5 Things to Know About the Converging Medicaid Funding Crisis

As the One Big Beautiful Bill Act (OBBBA) reshapes federal Medicaid financing, chief medical officers (CMOs) and managed care leaders are navigating compounding pressures, from Federal Medical Assistance Percentage (FMAP) cuts and rate compression to mass redeterminations, plan exits, and accelerating artificial intelligence (AI) deployment. All with little margin for error.

Here are 5 key pressure points every health policy leader should know about the Medicaid funding cuts.

1. The OBBBA Is Delivering the Largest Medicaid Cuts Since the Program's Founding

The OBBBA authorizes a $1 trillion reduction in federal Medicaid spending over 10 years, implemented through a phased approach beginning in 2026.¹ RAND Health projects that state Medicaid budgets will fall by $664 billion between 2025 and 2034, while state general funds will absorb an additional $87 billion in losses.²

For managed care leaders, the structural mechanism matters as much as the dollar figure: the OBBBA caps state-directed payment rates for Medicaid managed care at 100% of the Medicare rate for expansion states and 110% for nonexpansion states, directly constraining the supplemental payment tools that states have used for years to keep providers and plans financially solvent.³ Among the most complex provisions are those governing state-directed payments where new caps, grandfathering conditions, and undefined terms like good faith effort and completed preprint have left providers facing significant revenue recognition uncertainty while CMS guidance remains pending.¹

Beginning October 1, 2026, the federal matching rate for emergency Medicaid services provided to noncitizens who would otherwise qualify for Medicaid expansion will be reduced from the 90% expansion rate to the standard state FMAP.³ The window to model contract exposure and renegotiate is closing. Plans that have not stress-tested their state-directed payment-dependent revenue assumptions against the OBBBA's new parameters are operating with material blind spots.

2. States Are Being Squeezed and MCO Rates Will Absorb the Shock

When federal funding contracts, states face a choice: increase their own spending or reduce what they pay plans and providers. Industry forecasters predict that in response to cuts, states will ratchet down Medicaid managed care rates, causing significant disruption as some for-profit carriers threaten to leave Medicaid in certain states.⁴

Kodiak Solutions projected up to $25 billion in annual hospital revenue reductions, while Premier estimated $68.5 billion in hospital revenue at risk over 2026 and 2027, with Commonwealth Fund analysis projecting safety-net hospital operating margins shrinking by nearly 30%.⁵ Providers facing revenue losses will seek higher reimbursement from commercial payers to offset reductions from the public sector, a dynamic that will compress margins across every line of business and is expected to pressure employer-sponsored plan premiums.⁶ For CMOs, this means the Medicaid funding crisis is not a government payer problem, but a system-wide margin problem.

3. Semi-Annual Redeterminations Are a Mass Administrative Event and MCOs Are Caught in the Middle

Beginning December 2026, states must conduct Medicaid eligibility redeterminations every 6 months for expansion adults, shifting from the prior annual schedule.⁷ RAND projects that the semi-annual redetermination requirement alone will contribute to a loss of Medicaid eligibility for approximately 923,000 people, not because they are ineligible, but because of administrative attrition.²

Managed care organizations (MCOs) experienced exactly this dynamic during the post-COVID unwinding, where procedural barriers drove coverage loss among eligible members. States are required to explain the new rules and procedures to both beneficiaries and eligibility workers, as well as to providers and managed care organizations, all while operating systems that were not built for this volume or frequency in many cases.³ For plans, the redetermination surge will strain member outreach infrastructure, increase churn, and create gaps in care continuity that directly affect quality metrics and Stars ratings.

4. Health Plans Are Weighing Their Exits and the Plans That Remain Will Inherit a Sicker Risk Pool

When plans exit, the remaining carriers absorb their members—a disproportionate portion being those with higher needs and more complex conditions, since healthier members are more likely to be lost to disenrollment through redetermination churn.⁸

The Congressional Budget Office has already noted that Medicaid costs per enrollee grew 16% in 2025, and it attributed that increase to a decrease in the average health status of enrollees following the end of COVID-era continuous eligibility.⁹ A second round of sicker-member concentration, driven by market exits and administrative disenrollment of lower-need beneficiaries, will further pressure plan medical loss ratios.

