As of March 15, 2026, most governors had released proposed budgets for state fiscal year (FY) 2027. In addition, several governors in states that enacted biennial budgets in 2025 have released supplemental proposals. These FY 2027 state budget proposals signal how governors are responding to Medicaid financing changes, provider tax phase downs, and new implementation costs created in the 2025 Budget Reconciliation Act (P.L. 119-21, OBBBA).
Given the requirement enacted in OBBBA, this year’s state budgets are more than spending plans. They are critical policy tools governors will use to navigate changes in federal funding, new program requirements, and increasing pressures across Medicaid and broader healthcare markets.
The FY 2027 budgets indicate how governors are attempting to balance competing imperatives: maintaining healthcare coverage and access, stabilizing provider networks, financing Medicaid obligations, and aligning state healthcare and health-related programs with new federal rules. Healthcare provider taxes, revised funding priorities, and targeted funding proposals are key levers in the process of balancing budgets.
Health Management Associates Information Services (HMAIS) has published its final iteration of the FY 2027 Proposed State Budget Overview Report (subscriber access required), which examines proposed FY 2027 state budgets (January 22, 2026, A Look at Proposed State Fiscal Budgets). Our March 2026 issuance covers all proposed FY 2027 budgets for non-biennial budget states and some supplemental budget proposals for states that enacted biennial budgets in 2026. Following is a look at key trends in Medicaid proposals and some of the substantial budget proposals that are discussed within the report.
Provider Taxes and Medicaid Financing Under OBBBA
One notable fiscal federal policy change under OBBBA is the phase down of the Medicaid provider tax programs, a financing mechanism many states rely on to draw down federal matching funds and support provider payments. The federal law freezes existing provider tax programs, prohibits new ones, and requires Medicaid expansion states to phase down the minimum allowable tax rate from 6 to 3.5 percent by 2032.
In addition, OBBBA places new limits on state-directed payments, capping them at 100 percent of Medicare rates for expansion states and 110 percent for non-expansion states. Grandfathered payment arrangements will be phased down by 10 percent annually beginning in 2028.
FY 2027 state budget proposals highlight how these changes will have substantial and long-term fiscal impacts, even if some effects are delayed. Examples include:
- Arizona estimates it will receive $5.3 billion less in federal support between FY 2029 and 2033 as a result of policy changes.
- California projects that state expenditures for Medi-Cal will grow $2.4 million in FY 2027, largely because the Medical Provider Interim Payment expires in FY 2026 and a decrease in managed care organization (MCO) tax revenue available to support the Medi-Cal program. Gov. Gavin Newsom’s proposed FY 2027 budget assumes a transition period for the decreased MCO tax through December 31, 2026.
- Connecticut Gov. Ned Lamont’s proposed supplemental budget for the 2025–27 fiscal biennium calls for reducing hospital provider taxes by $275 million. Connecticut increased supplemental payments and provider taxes during the 2025 legislative session, but the governor’s proposal would reduce the inpatient hospital provider tax rate from 6 percent to 4.1 percent.
- Illinois projects that most of the budgetary impacts will begin in FY 2028, with federal Medicaid support reduced by approximately $2.8 billion annually by FY 2031.
- New York Gov. Kathy Hochul’s budget proposal updates the managed care tax spending plan and estimates the state will collect $1.5 billion fewer receipts than anticipated in fiscal 2027.
Implementation Costs: Staffing, Systems, and Administrative Burden
Along with the decreased federal funding, implementing OBBBA carries significant administrative and operational costs, compounding pressure on state budgets.
According to an Associated Press analysis of 25 state budget protections, states will need to spend up to $1 billion in federal and state funds on technology upgrades and additional staff to fully implement the Medicaid work and community engagement requirements. Many FY 2027 budgets reflect this reality, with new investments focused on expanding staffing capacity and modernizing eligibility and data systems. For example:
- Michigan’s proposed budget, for example, includes $186.6 million from the state general fund to fully implement OBBBA, including $80.3 million in all funds to hire additional full-time employees who can meet the increased workload.
- Missouri proposes $294.6 million and dedicated staff members to comply with OBBBA.
- Arizona proposes a $14.4 million one-time investment and dedicated OBBBA implementation staff.
Several governors also propose investments to help beneficiaries remain enrolled amid more frequent eligibility checks and new requirements. For example:
- Kentucky proposes $35.6 million in FY 2027 and $11 million in FY 2028 to modify the Medicaid information technology systems and other administrative systems to cover increased costs for the more frequent six-month eligibility redeterminations and to implement the new community engagement and work requirements.
- Rhode Island proposes $32.7 million for technology modifications to the RIBridges software to maintain compliance for various health and human services programs to align with OBBBA.
What to Watch: FY 2027 Budget Decisions and Medicaid Financing Risks
Upcoming provider tax phase downs and caps on state-directed payments constrain core funding tools just as implementation costs for staffing and systems are rising, forcing difficult decisions about coverage, provider support, and administrative capacity. Providers face growing uncertainty as tax supported supplemental payments are reduced or restructured, with potential implications for cash flow, service availability, and network participation.
Managed care plans, meanwhile, must navigate shifting rate development assumptions, changes in provider payment arrangements, and increased enrollment churn tied to eligibility and redetermination changes.
While the timing and magnitude of effects vary, these proposals underscore that provider tax and supplemental payment changes are more than abstract future concerns. They already are shaping FY 2027 budget decisions and long-term Medicaid financing strategies.
Most state legislatures are still debating their spending plans, making it critical to track which proposals are included in FY 2027 budgets, which are scaled back, and which are eliminated. These budget decisions will play a central role in determining market stability, access to care, and program sustainability in the years ahead.
HMAIS will publish additional reports in the coming months summarizing each state’s enacted budget. The first iteration is expected in May 2026.
Connect with Us
As the policy and funding landscapes continue to evolve, states and other stakeholders need to remain flexible. HMA brings the expertise, tools, and insights needed for stakeholders to stay on top of the rapidly changing environment. For questions or to connect with an HMA expert, contact Andrea Maresca and Kathleen Nolan.
The full report is available to HMAIS subscribers. Questions can be directed to Maddie McCarthy.
