Iowa Medicaid faces shortfall as pandemic aid runs out

Iowa's Medicaid program is projected to face tens of millions of dollars in deficits in coming years, prompting warnings from the state auditor.

State Auditor Rob Sand, a Democrat, accused Republican state leaders of "irresponsible budgeting practices" that he said are creating a "fiscal time bomb." Sand pointed to recent estimates from the state's Medicaid Forecasting Group showing projected shortfalls of nearly $76 million in fiscal year 2026 and $181 million in 2027.

State health officials and Republican leaders countered that rising patient needs and drug costs, not budgeting practices, are driving Medicaid's projected shortfalls.

Iowa Medicaid covers about 700,000 Iowans, including low-income children and families, people with disabilities and older adults. At the same time, policymakers are weighing potential federal funding cuts and new work requirements for recipients, adding to uncertainty about the future of the program.

Forecast: Deficits after short-term surpluses

A report released Sept. 8 by the Medicaid Forecasting Group — made up of the non-partisan Legislative Services Agency in collaboration with Iowa Department of Health and Human Services and the Iowa Department of Management — showed the program ended fiscal year 2024 with a $307 million surplus. That cushion was largely driven by temporary federal pandemic aid and an enhanced federal match rate, as well as the disenrollment of 168,908 people who lost eligibility when the COVID-19 public health emergency expired in 2023.

For fiscal year 2025, forecasters expect another surplus of $105.7 million, thanks to remaining carryover funds. But those reserves disappear after that. Declines in revenues from Iowa's health care trusts, the Medicaid fraud fund and a managed care organization premium tax — combined with growing costs and a decrease in the federal government's share of Medicaid funding — create the projected $75.9 million deficit in fiscal year 2026 and $180.7 million in 2027.

The LSA memo warned that expenditures will continue to climb, with managed care capitation rates expected to increase by nearly $114 million in 2026. Capitation is the fixed payment the state makes to private insurers to manage Medicaid members' care.

Mason Mauro, deputy communications director for Gov. Kim Reynolds, said Medicaid in its current form is not sustainable and the budget shortfall is not unexpected.

"There was a shortfall last year, and another is projected this year due primarily to the increase of chronic illness among those on taxpayer-funded health care," Mauro said in a statement to The Gazette. "Rest assured, we'll ensure that the most vulnerable Iowans continue to receive the care they need."

State health officials emphasized that Iowa remains committed to maintaining Medicaid services for the state's most vulnerable residents, including children, seniors and people with disabilities.

While Iowa has benefited from higher federal revenue in recent years, state budget gaps for Medicaid are not unusual, they said. During the COVID-19 public health emergency, states were required to keep people enrolled regardless of eligibility. Now that ineligible members have been removed, the remaining population generally tend to be sicker and require more complex, costly care, according to Iowa HHS. Additionally, the Medicaid program is required to cover any FDA approved drugs, and as more drugs come online those costs are also rising and driving increases, said Sarah Ekstrand, chief of staff for external relations at Iowa HHS.

Ekstrand stressed that the state has a robust process to ensure managed care organizations balance financial sustainability with access to care, including routine monitoring of provider networks. She added that detailed information about Medicaid managed care contracts and capitation rates is publicly available on the Iowa HHS website.

Auditor blasts reliance on one-time funds

Sand said state leaders squandered pandemic aid by relying on it to paper over structural budget issues instead of making sustainable decisions. Federal support during the public health emergency totaled $1.17 billion for Iowa's Medicaid program between 2020 and 2024. At its peak in fiscal 2024, $368 million in carryover remained, but that will be gone by 2027, according to the forecasting group.

"My predecessors and I have always cautioned that reliance on one-time funding, such as COVID-19 funds, for long-term budget needs is irresponsible," Sand said in a statement. "This, combined with intentional decline in revenue yet also increased spending on things like Education Savings Accounts (ESA), creates a fiscal time bomb. We now know, among the first in the path of the shock wave are Iowa's most vulnerable — children, seniors and disabled Iowans — which will only lead to rising costs for every Iowan."

