The budget reconciliation bill reshapes US healthcare

Medicaid eligibility, enrollment and redetermination reforms

Moratoriums and system modernization

A moratorium on implementation is established through September 30, 2034, for the following Centers for Medicare and Medicaid Services (CMS) final rules: "Streamlining Medicaid; Medicare Savings Program Eligibility Determination and Enrollment" (88 Fed. Reg. 65230) and "Streamlining the Medicaid, Children's Health Insurance Program and Basic Health Program Application, Eligibility Determination Enrollment and Renewal Processes" (89 Fed. Reg. 22780). The legislation allocates US$1 million in fiscal year (FY) 2026 to CMS for implementing the amended eligibility and enrollment rules.

Address verification and duplicate enrollment prevention

By January 1, 2027, all states and the District of Columbia (DC) must set up a process to regularly obtain and verify the address for Medicaid and the Children’s Health Insurance Program (CHIP) enrollees using reliable data sources. Managed care and prepaid health plans must promptly report any address updates provided or verified by enrollees. Starting no later than October 1, 2029, states and DC must submit enrollee data at least monthly and during each eligibility check to a new federal system to identify duplicate enrollments. If dual enrollment is found, states must review and, if necessary, disenroll ineligible individuals. The legislation provides US$10 million in FY 2026 to create this system and US$20 million in FY 2029 for its maintenance.

Deceased enrollee verification

Starting January 1, 2027, states will be required to check quarterly, and ensure annually, any deceased Medicaid enrollees by reviewing the federal Death Master File. This database, maintained by the Social Security Administration, contains information on individuals who have passed away. If an enrollee is confirmed as deceased, the state must promptly end their Medicaid coverage and payments, except for services provided before death. If someone is wrongly removed, benefits must be immediately reinstated retroactively. States may also use other electronic data sources to identify deceased enrollees, provided all eligibility rules are followed.

Provider screening

To ensure that only living, eligible healthcare providers and suppliers participate in and receive payment under the Medicaid program, states will be required to regularly check the federal Death Master File to verify the status of enrolled providers or suppliers, beginning January 1, 2028. These checks must be done at least every three months, as well as whenever a provider enrolls, re-enrolls, or updates their enrollment information.

Auditing for payment errors

The legislation grants the Secretary of Health and Human Services (Secretary), or the state if permitted, enhanced flexibility to audit and address Medicaid payment errors that exceed the three percent threshold for eligibility-related erroneous excess payments under the Medicaid Eligibility Quality Control Program, beginning in FY 2030. It also expands the definition of payment errors to include situations where eligibility cannot be confirmed.

Eligibility redeterminations in expansion states

Starting after December 31, 2026, states will be required to verify the eligibility of certain Medicaid enrollees every six months, rather than annually. This new requirement primarily affects adults who qualify for Medicaid under the expansion rules, as well as individuals in similar groups covered by state waivers that comply with federal minimum coverage standards. Some individuals, including those in the Indian Health Service, may be exempt from these more frequent eligibility reviews. CMS must provide guidance on implementing these changes by the end of 2025. To assist states with the transition and implementation of these new rules, US$75 million will be allocated to CMS for FY 2026.

Medicaid eligibility for qualified immigrants

Starting October 1, 2026, federal Medicaid payments to states for medical assistance will be restricted to specific groups of individuals. Eligible individuals include US citizens, US nationals, lawful permanent residents, certain Cuban and Haitian entrants and those legally residing in the US under a Compact of Free Association. As a result, undocumented immigrants and temporary visitors will no longer qualify for any non-emergency Medicaid-funded services. These same restrictions will also apply to CHIP. Furthermore, US$15 million will be allocated in FY 2026 to CMS for implementing these changes.

Emergency Medicaid coverage for immigrants

Starting October 1, 2026, the federal government will limit the amount it pays states for emergency medical care provided to certain non-citizen immigrants under Medicaid. Specifically, the federal matching rate for these emergency services will be capped at the standard rate for each state. To support the implementation of this change, US$1 million will be allocated to CMS in FY 2026.

Moratorium on nursing home staffing standards

A moratorium is imposed on the implementation and enforcement of the nationwide nursing home staffing rules, effective immediately through September 30, 2034.

Retroactive coverage eligibility

The retroactive eligibility period for the Medicaid expansion population will be limited to services furnished in or after the month preceding the application month, rather than the previous three-month period. For all other Medicaid applicants, retroactive coverage will be limited to services provided in or after the second month before the application month. For CHIP, if a state elects to provide retroactive coverage for child health or pregnancy-related assistance, coverage cannot extend to services furnished before the second month preceding the month of application. These provisions apply to applications submitted on or after January 1, 2027. CMS will receive US$10 million in FY 2026 to implement these changes.

