OBBBA’s Medicaid “Cuts” Still Lead to an Increase in Medicaid Spending
A trillion dollar cut is more like a tap on the brakes plus a course correction
There is no question that the One Big, Beautiful Bill Act (OBBBA) lived up to its name in at least one respect: it was big. The Congressional Budget Office (CBO) estimated that OBBBA will increase 10-year non-interest deficits by over $3.4 trillion.
It would have been even larger, except Congress offset a portion of the bill’s budget effect by slowing down the growth in Medicaid spending. Among other Medicaid reforms, Congress enacted new limits for state provider taxes, work requirements for able-bodied adults, and more frequent redetermination requirements. CBO projected these reforms would reduce Medicaid spending by $910 billion over the next decade.1 Combined with other reforms to federal health programs, federal health care outlays would fall by more than a trillion dollars over the next 10 years.
A trillion dollars is hard to comprehend. It certainly seems like a big number. Recent news coverage implies it will have a significant effect on America’s health care system. Just last week, the Wall Street Journal noted that health care jobs were a “rare bright spot” in the recent jobs report, but their subtitle warned that “One danger: Coming Medicaid cuts pose a threat to health services.” The major medical coalitions—from the American Hospital Association to the American Medical Association—have similarly warned about the dire consequences of OBBBA’s health care changes.
So how big is a trillion dollars? In almost all cases, the answer to the question would be “a lot.” But the answer is more complicated when it comes to nation’s health care budget.
When Is a Cut Not a Cut?
The trillion dollar cut is from CBO’s January 2025 current law baseline. That baseline reflects CBO’s best guess on how Medicaid will grow if there are no changes to current law. CBO had projected in January 2025 that Medicaid spending would rise by 50 percent from 2025 to 2034 (or 23 percent after adjusting for inflation). The figure below shows Medicaid spending with and without the OBBBA.2 The area between the lines is the $910 billion cut that has garnered dire warnings about the future of American medicine.
The definition of “cut” itself is debatable. One option is to measure it as the inflation-adjusted change from CBO’s baseline. Because Congress backloaded the reforms (fewer than two percent take effect in 2025–26), the cut in 2025 inflation-adjusted dollars is only $792 billion.3
But even that framing is misleading. A “cut” usually means getting less tomorrow than today. Medicaid spending keeps rising year-after-year, even after the “cut.” Nominal Medicaid spending grows by a total of $740 billion over 10 years after OBBBA. Perhaps more interesting, once adjusted for inflation, real Medicaid spending is essentially flat, with cumulative growth of just under $20 billion.
Importantly, the base year for this “cut” is unusually high: Medicaid spending ballooned during the pandemic, rising 28 percent faster than inflation from 2019 to 2025—10 percentage points more than CBO had projected in January 2020.
The Effect of Medicaid “Cuts” on Total Health Care Spending
Medicaid is a large government program—it comes in fifth in spending after Social Security, interest payments, Medicare, and defense spending. But Americans spend trillions on health care. In 2024, Medicaid accounted for 17.6 percent of national health expenditures.4 That means that if Medicaid spending were cut by 10 percent, it would only reduce national expenditures by 1.76 percent.
To be fair, the OBBBA contained other changes to federal health programs. If we include those changes and assume that states reduce their Medicaid spending in proportion to the federal changes, OBBBA will lower projected total health expenditures by $1.4 trillion over the next 10 years after adjusting for inflation.5 That is a 2.1 percent reduction from the $64.8 trillion that Americans were expected to spend on health care over the next decade.6 The figure below shows the change in projected health spending with the OBBBA. Be prepared to squint to see the effect.
But, as we discussed above, a cut typically means something will be smaller tomorrow than today. That certainly isn’t the case with national health expenditures. Without the OBBBA, real health expenditures would have grown by 2.8 percent; with the OBBBA, the growth rate will instead be 2.4 percent.
Even this likely overstates the change in spending. We are assuming the loss in government spending isn’t made up for by increased spending by individuals or employers. That’s an aggressive assumption. In 2023, states were required to redetermine eligibility for existing Medicaid recipients that had been allowed to stay on the rolls during the pandemic. At the time, the CBO had estimated that of the 15.5 million that were set to lose coverage, 7.8 million would obtain or maintain employment-based coverage. In short, the 2.1 percent change in 10-year national health expenditures is likely an overestimate.
Hospitals and Providers Do Face Budget Threats
Some hospitals and providers still have legitimate budget concerns. Rural hospitals and providers with thin margins might be rightfully concerned above their ability to maintain services. The OBBBA tried to address some of these concerns with a new rural health fund. Whether lawmakers did enough (or designed it well enough) remains to be seen.
But if Americans are worried about a 2.1 percent reduction in projected health spending under OBBBA, they should be far more concerned about reforms proposed on the left. Plans like Medicare for All or public option plans would require hospital and physician payments fall to rates closer to Medicare levels. In fact, CBO estimated in 2020 that Medicare for All could lower long-term national health expenditures by more than 10 percent—far larger than anything OBBBA imposed.
The estimated Medicaid cuts come from the Kaiser Family Foundation’s summary of CBO’s July OBBBA score.
Pre-OBBBA projections come from CBO’s 10-Year Budget Projections from January 2025.
Figures are adjusted for inflation using the CBO’s January 2025 projections for the growth in the CPI-U (https://www.cbo.gov/data/budget-economic-data#4).
National Health Expenditure data are from CMS (https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/projected).
We assume the federal share of Medicaid spending is constant at 62.7 percent. In FY2023, the average federal share of Medicaid was 68.9 percent, which included a temporary 6.2 percentage point increase; we reduce the FMAP by that amount to reflect the share in late years.
The NHE projections go through 2033. For 2034, we assume the growth in national health expenditures is equal to the average growth from 2025 to 2033.
Tom Church: Many people are getting Medicaid but do not qualify says the chair of the HBC. Their staff report says some are also enrolled in some form of Obamacare and you can't double dip. And illegal aliens are taken off/ And able bodied men who are now free loading. CBO simply compares the BBB changes but to a baseline which is inflated because of the pandemic but also stupid USG policy. Such as when Obama changed the state reimbursement rate to 90% vs the previous 55-45 split which worked for nearly 50 years until Obama gave us the Cornhusker deal just for Nebraska but then changed it for all states. The cut does not exist but growth is slowed which you admit. But there is nothing wrong with the slower growth. Should be even more. Best, Peter Huessy Geostrategic Analysis, Potomac, Maryland
Great piece!
Worth mentioning that healthcare job growth is similar to job growth from the broken windows analogy. Most healthcare spending isn't productive. It goes towards administrative bloat, inefficiencies, ineffective treatments, and end-of-life care.