Understanding the Impact of Federal Funding Cuts to Medicaid

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July 15, 2025

From Kim Bimestefer, executive director of HCPF:

Federal Changes to Medicaid

H.R.1 – the One Big Beautiful Bill Act (OBBB), was signed into law July 4 and represents the largest cuts to Medicaid since the program began in the 1960s. The Department of Health Care Policy and Financing (HCPF) anticipates that the bill will ultimately result in the large-scale loss of health coverage for Coloradans and an extraordinary, longer term funding shift from the federal government to our state that Colorado’s state budget cannot absorb.

One change took effect immediately - our ability to use federal funds to pay certain reproductive health care providers, largely impacting Planned Parenthood and the thousands of Medicaid members who use them for primary care and women’s health services. We are working to ensure members impacted by this change are connected to other providers to receive needed services.

Some provisions that affect Colorado Medicaid members and providers do not take effect until December 2026. This includes increasing eligibility renewal frequency from annually to every 6 months, as well as the new work requirements provision, both of which impact the 377,000 member Medicaid Expansion population. Implementing these federal mandates will require significant IT system investments, staffing resources, industry and efficiency advances, massive communications, stakeholder engagement and more. The work requirements aspect of the bill is especially concerning.

HCPF remains committed to improving efficiencies within our eligibility ecosystem while advancing automation where possible to reduce administrative burden for our members, county partners and others impacted by the bill. That said, creating an entire industry and ecosystem that captures and feeds work requirements related, member-specific data insights into the eligibility process required by the bill - like student status, work hours, and volunteer or community work - will be a very heavy lift, especially given the December 2026 deadline. Further, automating the processing of those insights into the eligibility ecosystem will also be an important part of the design, build and investment process to mitigate this new and significant barrier to Coloradans securing or maintaining eligibility. While federal waivers to states that need additional time to build this capability are a component of the bill, securing a waiver is not a certainty, nor is the additional time a waiver might allow.

HCPF efforts will focus on our north star, which is to mitigate inappropriate health care coverage loss and the challenging downstreaming results, such as increased uninsured rates, poor health outcomes and medical bankruptcies for those who lose coverage, increased provider uncompensated care, and the cost shifting that will increase commercial health insurance rates paid by Coloradans and employers as a result.

OBBB provisions that decrease provider fees and related federal funding will significantly reduce revenues to cover Medicaid and the Children's Health Insurance Program (CHP+) beginning October 2027. This reduction in federal funding will propel very difficult conversations necessary to balance program expenses with lower available revenues. Specifically, federal funding collected through HCPF, in partnership with the Colorado Healthcare Affordability and Sustainability Enterprise (CHASE) will decrease; this funding finances care for more than 425,000 Coloradans covered under Medicaid Expansion, Buy-In Programs for Individuals with Disabilities, and CHP+ coverage for children and pregnant women each year. This funding also significantly increases reimbursements to Colorado’s hospitals. Beginning October 2027, the amount of federal funds that states can draw down decreases each year by 0.5%. Each incremental reduction of 0.5% to the threshold would result in an estimated reduction of over $115 million in provider fees that can be collected from the hospitals and a loss of approximately $180 million to $525 million in federal matching funds for hospital reimbursement or expansion coverage, depending on policy decisions made by the state. Once the threshold reaches the target of 3.5% in federal fiscal year 2032, the estimated annual reduction would be over $550 million in collected fees from hospitals, generating a reduction in federal funds that could be drawn down ranging from $900 million to $2.5 billion annually, depending on policy decisions made by the state.  

This federal reduction in funding to all states will further complicate our existing state budget challenges, requiring advanced planning, early action, efficiency partnerships, stakeholdering, and lots of collaboration to balance Medicaid and CHP+ costs with shrinking revenues.

Related, last month HCPF also submitted a State-Directed Payment (SDP) proposal for hospital payments to the Centers for Medicare and Medicaid Services (CMS) for review. The SDP is a mechanism that state Medicaid programs have used to allow targeted supplemental payments for care provided under Medicaid managed care arrangements. These efforts represent another step taken by hospitals, the Colorado Hospital Association, the CHASE Board and HCPF to address fiscal concerns, in accordance with HCPF’s Medicaid Sustainability Framework. The addition of hospital SDP funds would provide more ways to bolster inpatient and outpatient services for both urban and rural hospitals across Colorado, as well as psychiatric institutions. If CMS approves the proposal, the new SDPs could increase overall funds by an estimated $378 million beginning in the state fiscal year 2025-2026. This would represent more than $295 million of estimated net new funds going to urban hospitals, more than $75 million of estimated funds going to rural and critical access hospitals and $4 million of estimated funds going to psychiatric institutions. Thank you to all partners who worked so hard with HCPF experts to complete a huge amount of complex work in a short amount of time to make this happen.

HCPF recognizes that these new federally mandated changes will impact all Coloradans, not just those served by our safety net coverage programs. We will collaborate with other state departments and stakeholders to double down on efforts to mitigate the commercial health insurance price increases that will result from the provisions of this bill. We must also advance and increase efforts to mitigate the financial threats to doctors, hospitals, and other care providers from this bill - especially rural providers - that will occur as uninsured rates rise, driving increases in uncompensated care costs that will threaten care access, health care jobs, and ultimately the solvency of certain providers.

HCPF will continue to communicate broadly and transparently with members and stakeholders on these and other issues, and in advance of changes to program eligibility requirements, processes, benefits, coverage or provider reimbursements.  

We will continue to post updates on our federal resource center.

Read Executive Director Bimestefer's full monthly message from July 15, 2025