Executive Summary 

• In its fiscal year 2025 budget, Congress intends to include reconciliation instructions that direct committees to find spending reductions; and while the two chambers have not agreed to a budget, the House-passed budget calls for $2 trillion in net spending reductions. 
• Whatever the final spending-reduction amount Congress agrees to, it is likely that Medicare and Medicaid – the largest federal health programs – will see reform that will both save federal dollars and promote responsible stewardship and sustainability of these programs to strengthen their long-term solvency. 
• This insight analyzes several potential reforms aimed at addressing long-term challenges in Medicare and Medicaid that Congress may consider during the reconciliation process. 

 Introduction 

In its fiscal year 2025 budget, Congress intends to include reconciliation instructions that direct various committees to find spending reductions. While the House of Representatives-passed budget blueprint instructs committees to identify $2 trillion in net spending reductions, both chambers have not yet agreed to a budget. Regardless of the final budget Congress adopts, Congress will likely consider a variety of changes to address mandatory spending programs, including the largest federal health programs, Medicare and Medicaid. This insight analyzes several potential reforms that the House committees on Energy and Commerce and Ways and Means and the Senate committees on Finance and Health, Education, Labor, and Pensions may consider aimed at addressing long-term fiscal challenges in Medicare and Medicaid during the reconciliation process. These reforms are intended to both save federal dollars and promote responsible stewardship and sustainability of these programs in order to strengthen their long-term solvency. 

When considering the total impact that these reforms might make, it is not as simple as summing the individual savings. Interactions between the policies will create compounding effects, and the costs, savings, or coverage impacts noted may be larger or smaller than when considered in isolation.  

Largest-impact Reforms 

Establishing Site Neutral Payments

Under current law, Medicare pays different rates for services depending on where a patient receives care (e.g., in a hospital outpatient department or in a physician’s office). For services performed in a physician’s office, Medicare disburses funds according to the Physician Fee Schedule (PFS). In a hospital outpatient department, in addition to paying a physician fee, Medicare also pays the hospital a facility fee determined in the Hospital Outpatient Prospective Payment System (OPPS). Because of this additional OPPS payment, Medicare almost always pays more for the same service if it’s provided in a hospital outpatient department setting rather than in a physician’s office.  

One reform to make the Medicare program more cost efficient, therefore, might center on rectifying this disparity by creating a “site-neutral” rate for a given service. This would equalize the cost of a service irrespective of the location in which it is performed. Because this site-neutral payment would theoretically be lower than the current combined PFS/OPPS rate, such a policy is estimated to save $146 billion across the 10-year budget window.  

The provision also has the potential to reduce both the out-of-pocket costs for beneficiaries and the total costs the federal government pays to cover these services, as well as generate other savings through second- and third-order effects. Site neutrality could also help Medicare beneficiaries access care across a wider range of service settings by making costs more consistent, rather than concentrating affordable care in only a few types of facilities.  

Limit Medicaid Provider Tax 

To finance their portion of the Medicaid program, states can draw funds from various sources. Currently, 49 of 50 states impose a “provider tax” levied on in-state health care providers to raise funding to pay for Medicaid beneficiaries. In practice, states use the funds gained through the provider tax to increase their total Medicaid spending – because the federal government matches these dollars – and claim additional reimbursements, thus increasing their total Medicaid budgets. What’s more, while states cannot outright guarantee providers a return on their initial tax payments, states can and often do return these funds to providers by increasing their Medicaid provider reimbursement rates.  

In response, this provision would decrease the Medicaid provider tax safe harbor from 6 percent to 4 percent between 2026 and 2027, followed by a further decrease to 3 percent in 2028, which would save up to an estimated $175 billion over the next 10 years. If this provision were implemented, states would likely need to alter their Medicaid budgets, either by falling in line with reduced federal funding or increasing state spending to offset the cost of additional Medicaid coverage.    