5. AI Is Being Deployed to Manage the Surge But Governance and Guardrails Are Still Catching Up

With administrative volumes rising and state Medicaid agency capacity stretched thin, health plans are accelerating AI deployment for eligibility verification, redetermination processing, member outreach, and utilization management.⁴ Leading MCOs are actively exploring AI tools to support process improvement, compliance, and redeterminations. At the federal level, CMS launched the Wasteful and Inappropriate Service Reduction (WISeR) Model on January 1, 2026—a 6-year pilot running through 2031 in 6 states that uses AI and machine learning alongside human clinical review to assess medical necessity for select services in traditional Medicare, making it the first time original Medicare has deployed AI-assisted prior authorization at scale on a voluntary basis for providers, marking a significant regulatory precedent. But the governance framework has not kept pace with adoption speed.¹⁰

CMS has proposed, for the first time, new guardrails that must be adopted by Medicare Advantage plans when using AI to manage patient care, citing concerns that AI use may lead to algorithmic discrimination that exacerbates health inequities.¹¹ For CMOs, the strategic imperative suggests that AI can help absorb the operational shock of mass redeterminations and enrollment volatility, but plans that deploy it without documented clinical oversight protocols, bias auditing, and member appeal protections are accumulating regulatory and reputational risk at the same pace.

Taken together, these 5 pressure points constitute a stress test for which most MCOs are not yet fully prepared. The plans and health systems that will emerge from this period in the strongest position are acting now, not when the regulatory timelines force their hand.

References

1. OBBBA Medicaid impacts: how to navigate state-directed payment revenue reduction. Healthcare Financial Management Association. Updated December 23, 2025. Accessed May 7, 2026. https://www.hfma.org/payment-reimbursement-and-managed-care/obbba-medicaid-impacts-how-to-navigate-state-directed-payment-revenue-reduction/

2. Hut N. Study details how OBBBA Medicaid cuts will restructure state budgets. HFMA. Updated March 1, 2026. Accessed May 7, 2026. https://www.hfma.org/payment-reimbursement-and-managed-care/obbba-medicaid-cuts-state-budget-impact/

3. One Big Beautiful Bill Act reduces revenue streams from Medicaid for healthcare providers. Advis. July 7, 2025. Accessed May 7, 2026. https://advis.com/regulatory-updates/obbba-medicaid-cuts-healthcare-provider-impact/

4. Murray MA, Hunter E, Gremminger S, et al. Predictions for 2026 from Margaret A. Murray, MPA Eric Hunter, MBA, Shawn Gremminger, MPP and others. Managed Healthcare Executive^®. January 2, 2026. Accessed May 7, 2026. https://www.managedhealthcareexecutive.com/view/predictions-for-2026-from-margaret-a-murray-m-p-a-eric-hunter-mba-shawn-gremminger-m-p-p-and-others

5. Condon A. Hospitals brace for new wave of federal cuts as GOP turns to reconciliation again. Beckers Hospital Review. April 9, 2026. Accessed May 7, 2026. https://www.beckershospitalreview.com/finance/hospitals-brace-for-new-wave-of-federal-cuts/

6. Gliadkovskaya A. 2026 outlook: The domino effect of Medicaid cuts and the hidden costs for healthcare. Fierce Healthcare. December 23, 2025. Accessed May 7, 2026. https://www.fiercehealthcare.com/payers/2026-outlook-domino-effect-medicaid-cuts-and-hidden-costs-healthcare

7. Navigating the OBBBA impact on Medicaid. FasPsych. July 30, 2025. Accessed May 7, 2026. https://faspsych.com/blog/navigating-the-one-big-beautiful-bill-act-impacts-on-medicaid-funding/

8. Hinton E, Raphael J, Tolbert J. Understanding the role of Medicaid managed care plans in unwinding pandemic-era continuous enrollment: perspectives from safety-net plans. KFF. February 13, 2023. Accessed May 8, 2026. https://www.kff.org/medicaid/understanding-the-role-of-medicaid-managed-care-plans-in-unwinding-pandemic-era-continuous-enrollment-perspectives-from-safety-net-plans/

9. CBO's new baseline signals shifting cost and risk dynamics in Medicaid and Medicare. Health Management Associates. February 19, 2026. Accessed May 7, 2026. https://www.healthmanagement.com/blog/cbos-new-baseline-signals-shifting-cost-and-risk-dynamics/

10. WISeR (Wasteful and Inappropriate Service Reduction) Model. CMS. Updated March 30, 2026. Accessed May 7, 2026. https://www.cms.gov/priorities/innovation/innovation-models/wiser

11. CMS proposes artificial intelligence limits and utilization management guardrails for Medicare Advantage. Sidley. December 18, 2024. Accessed May 7, 2026. https://www.sidley.com/en/insights/newsupdates/2024/12/cms-proposes-artificial-intelligence-limits-and-utilization-management-guardrails