As Washington contemplates cutbacks to federal funding for Medicaid, officials in Albany have reacted in two self-contradictory ways.

On one hand, they warn of catastrophic consequences if the plans go through. On the other, they admit that they are doing nothing to hedge against that risk in their own planning for the state budget.

Both responses are wrong-headed. Although Congress is indeed preparing to reduce future federal Medicaid spending, the effects are unlikely to be as dire as Governor Hochul and others have suggested.

At the same time, state budget-makers would be prudent to hit the brakes on spending now – and not go forward with a budget that could balloon state Medicaid spending by 17 percent or more in a single year.

What’s on the table in Washington

The House’s budget blueprint calls for reducing projected federal spending by $2 trillion over the next 10 years. The Energy and Commerce Committee, which oversees major health programs, has been assigned to identify $880 billion of those savings. Because President Trump has declared Medicare to be off the table, the committee’s cost-cutting is expected to focus largely on Medicaid, a means-tested health plan jointly financed by federal and state governments.

The menu of options being discussed includes mandating a work requirement for Medicaid recipients, lowering the percentage of costs covered by Washington or switching to a system of block grants instead of matching funds.

Whatever changes the committee recommends would be subject to further review and adjustment by the full House of Representative and the Senate before becoming law.

Even if the committee takes the full $880 billion out of Medicaid, that would amount to slowing the growth of federal outlays on the program rather than reducing them from their current level.

The Congressional Budget Office has estimated that federal Medicaid spending will rise at an average level of about 4.8 percent per year from 2025 to 2034. Lowering that rate of increase of 3.1 percent would be enough to save $880 billion over the 10-year period (see chart).

Gauging the impact on New York

Until Washington’s budget plan takes clearer shape, it will be impossible to predict the effects in New York with any confidence.

However, two things are clear:

First, because New York receives a disproportionately large share of federal aid, it can expect to sustain a disproportionately large share of any cutbacks.

Second, because New York’s Medicaid program is so richly funded, it can more easily absorb a loss of money from Washington without harming the program’s essential services.

New York spent $4,800 per resident on Medicaid in 2023, which was 82 percent higher than the national average. Even if New York had reduced its Medicaid budget that year by 17 percent, its per-capita spending still would have outstripped that of the No. 2 state, New Mexico.

The House Republicans’ cost-cutting target of $880 billion, if fully applied to Medicaid, would be the equivalent of 11 percent of federal spending on the program over the next 10 years. Any cuts are likely to be phased in gradually, so states would not feel the full effect right away.

Assuming New York’s aid were to be cut by 11 percent tomorrow, that would represent a loss of almost $8 billion, which is 6 percent of the state’s total Medicaid spending (including state and local funds).

To put that in context, New York’s total Medicaid spending has increased by $26 billion or 29 percent in the last three years alone. If New York immediately cut $8 billion out of its proposed budget for 2025-26, it would still be spending $115 billion, which is roughly its cost for the current fiscal year.

Although squeezing $8 billion out of Medicaid would be politically challenging for Albany lawmakers, it’s unlikely that a cut of that scale would trigger fundamental changes to coverage or benefits. Governor Hochul’s claim that House Republicans “voted to rip health care away from up to 1.8 million New Yorkers” – which would be a quarter of the state’s current enrollment – was a gross exaggeration.

Protecting the vulnerable

Critics of the House Republicans’ budget plan have raised concern about the impact on Medicaid’s traditional target population, including impoverished children, the disabled and residents of nursing homes. With the expansion of Medicaid under the Affordable Care Act, however, these groups are a shrinking share of the program’s population.

In New York, less than one-fifth of recipients are elderly or disabled. Forty-nine percent are able-bodied working-age adults.

Also, more than half of the state’s enrollees have incomes above the federal poverty level. Indeed, combined enrollment in Medicaid and the Medicaid-like Essential Plan appears to be about 3 million higher than it should be based on Census Bureau income data.

Those figures make clear that New York could significantly pare back its Medicaid program without touching the coverage or benefits of the indigent and disabled.

Identifying places to cut

To protect vulnerable Medicaid recipients, Albany budget makers could focus their cost-cutting on the substantial share of spending that is not directly related to patient care.

Examples include:

Subsidizing money-losing providers. Medicaid spends almost $4 billion per year on various programs targeted to financially distressed hospitals, nursing homes and other health-care institutions. This is done in the name of saving safety-net providers from going bankrupt. Yet some have received substantial operating help for years on end without becoming more financially self-sufficient. Rather than subsidizing inefficiency, the state should be encouraging under-utilized or failing facilities to downsize, merge or close.

Financing labor contracts. The state’s politically influential hospital industry has come to rely on Medicaid to cover the cost of negotiated pay raises for its unionized employees. A document obtained by the Empire Center showed that state officials tailored a Medicaid rate increase in 2018 to disproportionately benefit hospitals that had labor contracts with the state’s largest health-care union, 1199 SEIU.

Bailing out benefit funds. Over the past decade, a quarter-billion dollars in Medicaid funds earmarked for an “advanced training initiative” – described as a way of improving care in nursing homes – have instead flowed to a pair of benefit funds providing health coverage for 1199 members. The cost of those benefits should fall on the workers, their employers and their union, not the taxpayers.

Rewarding political allies. State officials sometimes use their discretion over Medicaid-funded grants in questionable ways. In 2022, a politically connected physician group in the Bronx, Somos Community Care, received a $29 million grant from funds normally reserved for distressed hospitals and nursing homes. That same year, donors linked to Somos contributed more than $400,000 to the campaign accounts of Governor Hochul and her running mate, Lieutenant Governor Antonio Delgado, and another $150,000 to the state Democratic Party.

Covering the well-to-do. One of Medicaid’s fastest-growing expenses is long-term care. Although this coverage is intended for the poor, people with substantial resources can qualify by transferring their assets and income to relatives or a protected trust. For people entering nursing homes, Medicaid enforces a so-called lookback: Assets transferred within the previous five years are counted as if they still belong to the applicant, resulting in a “penalty period” during which Medicaid benefits are limited or denied. However, there is currently no such lookback for home care, meaning applicants can theoretically transfer assets and qualify the next day. State lawmakers approved a 2.5-year lookback in 2022, but the Health Department has yet to put it into effect.