Medicaid Financing And The Health Care Safety Net: Preparing For Challenges Ahead

By Michael C. Wang, Paula Chatterjee / December 16, 2025

State Medicaid financing and the health care safety net are entering a critical period. Medicaid spending continues to grow as a share of state budgets, while recent policy changes will introduce new administrative and fiscal challenges for Medicaid financing with specific consequences for safety net providers. At the same time, demand for safety net health care services may grow in coming years. This article discusses these challenges as well as strategies to bolster the safety net moving forward.

Demand For Safety Net Health Care

The health care safety net provides essential clinical and social services to low-income and uninsured people in the United States. This loosely defined group of organizations —which includes, but is not limited to, free and charitable clinics, federally qualified health centers, rural health clinics, hospitals in areas with few health care resources, and hospitals in areas with high concentrations of low-income people—is united in their mission to serve any patient regardless of their ability to pay. For decades, the safety net has served as the primary defense against health care market failures and relied on a patchwork of local, state, and federal funding to remain afloat.

Many patients served by the safety net are insured by Medicaid or are uninsured. Understanding how the size and composition of these groups are anticipated to change is essential to understanding the dynamics of safety net health care demand.

Based on the policy stipulations in the One Big Beautiful Bill Act (OBBBA), Medicaid enrollment is likely to decrease and the uninsured rate is likely to increase. Much of this is related to more administrative requirements for obtaining and maintaining enrollment in Medicaid. Already, Medicaid enrollment has decreased in recent months due to the unwinding of pandemic-era measures for continuous enrollment. Among the almost 20 million people who have been disenrolled from Medicaid (many for procedural reasons, not because they are ineligible), nearly 1 in 4 report that they have not transitioned to other sources of coverage. Medicaid enrollment may be expected to decline further due to the OBBBA’s eligibility redeterminations and work requirements in states that expanded Medicaid, which go into effect January 1, 2027. The law also makes refugees and asylees who were previously eligible for coverage now ineligible starting October 1, 2026. These populations will have minimal alternatives for insurance and may contribute to higher demand for safety net health care in the absence of Medicaid coverage. States with large numbers (e.g., Texas and California) or proportions (e.g., Nebraska and Iowa) of refugees may be especially affected.

If patients shift out of Medicaid and into the uninsured pool, their choices for care will be constrained to safety net institutions. Uninsured patients have long relied on federally qualified health centers and free and charitable clinics for care, but recent estimates suggest that the upcoming policy changes will result in an annual gain of 1.9 million uninsured patients for federally qualified health centers. It’s also likely that some uninsured people will forego care due to concerns about cost, leading to delays in diagnosis and management of chronic conditions and potentially to acute complications that require hospitalization. These patterns of more severe chronic disease burden may increase demand for uncompensated, resource-intensive care in emergency departments and hospitals for conditions that could have been managed with consistent outpatient care.

Financial Challenges For The Safety Net

States have historically relied on the flexibility of supplemental payment programs and provider taxes to bolster the safety net. Due to concerns about gamin of current laws on provider taxes to increase federal matching funds, OBBBA increases regulation on use of these mechanisms to fund Medicaid. There is substantial state-level variation in existing use patterns; Alaska, which does not impose provider taxes, may be little affected by new provisions, whereas states that fund more than 30 percent of their share of Medicaid expenditures with provider taxes, such as Michigan, New Hampshire, and Ohio, are likely to experience outsized budgetary impacts. OBBBA also reduces the federal medical assistance percentage (FMAP) for emergency Medicaid for people who would have qualified for Medicaid except for their immigration status, and the law ends the temporarily enhanced FMAP for states that newly expand Medicaid.

In addition to reductions in federal Medicaid funding, increases in uncompensated care will further challenge safety net healthcare institutions. The increased uninsured population is projected to lead to nearly 20 percent lower revenue for federally qualified health centers in the next 10 years. Safety net providers have been under perennial financial strain with growing concerns about closures in recent years, particularly in rural areas. While financial circumstances do not perfectly predict the likelihood of closure, financial strain can affect operational decisions for health care organizations, including their willingness to provide unprofitable, but essential, clinical services (such as trauma, psychiatric, substance use disorder, or obstetric care).