Federal payments to prohibited entities  

Federal “direct spending” under Medicaid cannot be used to pay any “prohibited entity,” defined as a nonprofit, tax-exempt essential community provider primarily engaged in family planning and reproductive health that provides abortions (except in cases of rape, incest or life endangerment), and that received over US$800,000 in combined federal and state Medicaid payments in FY 2023, for items and services furnished during the one-year period beginning on the date of enactment. This restriction applies to payments made directly or through managed care organizations or other covered entities, including their affiliates, subsidiaries and clinics, effective July 4, 2025. To support the implementation of this change, US$1 million will be allocated to CMS in FY 2026.

Medicaid provider tax and state directed payment changes

Increased FMAP sunsets for new expansion states

The five percent enhanced federal matching assistance percentage (FMAP), established under the American Rescue Plan Act for new Medicaid expansion states, will sunset effective January 1, 2026. This is one of several provisions that single out states that opted to expand Medicaid to additional populations.

Change in hold harmless threshold

The legislation modifies the “hold harmless” threshold, so that beginning October 1, 2026, the maximum percentage of net patient revenue that states can tax certain healthcare providers will be determined based on whether the state has expanded Medicaid. For non-expansion states, the threshold is set based on whether a qualifying tax was already in place at the time the law is enacted; if not, the threshold is zero. For expansion states, the threshold is either lower of the existing rate or a gradually decreasing cap, dropping from 5.5 percent in 2028 to 3.5 percent by 2032. The new requirements, which apply to the states and DC, do not apply to US territories. CMS will receive US$20 million in FY 2026 to support the implementation of this change.

State-directed payments

A cap is established for certain state-directed payments as follows: States that offer Medicaid expansion coverage equivalent to minimum essential coverage must limit payments to 100 percent of the total published Medicare payment rate (or the Medicaid rate if no Medicare rate exists) while non-expansion states are allowed up to 110 percent of the Medicare rate. Certain payments that received written approval before May 1, 2025, or a payment for a rural hospital for which written prior approval, or a good faith effort to obtain approval, was made by the date of enactment, are “grandfathered” and will have their payment rates gradually reduced by 10 percentage points each year starting in 2028 until they meet the new limits. States that newly expand Medicaid after the enactment date are subject to the 100 percent cap for expansion states. The legislation also defines key terms such as “rating period,” “rural hospital,” “total published Medicare payment rate” and “written prior approval.” The sum of US$7 million is appropriated for each of the FYs from 2026 through 2033 for implementing these changes.

Medicaid provider tax requirements

States have the option to seek waivers from CMS that permit them to implement Medicaid provider taxes that do not strictly adhere to broad-based or uniform tax requirements. The legislation clarifies that a tax is not considered “generally redistributive” if, within a permissible class, the tax rate is lower for providers with a smaller share of Medicaid business or higher for those with a larger share, or if the tax structure achieves the same effect by other means, such as using different terminology or closely approximating Medicaid-related groups. It defines “Medicaid taxable units” as those tied to Medicaid payments, revenue, or costs, and “non-Medicaid taxable units” as those tied to non-Medicaid business. Further it provides that a “tax rate group” is a set of entities within a permissible class taxed at the same rate. These changes apply to the 50 states and DC, but not to the US territories. They are effective upon enactment, subject to a transition period determined by the Secretary, not to exceed three fiscal years.

Section 1115 demonstration budget neutrality

The legislation codifies that any new, renewed, or amended Section 1115 Medicaid demonstration projects cannot be approved unless the Chief Actuary for CMS certifies that the project will not increase federal spending compared to what would have been spent without the project, beginning January 1, 2027. Further, it requires that all costs, including those for populations and services that could have been covered under the regular Medicaid state plan, must be considered in the comparison. In the event the demonstration project results in lower expenditures than would have occurred otherwise, the Secretary will determine how those savings are factored into future project approvals. To support the implementation of these changes, US$5 million is appropriated to CMS in each fiscal year 2026 and 2027.

Personal accountability and cost sharing

Community engagement (work) requirements

Beginning in 2027, states will be required to implement community engagement requirements as a condition of Medicaid eligibility for certain adults between the ages of 19 and 64 who are not otherwise excluded. Under these requirements, individuals must demonstrate each month that they are engaged in qualifying activities, such as working at least 80 hours, participating in community service or a work program for at least 80 hours, being enrolled at least half-time in an educational program or earning income at or above the minimum wage for 80 hours per month. There is flexibility for individuals to combine these activities to meet the 80-hour threshold, and special provisions exist for seasonal workers who meet income requirements over a six-month period. States have the discretion to specify the number of months of compliance required prior to application or between eligibility redeterminations, and they may conduct compliance verifications more frequently if desired.

