeaway is uh watch Congress because the way this law was designed was all the great things, the cuts and and the things that everybody likes were on the front end. The hard stuff that we were talking about, you know, during this conversation, the provider taxes, the work requirements, those are coming later, but you never know. There could be more delays, there could be congressional action, there could be reprieve from uh changes in in you know who is uh in Washington. So that that's also something to watch. Uh with that, uh, thank you um to uh to our audience for joining us, and uh uh we look forward to providing an update on this uh many months from now. Have a great day. Thank you for joining us.
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