MW Trump may use Medicaid cuts to fund tax reform. These states would be hit hardest.
By Chris Matthews
Conservative healthcare wonks accuse states and providers of gaming the system
President Donald Trump and congressional Republicans entered office on promises to enact trillions of dollars in new tax cuts at a time of record federal budget deficits, rising interest rates and stubbornly high inflation.
For decades, the GOP has been willing to forgo budget discipline in order to enact tax cuts, arguing that the economic benefits of lower taxes outweigh the negative effects of higher deficits, but in the current environment that strategy has run out of steam.
That has led Republican leaders in Congress to circulate a document outlining plans for more than $5 trillion in spending cuts to Medicaid, Medicare and the Affordable Care Act, which if implemented would have far-reaching effects on the U.S. healthcare system and on Americans' access to healthcare services.
These cuts would likely be more than enough to offset making Trump's 2017 tax cuts permanent, but analysts say the Republican House majority of just three votes will only put into stark relief the impact of these cuts on American people and businesses, making it unlikely that they will ultimately be enacted.
The most important political data point for investors to monitor when considering tax and spending negotiations is this Congress, according to Spencer Perlman, a healthcare policy analyst with investment adviser Veda Partners.
"There's functionally no real majority in the House of Representatives, as there's very little that 218 Republicans can agree on," Perlman told MarketWatch. "It only takes three malcontents to throw the sand in the gears of anything."
The Trump administration didn't immediately respond to a request for comment.
No pain, no gain
Republicans will need to take a hard look at healthcare spending, because it makes up such a large share of federal spending - nearly 25% in 2024, or $1.7 trillion.
That's a chunk of change that could go a long way toward paying for an extension of the 2017 Trump tax cuts, as well as the trillions more in tax cuts Trump promised on the campaign trail - including eliminating taxes on tips, restoring the state and local tax deduction and abolishing taxes on Social Security earnings.
Perlman argues, however, that it won't take much in the way of cuts to healthcare programs before lawmakers start to hit parts that are very popular with voters and with politically powerful constituencies like doctors, hospitals and other healthcare providers.
Many of the proposals being circulated by Republican leaders, he said, are not "politically viable because the impact on hospitals, especially rural hospitals associated with academic medical centers, would be devastating."
He noted that hospitals are a powerful lobbying force not just because of the services they provide but because "they are often the largest employer in a geographic area." This is especially true for rural areas and poorer states, which are represented almost exclusively by Republicans in Congress.
Cuts to Medicaid could affect publicly traded hospital operators like Ardent Health Partners $(ARDT)$ and HCA Healthcare $(HCA)$, as well as insurers like Centene $(CNC)$, Elevance Health (ELV), UnitedHealth Group $(UNH)$ and Molina Healthcare $(MOH)$, which contract with states to provide Medicaid-related services.
Medicaid 'money laundering'
Conservative healthcare-policy experts argue that this perspective underestimates the degree of waste in these healthcare programs.
Brian Blase, president of the Paragon Health Institute and former special assistant to Trump for economic policy, told MarketWatch that one of the most important reforms Republicans should be looking at is reforms to so-called Medicaid provider taxes.
These taxes, he said, are designed to make it appear that states are contributing more to Medicaid costs than they actually are, because these taxes are often levied against hospitals and other providers with the knowledge that they will be returned in the form of higher reimbursements, which must then be matched by the federal government.
"There's an enormous amount of money laundering in these programs," Blase told MarketWatch, arguing that these "financing gimmicks" take advantage of the fact that the federal government's Medicaid responsibilities are uncapped and create no incentive for states or providers to spend wisely.
Hayden Dublois, who studies healthcare policy for the conservative Foundation for Government Policy, believes there will be a lot of support for reducing the amount of money the federal government must spend to cover new enrollees in the program who joined under the Affordable Care Act.
In order to entice states to expand Medicaid to cover nondisabled adults who have income up to 138% of the poverty line, the law has the federal government cover 90% of the cost, compared with the 50% to 78% covered by traditional Medicaid.
"It isn't morally right for the federal government to be subsidizing able-bodied adults at a higher rate than they do disabled individuals," Dublois said.
Amending the law so that the cost for newer enrollees is matched at the same rate as the broader population could save $690 billion over 10 years, but Perlman of Veda Partners estimated that would require the 41 states that have expanded Medicaid to increase their spending on the program by 25% to retain baseline spending levels.
Sticking it to blue states
Another idea conservative wonks think will gain traction will be to lower the rate the federal government pays for Medicaid enrollees in wealthier states by eliminating a floor in the percentage the government pays to states based on a formula comparing a state's per capita income with the federal per capita income.
States with lower per capita income pay a smaller share of Medicaid costs than do states with higher per capita income, on the logic that states with wealthier residents can afford to raise taxes to pay for those benefits themselves.
Perlman estimates that this proposal could save nearly $400 billion over 10 years and would largely affect states that send Democrats to Congress, including California, Colorado, Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Washington and Wyoming, as well as the unrepresented Washington, D.C.
Paying for tax cuts by cutting healthcare subsidies for Americans in so-called blue states may seem appealing to many Republican lawmakers and voters, but there are 27 House Republicans representing such states, and the political backlash to supporting such a change could be severe.
That said, the allure of tax cuts could lead many Republicans to vote to cut funding for healthcare programs nonetheless.
"The threat of millions of people losing their coverage will be sure to spark a pushback," Beacon Policy Advisors analyst Maxwell Shulman wrote in a recent client note, adding that this pushback could come even from red-state officials who are reliant on federal money to fund healthcare programs.
"But ... there will be tax cuts one way or another," Shulman added. "Lawmakers will do what they have to to get there, and if that requires substantial offsets, that's what they're going to do."
-Chris Matthews
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January 21, 2025 12:23 ET (17:23 GMT)
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