Equalizing FMAP for ACA Expansion Population  

A key aspect of Medicaid funding is the Federal Medical Assistance Percentage (FMAP), which is the rate at which state funding is matched by federal funding to provide budgetary support for states’ Medicaid costs. This percentage varies from the statutory minimum of 50 percent to a variable high of nearly 77 percent, with uncapped reimbursement. While most enrollees are covered at this state-by-state-determined FMAP, some populations are reimbursed at a higher FMAP, such as the Affordable Care Act (ACA) expansion population (able-bodied, non-caregiving, adults making below 138 percent of the federal poverty level). The ACA created a 90-percent FMAP for state Medicaid programs when covering this expansion population. Originally used as an incentive for states to expand Medicaid beyond its traditional bounds, it has since become the second-largest enrollee group with the second-largest budgetary impact.  

In response to this outsized growth, lawmakers have proposed equalizing the FMAP for able-bodied adults earning below 138 percent of the federal poverty level to the rest of the respective state’s Medicaid population. This policy would return Medicaid to its original, intended mission – assisting states in providing care to the neediest in their populations – and would yield an estimated $561 billion in savings over a decade.  

Medicaid Per Capita Caps  

Currently, the federal government reimburses state Medicaid programs for a portion of their total Medicaid costs through an open-ended entitlement. Effectively, states receive an uncapped amount of funds from the federal government, calculated using the FMAP, and then use these funds to offset some of the costs of their Medicaid programs. In response, lawmakers have suggested shifting state Medicaid program reimbursements from this open-ended entitlement system to a per capita cap (PCC) system. A PCC would tie a predetermined, capped dollar value to each individual enrollee based on their relevant demographics. Care would be provided as normal, but states would get reimbursed only until the cap is reached, at which point the state would be responsible for any additional costs for an individual’s care within the given fiscal year. While sometimes confused with a block grant system, a PCC system has several key distinctions (recently discussed here). 

Capitated health care reimbursement is not new to federal programs. Other programs such as Medicare fee for service and Medicare Advantage already utilize a capitated system – known as Diagnosis Related Groups – in the inpatient prospective payment system to categorize and control hospitalization costs and determine hospital payments.   

This provision is estimated to save up to $900 billion across the 10-year budget window. Because a PCC would limit the amount of federal match funding a state receives on a per-enrollee basis, this reform could encourage state governments to take a fresh approach to managing their Medicaid programs. For example, in response to a reduction in overall federal Medicaid assistance, some states could choose to access other funds to offset the costs of continuing to cover their ACA expansion population, while other states might respond by increased Medicaid value-based purchasing. However a state might opt to proceed, this provision would encourage states to focus their Medicaid spending on their populations’ needs while also significantly reducing federal spending.  

Repeal Biden-era Finalized Medicaid Eligibility 

The proposal would alter the vetting procedure for the Medicaid and Children’s Health Insurance Program by repealing the Biden Administration’s Medicaid Eligibility and Enrollment Rules. These rules, finalized in 2024, prevent states from conducting in-person eligibility checks more than once every 12 months and eliminated in-person interview requirements, among other provisions. 

Repealing these rules would save an estimated $164 billion over 10 years by allowing states to more frequently verify their enrollee population. This reform would not only enable states to better detect and prevent improper Medicaid enrollment; it could also allow state Medicaid programs to better meet enrollees’ needs by accounting for demographic updates as they access care. This improved verification system will enable states to better account for their Medicaid populations. 

Individual vs. Collective Reform Impacts 

Independently, each Medicaid reform might result in a moderate-to-large impact on federal Medicaid spending and how the federal and state governments interact, depending on the specific legislative language that is agreed upon. If enacted collectively, however, the total impact of these reforms would likely cause a significantly different impact than that of each independent reform. Because each provision alters a different link in the Medicaid chain, the forecasted savings of each provision cannot simply be added together to accurately forecast total savings. For example, if Congress were to repeal the finalized Medicaid eligibility rules and approve PCCs in the same budget, it’s likely that the multiplicative effect of tying federal reimbursements to a state’s population count, while also allowing states to increase their verification processes, might yield significantly higher savings than independent passage. 

