The Impact of Federal Medicaid Cuts on States and School Districts

The massive budget bill known as “OBBBA” (HR1), which was signed into law in July, includes significant changes to Medicaid policy that will negatively affect the health of students, families, schools and communities.

As states and school districts unpack these changes, the concerns we heard earlier this year from district leaders remain valid: Cuts to Medicaid funding will likely force some school districts to reduce their school health staff and services.

There are, however, ways for states to help mitigate these harms, which we’ll discuss below.

While HR1 does not include any specific changes to the school Medicaid program, all states will face considerable decreases in the amount of federal Medicaid funding they receive, which may result in significant budget gaps at the state level. Federal reductions will result from new healthcare provisions, including: work requirements for Medicaid enrollees; more frequent eligibility redeterminations; restrictions on immigrant, refugee and asylee eligibility; and changes to certain financing structures, such as provider taxes and state-directed payments.

Since all state Medicaid programs are structured differently, the impact of federal Medicaid spending reductions will vary from state to state and occur on different timelines, but all states will be affected. States will need to draw from general funds, raise taxes, and/or reduce Medicaid benefits — or some combination of these options — to close budget gaps.

If states reduce Medicaid spending, possible outcomes include an uptick in the number of uninsured children and families, more limited Medicaid benefit packages and greater healthcare provider workforce shortages — all of which would impact the services and care schools can provide.

Over the past decade, bipartisan efforts to educate state and federal policymakers have led to the development of key policies and efforts that support Medicaid’s critical role in schools. We have seen significant progress in strengthening Medicaid’s capacity to support student health and well-being, and for good reason: It is a proven-effective solution and a sustainable funding source.

While OBBBA significantly decreases the amount of federal money that states receive, it does not target school Medicaid directly, and there is no cap on Medicaid reimbursement for the delivery of school-based health services.

As states face reductions in Medicaid and education funding, it is crucial for them to maximize this reimbursement — especially since this funding can be reinvested in school health services and used to retain school health providers (or hire additional providers) and offer more types of health services that students need.

Some states are already well-positioned to receive maximum reimbursement. They have updated their school Medicaid program to include the full range of school health provider types and services that are reimbursable. But many states are still receiving only a trickle of the reimbursement funds for which they are eligible because they have yet to bring their state Medicaid plan into alignment with federal policy.

It is essential for these states, and their school districts, to work toward leveraging federal policy that allows reimbursement of all medically necessary covered services — including mental and behavioral health services — delivered to all students enrolled in Medicaid. Doing so will help states to mitigate the harms that federal Medicaid cuts will cause to schools and students.

Healthy Schools Campaign recommends a series of policy actions that states can take to maximize Medicaid reimbursement for school districts. For additional materials to help states and school districts implement, improve and sustain effective school Medicaid programs, visit START: State Tools and Resources to Advance School Medicaid.

Going forward, the fight for expanding children’s access to healthcare shifts to the states, but it does not stop. We will continue to advocate for Medicaid and its essential role in improving children’s health, and we will champion state and school district policies that protect and strengthen school Medicaid programs.