There are several mandatory exceptions to these requirements, ensuring that vulnerable populations are not adversely affected. Excluded groups include children under 19, seniors, pregnant women, individuals with disabilities or serious health conditions, caregivers for young children or disabled dependents, veterans with total disabilities, American Indians and Alaska Natives, and those already meeting work requirements under other federal programs like TANF or SNAP. Additionally, states may grant optional exceptions for individuals experiencing short-term hardships, such as hospitalization, residing in areas affected by disasters or high unemployment, or needing to travel for complex medical care. States are required to use available data sources, such as payroll or benefit records, to verify compliance and minimize the need for individuals to submit additional documentation.

States are not allowed to use Medicaid managed care organizations, certain other entities or contractors to decide if beneficiaries are meeting program requirements if those contractors have any financial ties—direct or indirect—to the organizations that provide or arrange Medicaid coverage for those beneficiaries.

If a state cannot verify that an individual has met the community engagement requirement, the individual must be notified and given a 30-day period to resolve the issue, during which time Medicaid coverage continues. If the individual does not provide satisfactory evidence of compliance or exemption, coverage may be denied or terminated, but only after the state determines whether the individual qualifies for other forms of assistance and provides notice and an opportunity for a fair hearing. States are prohibited from waiving these requirements but may request a temporary exemption if they demonstrate good faith efforts and face significant barriers, with all exemptions expiring by the end of 2028.

States are required to conduct outreach to individuals enrolled in Medicaid or related waivers to inform them about the new community engagement requirements. The notice must clearly explain how to comply with the community engagement requirement, detail any exceptions and define who is considered an "applicable individual." It must also outline the consequences of not meeting the requirement and provide instructions for reporting changes in status that could affect eligibility or exceptions. Notices must be sent by regular mail (or electronically if the individual prefers) and through at least one additional method, such as phone, text, website or other electronic means, to ensure broad and effective communication. The timing of these notifications must begin before December 31, 2026, or earlier if the state decides, and then at regular intervals after that following standards set by the Secretary.

To support the implementation of new Medicaid eligibility and redetermination requirements, the federal government will provide states with significant financial assistance through government efficiency grants. Specifically, US$200 million is appropriated for FY 2026, with half distributed to states based on their share of eligible individuals and the other half divided equally among all states and DC. These grants are intended to help states develop and maintain the necessary systems for conducting eligibility determinations and redeterminations and to comply with the new federal mandates and streamline their administrative processes.

The Secretary is tasked with issuing regulations and overseeing the process to ensure consistency and fairness across states. As such, the Secretary is required to promulgate an interim final rule for purposes of implementing these provisions by June 1, 2026. 

Cost sharing for expansion enrollees

Expansion enrollees with family incomes above 100 percent of the federal poverty level must pay cost sharing for covered services, beginning October 1, 2028. These individuals, called "specified individuals," will no longer be charged enrollment fees or premiums, but states will be required to impose some form of cost sharing, such as copayments or deductibles, for certain services. However, there are important limits: no cost sharing can be applied to primary care, mental health, substance use disorder services or services provided by federally qualified health centers, certified community behavioral health clinics or rural health clinics. For other services, the maximum charge per item or service is US$35, except for prescription drugs, which have their own federal limits. Additionally, the total cost sharing for all family members cannot exceed 5 percent of the family’s income, calculated on a monthly or quarterly basis. Providers may require payment of these charges as a condition for providing care, but they can also choose to reduce or waive them. To support these changes, US$15 million will be allocated to CMS in FY 2026 for implementation.

Access, coverage and program expansion

Home and community-based (HCBS) waivers

Beginning July 1, 2028, states will be able to apply for a new type of Medicaid waiver that allows them to expand coverage for home or community-based services (HCBS) to individuals who do not require an institutional level of care, if they meet state-established, needs-based criteria approved by the Secretary. These waivers can be approved for an initial three-year period and extended for five-year increments, provided states meet certain requirements, such as ensuring that expanding HCBS does not increase waiting times for those already eligible for such services and that per capita spending on these new recipients does not exceed the average cost of institutional care. States must also provide detailed annual data to the Secretary on service costs, duration and recipient numbers, and cannot use federal funds from this program to pay for certain practitioner benefits. To support these changes, US$50 million is allocated for federal implementation in 2026, and US$100 million in 2027 will be distributed to states based on their HCBS-eligible populations to help build and maintain systems for delivering these expanded services.