Indeterminate-impact Reforms 

Financing Uncompensated Care  

This proposal, estimated to save $229 billion, would shift payments for uncompensated care from the Medicare trust fund to a newly established fund. This new fund would then be distributed to providers based on their share of charity care and non-Medicare bad debt. Currently, the federal government provides financial support to hospitals that take on a disproportionate share of low-income patients through the Hospital Insurance (HI) trust fund or the Supplemental Medical Insurance (SMI) trust fund (the two sub-funds that comprise the original Medicare trust fund). Hospitals then receive payments from either sub-fund depending on the service they provide: HI covers all Medicare Part A expenses while SMI covers all Medicare Part B and D expenses. In FY 2025, this fund had $5.7 billion allocated for distribution among all hospitals covered under the Disproportionate Share Hospital Program.  

This proposed reform would prevent any future uncompensated care payments being dispensed from the existing Medicare trust fund and establish a new, separate fund to make these payments and allow nonhospital settings or non-Medicare bad debt to also qualify for this coverage. While this provision has a projected savings of $229 billion over the next 10 years, it’s currently unclear how Congress in practice might create a new uncompensated care fund that equitably distributes payments based on true share, or from where this funding would originate (e.g., would it come from general revenue, user fees, or elsewhere?).  

Eliminate Medicare Coverage of Bad Debt  

This proposal would gradually reduce the amount that Medicare reimburses providers for bad debt – any unpaid portion of a beneficiary’s out-of-pocket costs that a provider is unable to collect – potentially saving $42 billion over the next 10 years. Currently, Medicare reimburses hospitals for 65 percent of the bad debt accrued by beneficiaries.  

While this provision is a net saver, it’s unclear how substantial an impact this reduction in Medicare enrollee risk coverage would have on hospitals or enrollees. Should Congress undertake this reform, hospitals would likely respond by increasing their efforts to collect debt from Medicare beneficiaries. This may involve hospitals diverting more of their resources to debt collection to recapture as much of the lost revenue as possible, likely by garnishing enrollees’ wages or targeting their non-ERISA protected retirement accounts. 

Minor-impact Reforms 

Establishing Medicaid Work Requirements  

This proposal would add work requirements for all able-bodied, non-caregivers to Medicaid (generally, the ACA expansion population), potentially saving up to $100 billion over a 10-year period. The provision would require this population – those without an exemption – to meet a minimum of 80 hours of work-related activity per month (including employment, job-training program, community service, etc.) to continue qualifying for Medicaid assistance.  

This provision would likely have a minor impact. If approved in a broader reform package, work requirements would likely be overshadowed by the other Medicaid reforms. Because work requirements would only apply to able-bodied, non-caregiving adults – the same populations other Medicaid reforms seek to reduce funding for – it is possible the other reforms would trim these expansion populations to such a level that work requirements would no longer be economical. It is also important to note that while there have been previous attempts to implement Medicaid work requirements at the state level, the only available data show that neither employment levels nor total numbers of hours worked in the population increased because “a large percentage of affected adults either met the requirement or qualified for an exemption,” according to CBO.  

Prevent Dual Classification for Hospitals Under Medicare 

This proposal would alter the Medicare hospital classification system to prohibit hospitals from classifying as a dual hospital for the purpose of overleveraging Medicare’s geographically adjusted payments. Under current law, hospitals are generally classified as either rural or urban, based on their physical location, and then receive different funding benefits based on this classification. Due to a ruling in 2016 by the 2nd U.S. Circuit Court of Appeals, some urban hospitals are also able to dually classify as both urban and rural hospitals. This geographic classification allows some hospitals to receive special benefits and increased funds originally allocated to ensure rural hospitals are able to continue providing services. Generally, a dual hospital does this to gain better leverage on discounted drug purchases – through the rural classification – while also classifying as urban to better attract more qualified clinicians.  

This provision would likely have a minor impact, saving an estimated $15 billion over the next decade. While it would close a loophole some hospitals have used to dually classify for both urban and rural benefits, this reform would yield relatively small savings and would only affect those hospitals that already are overleveraging Medicare program benefits.