States have historically relied on the flexibility of supplemental payment programs and provider taxes to bolster the safety net. Due to concerns about gaming of current laws on provider taxes to increase federal matching funds, OBBBA increases regulation on use of these mechanisms to fund Medicaid. There is substantial state-level variation in existing use patterns; Alaska, which does not impose provider taxes, may be little affected by new provisions, whereas states that fund more than 30 percent of their share of Medicaid expenditures with provider taxes, such as Michigan, New Hampshire, and Ohio, are likely to experience outsized budgetary impacts. OBBBA also reduces the federal medical assistance percentage (FMAP) for emergency Medicaid for people who would have qualified for Medicaid except for their immigration status, and the law ends the temporarily enhanced FMAP for states that newly expand Medicaid.

In addition to reductions in federal Medicaid funding, increases in uncompensated care will further challenge safety net healthcare institutions. The increased uninsured population is projected to lead to nearly 20 percent lower revenue for federally qualified health centers in the next 10 years. Safety net providers have been under perennial financial strain with growing concerns about closures in recent years, particularly in rural areas. While financial circumstances do not perfectly predict the likelihood of closure, financial strain can affect operational decisions for health care organizations, including their willingness to provide unprofitable, but essential, clinical services (such as trauma, psychiatric, substance use disorder, or obstetric care).

Navigating The Road Ahead

As policy changes phase in, states can consider several measures to sustain the health care safety net.

First, states can continue work to mitigate coverage losses. Automatic renewals of coverage on behalf of many beneficiaries using already available data (so-called ex parte renewals) can mitigate some of the health consequences of lost coverage. States and the Centers for Medicare and Medicaid Services may need to collaborate to determine the most cost-effective way to obtain just-in-time labor data. By seeking strategic partnerships with health systems and social services organizations that already help people sign up for Medicaid, states may be able to leverage private resources to help keep beneficiaries enrolled in Medicaid. States and municipalities can also consider developing public insurance options, like that of New York City. These arrangements come with their own financing challenges if intended for people disenrolled from Medicaid, but they can serve as a stopgap to mitigate coverage losses in the short term.

Second, states can minimize Medicaid payment delays to providers by streamlining reconciliation with managed care organizations. Federally qualified health centers are paid prospectively to cover 100 percent of reasonable costs, but financial stability requires timely updating of the cost-based estimates for covered services and supplemental “wraparound” payments by states for services covered by managed care. North Carolina has implemented a system for real-time wraparound payments that may be generalizable to other states.

Third, states can improve the targeting of existing safety net supplemental payment programs. Payments associated with the 340B program are frequently directed to communities with few low-income patients. Similarly, Medicaid disproportionate share hospital payments are often distributed to hospitals that don’t provide substantial levels of service hospitals that don’t provide substantial levels of service for patients insured by Medicaid or uninsured. With a smaller budget available for supplemental payments, efficient targeting will be essential to mitigate impacts on the most financially vulnerable safety net providers. Improvements in state-level data and transparency of existing allocation patterns would be essential to these types of efforts.

Fourth, rural communities can leverage the role of health care as a driver of local economies in designing proposals for the Rural Health Transformation Program. Supporting rural hospitals may require more upstream investments than simply focusing on health care infrastructure. Localities could apply for federal rural economic development grants to support utility infrastructure or capital development programs for rural healthcare institutions in tandem with the Rural Health Transformation Program. Sustaining rural health in a time of potential safety net strain is likely to require cross-sector inputs and collaboration.

Conclusion

With recent shifts in the policy landscape, the health care safety net is likely to face greater demand for uncompensated care but have reduced funding to provide that care in coming years. States can consider a variety of options to maintain the stability of their safety net institutions through these changes.