Melissa Saitz, communication director for Iowa House Republicans, said the rising cost of Medicaid is a challenge affecting state budgets across the country, not just Iowa.

"Republicans have been working to find common sense solutions like work requirements to control costs, while Sand and the Democrats push for free health care for illegal immigrants," Saitz said.

Newly elected Iowa Senate Majority Leader Mike Klimesh, R-Spillville, said the Medicaid Forecasting Group's report reinforces the importance of maintaining fiscally responsible budgets Senate Republicans have passed for several years.

"The state has billions of dollars in reserves, and the budget will be able to withstand this increase in Medicaid costs," Klimesh said in statement to The Gazette. "We have been dedicated to responsible budgeting, measured increases in important areas, and historic tax relief and we will continue down that path."

Iowa is facing a budget imbalance of more than $900 million this year, a gap state leaders have patched using one-time money, which Sand warned cannot sustain long-term commitments like Medicaid and will leave deeper shortfalls once the funds are exhausted.

As of July, the state was projected to have a $1.6 billion surplus for the FY 2026 budget year, along with $3.6 billion in the state's Taxpayer Relief Fund, which was created to cover funding shortfalls caused by the income tax cuts, as well as $849 million in other reserve accounts.

Reynolds and legislative Republicans have gradually and significantly reduced Iowans' state income taxes. The shift has been projected to save state income taxpayers — and thus reduce state revenues — $1.7 billion by the 2028 state budget year.

Because of those state income tax reductions, state revenue this year fell short of planned spending for the state budget year that began July 1. As a result, $917 million in reserve funds — including the budget surplus and Taxpayer Relief Fund — were used to balance the roughly $9.4 billion budget, which has a projected revenue of $8.5 billion.

GOP blasts Sand's criticism as misguided

In an op-ed published in The Gazette, Rep. Ann Meyer, R-Fort Dodge, accused Sand of spreading "falsehoods" about changes to Iowa's Medicaid program under the "One Big Beautiful Bill." She argued Sand's calls to repeal Medicaid managed care would cost hospitals more than $1 billion annually by eliminating federal hospital payments tied to managed care.

Meyer, a registered nurse, also defended new eligibility checks and work requirements included in the law as "common sense" safeguards, rejecting Sand's claim that the law will "kick people off their insurance."

"Based on Sand's previous comments, it's clear he lacks a fundamental understanding of how the Iowa Medicaid program works," Saitz said. "What he has shared about his plans if elected would mean major Medicaid cuts, resulting in the loss of services and rural hospitals."

H.R. 1, enacted in July as the "One Big Beautiful Bill Act," makes several changes that reduce Medicaid's Federal Medical Assistance Percentage and shift costs to states. The cuts are part of a broader federal budget reconciliation effort to decrease spending.

The federal law also imposes new eligibility and access restrictions for the state's Medicaid expansion population — the roughly 180,000 low-income, non-elderly adults with incomes at or below 133% of the federal poverty level in the Iowa Health and Wellness Plan — through work requirements, co-payments and more frequent eligibility checks.

The law requires states to redetermine eligibility for Medicaid expansion enrollees every six months instead of annually. It also constrains the ways states can finance their share of Medicaid program costs.

Medicaid director: Difficult choices ahead

Speaking Thursday during The Gazette's Iowa Ideas conference, Iowa Medicaid Director Lee Grossman said while his team is pursuing administrative efficiencies, he noted those savings are minimal compared to the program's more than $5 billion budget.

Ultimately, Grossman, who marked one month on the job this week, said there are only three major levers to close funding gaps: who Medicaid covers, what services are included and how much providers are paid. Decisions on those fronts, he stressed, rest with the governor and Legislature, and must be made carefully and transparently with input from policymakers and data from his agency.

Grossman said his agency is focused on providing data-driven analysis and recommendations to policymakers but acknowledged the stakes are high.

"Certainly, those are difficult conversations, but we have to face them head on," he said. "We've got to talk through those and do that together, again, as policymakers in particular for what the best course is for the state of Iowa and how Medicaid continues to advance our health policy goals in the state."

Gazette Des Moines Bureau Chief Erin Murphy contributed to this report.