At a period of record federal budget deficits, increasing interest rates, and persistently high inflation, President Donald Trump and legislative Republicans came to office promising to implement trillions of dollars in new tax cuts.
The GOP has been ready to compromise budgetary restraint for decades in order to implement tax cuts, claiming that the economic advantages of lower taxes exceed the drawbacks of larger deficits. However, in the current climate, that approach has lost its appeal.
As a result, Republican lawmakers have circulated a document detailing plans to cut Medicaid, Medicare, and the Affordable Care Act spending by over $5 trillion. If enacted, these cuts would have a significant impact on the U.S. healthcare system and the accessibility of healthcare services for Americans.
Though analysts say the Republican House majority of only three votes will only highlight the impact of these cuts on American people and businesses, they are unlikely to be implemented in the end. These cuts would probably be more than enough to offset making Trump’s 2017 tax cuts permanent.
According to Spencer Perlman, a healthcare policy analyst at financial adviser Veda Partners, this Congress is the most crucial political data point for investors to keep an eye on when thinking about tax and expenditure negotiations.
“There’s functionally no real majority in the House of Representatives, as there’s very little that 218 Republicans can agree on,” Perlman stated to MarketWatch. “It only takes three malcontents to throw the sand in the gears of anything.”
A request for comment was not immediately answered by the Trump administration.
No gain, no suffering
Because healthcare spending accounts for a significant portion of federal spending—nearly 25% in 2024, or $1.7 trillion—Republicans will need to examine it closely.
That sum of money could go a long way toward funding the continuation of the tax cuts that Trump promised during the campaign, including the removal of tip taxes, the reinstatement of the state and local tax deduction, and the removal of taxes on Social Security income.
However, Perlman contends that politicians would begin targeting aspects of healthcare programs that are very popular with voters and with politically influential constituencies, such as physicians, hospitals, and other healthcare providers, before making significant changes to these programs.
He claimed that a large number of the plans being floated by Republican leaders are not “politically viable because the impact on hospitals, especially rural hospitals associated with academic medical centers, would be devastating.”
In addition to the services they offer, he pointed out that hospitals have significant lobbying influence since “they are often the largest employer in a geographic area.” This is particularly true for poorer states and rural areas, which have nearly all Republican representatives in Congress.
Medicaid cuts could impact insurers like Centene (CNC), Elevance Health (ELV), UnitedHealth Group (UNH), and Molina Healthcare (MOH), which enter into contracts with states to provide Medicaid-related services, as well as publicly traded hospital operators like Ardent Health Partners (ARDT) and HCA Healthcare (HCA).
Medicaid “money laundering”
This viewpoint, according to conservative healthcare policy experts, understates the extent of waste in these programs.
“Reforms to so-called Medicaid provider taxes are one of the most important reforms Republicans should be looking at,” Brian Blase, president of the Paragon Health Institute and former Trump special assistant for economic policy, told MarketWatch.
He claimed that because these taxes are frequently imposed on hospitals and other providers with the understanding that they will be reimbursed in the form of higher reimbursements, which the federal government must then match, they are intended to give the impression that states are paying more toward Medicaid costs than they actually are.
Blase told MarketWatch that “there’s an enormous amount of money laundering in these programs,” claiming that these “financing gimmicks” exploit the fact that the federal government’s Medicaid obligations are unlimited and that neither states nor providers are incentivized to make prudent spending decisions.
“There will be a lot of support for lowering the amount of money the federal government must spend to cover new enrollees in the program who joined under the Affordable Care Act,” says Hayden Dublois, a healthcare policy analyst for the conservative Foundation for Government Policy.
The law requires the federal government to pay 90% of the cost, as opposed to standard Medicaid’s 50% to 78% coverage, in order to encourage states to expand Medicaid to cover nondisabled individuals with incomes up to 138% of the poverty level.
“It isn’t morally right for the federal government to be subsidizing able-bodied adults at a higher rate than they do disabled individuals,” Dublois stated.
According to Perlman of Veda Partners, changing the law to match the cost of new enrollees at the same rate as the general population could save $690 billion over ten years. However, in order to maintain baseline spending levels, the 41 states that have expanded Medicaid would need to raise their spending by 25%.
Applying it to blue states
The removal of a floor in the percentage that the federal government pays to states based on a formula that compares a state’s per capita income with the federal per capita income is another idea that conservative wonks believe will gain traction: lowering the rate that the federal government pays for Medicaid enrollees in wealthier states.
On the grounds that wealthier states can raise taxes to fund Medicaid on their own, states with lower per capita incomes pay a lesser percentage of the program’s costs than do states with higher per capita incomes.
According to Perlman, this proposal would primarily impact states that send Democrats to Congress, such as California, Colorado, Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Washington, and Wyoming, as well as the unrepresented Washington, D.C., and could save almost $400 billion over a ten-year period.
Many Republican lawmakers and voters may find it enticing to pay for tax cuts by reducing healthcare subsidies for Americans in so-called blue states. However, there are 27 House Republicans who represent these states, and there may be strong political opposition to such a change.
However, many Republicans may still vote to reduce funding for healthcare programs due to the appeal of tax cuts.
In a recent client note, Maxwell Shulman, an analyst at Beacon Policy Advisors, stated that “the threat of millions of people losing their coverage will be sure to spark a pushback.” He also mentioned that red-state officials who depend on federal funding for healthcare programs may also oppose the proposal.
Shulman went on to say, “But… there will be tax cuts one way or another,” “Lawmakers will do what they have to to get there, and if that requires substantial offsets, that’s what they’re going to do.”
