What Healthcare Provisions Generate the Largest Savings?

Below is a summary of the healthcare spending and tax provisions that generate the largest savings in the legislation.

Spending Provisions

On the spending side, Medicaid is the healthcare program impacted the most by the OBBBA. Medicaid spending is growing rapidly. Ten years ago, Medicaid spending totaled $350 billion annually and today it is 77 percent more ($618 billion). To temper those rising costs, lawmakers added multiple provisions in the OBBBA that reduce Medicaid spending. The provisions that will reduce Medicaid spending the most are related to eligibility requirements — the largest being a community engagement requirement ($317 billion), often referred to as a work requirement. The legislation requires states to implement community engagement requirements for adults who became eligible for Medicaid under the ACA or reside in a state with a Medicaid waiver to cover a similar population. Generally speaking, those changes mean that able-bodied adults ages 19–64 without dependents younger than age 14 must be working, studying, volunteering, or participating in job training for 80 hours per month in order to be eligible to receive Medicaid. There are exemptions for parents of dependent children age 13 or younger in addition to those who are medically frail.

Other provisions related to Medicaid eligibility include more frequent eligibility redeterminations (meaning Medicaid recipients will need to prove they are eligible to receive Medicaid more often) ($58 billion), in addition to delaying the implementation of Biden administration rules that would have made enrollment easier for dually eligible Medicare and Medicaid beneficiaries and the Children’s Health Insurance Program (CHIP) ($120 billion).

The OBBBA also generates meaningful savings by making changes to state provider taxes. Currently, states are allowed to use various sources of funding, including general state funds, local government funds, and taxes on healthcare providers (also known as “provider taxes”) to finance the non-federal share of Medicaid spending. States are allowed to tax providers up to 6 percent of their revenue and use that income stream to fund the state share of Medicaid. The reason this results in cost savings is because states have used provider taxes as a way to increase their federal Medicaid match funding, which in turn states can then use to pay providers more with those dollars transferred to the state. The OBBBA now closes that loophole and prohibits states from establishing any new provider taxes or increasing the rates of any existing taxes, except for nursing facilities and intermediate care facilities. This change is projected to reduce federal spending by $183 billion from 2025 to 2034 by limiting states’ ability to leverage provider taxes to access additional federal Medicaid “match” funding.

The OBBBA will reduce spending by another $149 billion over the decade by revising state directed payments, which are payments to providers facilitated by Medicaid managed care organizations. These types of payments are typically used to support providers with a large base of Medicaid patients to make up for the difference between Medicaid reimbursement rates and what those providers argue is their actual cost of care. The OBBBA will now cap state directed payments for inpatient hospital and nursing facility services at 100 percent of the total published Medicare payment rate for states that have adopted Medicaid expansion and 110 percent for states that have not adopted the expansion.

As the legislation was debated, many lawmakers and healthcare experts expressed concerns that the restrictions on Medicaid eligibility and financing changes would present challenges to rural healthcare systems. In an attempt to address those concerns, Congress added $47 billion for a Rural Health Transformation Program to help rural healthcare systems face challenges such as limited access to healthcare providers and financial instability as a result of the OBBBA.