Medicare

Medicare eligibility for immigrants

Medicare eligibility is limited to US citizens, lawful permanent residents, certain Cuban and Haitian entrants, and individuals lawfully residing in the US under a Compact of Free Association. For current beneficiaries, these restrictions will take effect 18 months after the date of enactment (January 4, 2027). The Social Security Administration is required to conduct a comprehensive review of all current Medicare beneficiaries within one year of the law’s enactment (by July 4, 2026) to determine whether they meet the newly established eligibility criteria. Beneficiaries who are found not to qualify under the updated standards must be formally notified that their Medicare coverage will terminate effective January 4, 2027. 

Temporary Medicare pay increase for physicians

A one-time 2.5 percent increase to the Medicare Physician Fee Schedule is provided for services rendered between January 1, 2026, and January 1, 2027. While it averts scheduled cuts in the immediate term, the increase is not factored into baseline calculations that determine physician payment amounts for subsequent years.

Orphan drug exclusion from price negotiation

Orphan drugs designated for one or more rare diseases or conditions are excluded from Medicare's drug price negotiation. The updated policy clarifies that if a drug maintains its orphan status, meaning it is approved for at least one rare disease or condition, it will not accrue time toward eligibility for price negotiation under the program. If a drug loses its orphan designation, the period for negotiation eligibility will begin to count from the first day it no longer qualifies as an orphan drug. These provisions take effect for initial price applicability years starting on or after January 1, 2028.

Telehealth services and health savings accounts

Permanent extension of the telehealth safe harbor

The safe harbor allowing high-deductible health plans (HDHP) to cover telehealth and other remote care services before the deductible is met will be made permanent, effective for plan years beginning after December 31, 2024, and the plan will still qualify as an HDHP for Health Savings Account (HSA) purposes. The law also removes language that previously limited this safe harbor to certain months or plan years.

Bronze and catastrophic plan eligibility for HSAs

For months beginning after December 31, 2025, bronze and catastrophic plans offered through the ACA Exchanges will be treated as HDHPs for purposes of HSA eligibility.

Direct primary care (DPC) service arrangements

DPC arrangements allow individuals to pay a fixed, recurring fee to a primary care practitioner for access to primary care services. These fees will be considered qualified medical expenses for HSA purposes if the monthly fee does not exceed US$150 for an individual or US$300 for a family. However, these arrangements must strictly limit services to primary care and cannot include procedures requiring general anesthesia, most prescription drugs or certain laboratory services. Dollar limits on fees will be adjusted for inflation starting in taxable years after 2026. These changes take effect for months beginning after December 31, 2025.

Rural healthcare

Rural health transformation program

The Rural Health Transformation Program provides US$10 billion per year from 2026 to 2030 to help states improve rural healthcare. States must apply with a comprehensive plan addressing issues like access, health outcomes, technology, provider partnerships, workforce and hospital stability no later than December 31, 2025. Approved states receive annual funding with no state match required. Half of the funds are split equally among participating states; the rest are distributed based on rural population and facility metrics. States must use funds for at least three key activities, such as evidence-based care, technology adoption, workforce development, IT upgrades or expanding mental health and substance use services. The program requires annual reporting, allows CMS to withhold or reclaim misused funds and redistributes unused funds. An additional US$200 million is provided for CMS implementation, and the program is exempt from certain administrative and judicial reviews.

The road ahead

The budget reconciliation bill represents a historic transformation of the US healthcare landscape, rolling back several reforms made in prior years and focusing significantly on Medicaid funding mechanisms traditionally utilized by states to draw down additional federal dollars to help fund Medicaid shortfalls. However, since many of the reforms do not take effect until after the 2026 election, questions arise concerning whether and how states will prepare for and begin implementation of these sweeping changes. The states will bear the greatest burden concerning administration and funding in the future, and providers will remain on the line for providing care, especially in emergency circumstances regardless of payor under the law.

Without changes, it is anticipated that stakeholders will face a future marked by a growing number of uninsured individuals and states having to increase their financial obligations or make changes to their Medicaid programs. Because states are required to maintain balanced budgets, a reduction in federal financial support will have an enormous impact on their Medicaid programs and providers will face a more complex and challenging environment in delivering care to low-income and vulnerable populations. Stakeholders should closely monitor implementation timelines and guidance to ensure readiness for the broad and lasting impacts of this landmark legislation.

Our team of experienced lawyers and professionals at Norton Rose Fulbright will be closely monitoring the implementation of the budget reconciliation bill. If you have any questions, please do not hesitate to contact us.