NC Medicaid leaders seek new funding strategy as work rules loom

The clock is ticking for lawmakers in North Carolina - the only state in the nation without an approved budget - to settle on a plan to cover rising administrative costs for Medicaid.

That was the key takeaway from a presentation that Melanie Bush, assistant secretary for NC Medicaid, gave earlier this month to members of the state legislature’s oversight committee that examines what’s happening with the entitlement program.

If action is not taken soon, Bush warned lawmakers, the state could struggle to meet deadlines tied to new federal eligibility and enrollment requirements for the program, which covers about 3 million of North Carolina’s 11.2 million residents.

Beginning Jan. 1, 2027, many Medicaid participants must prove they are working, volunteering or attending school for at least 80 hours a month in order to maintain benefits. The change is part of the One Big Beautiful Bill Act signed last summer by President Donald Trump, a sweeping federal law that reduces Medicaid spending by close to $900 billion over the course of a decade, in part by tightening eligibility rules and increasing oversight of enrollment.

In addition to work requirements, the law requires states to conduct eligibility redeterminations more frequently. It also introduces stricter limits on retroactive Medicaid coverage, a mechanism used commonly by hospitals to help cover the costs for uninsured patients. “We have done a lot of the legwork, and thanks to the generosity of the North Carolina General Assembly, we have a lot of the infrastructure [ ] in place to allow us to get into compliance,” Bush told lawmakers. “What we don’t have in place right now is a financing mechanism for the additional cost to implement work requirements.”

New requirements, new costs The changes outlined in the OBBBA will primarily affect beneficiaries who gained coverage through the state’s 2023 expansion of Medicaid - more than 700,000 North Carolinians - and would require the state to conduct eligibility redeterminations every six months instead of annually, all while also tracking compliance with the new work engagement requirements.

Expansion itself does not use state general fund dollars, Bush said. But she explained to lawmakers that the administrative burden associated with the new federal mandates will require significant new spending to update systems, pay vendors and support already overburdened county social services departments that handle eligibility determinations.

“We will need to come up with the additional administrative funding to build the infrastructure and maintain the systems,” she said.

Administrative funding for Medicaid expansion is “hard coded” in state statute, she said, providing counties with $7.6 million per quarter for eligibility workers and $3.3 million per quarter for state administrative costs. That funding was designed to support annual redeterminations, not twice that many.

Bush said the N.C. Department of Health and Human Services estimates an additional $7.8 million per quarter will be needed to support “county eligibility determination functions” once the new redetermination schedule kicks in.

“Doing it twice a year is going to increase the number of staff that the counties may need to keep up with the pace,” she said.

The federal government has given the state $1.9 million to implement the work requirement, but Bush said the state still needs $6.5 million to cover “startup costs,” along with $3.3 million per quarter for ongoing administrative costs.

The state is also expected to face higher vendor costs - particularly for income verification services through Equifax.

“Right now, we spend a considerable amount of money on our Equifax income verification contract,” Bush said. “We only use that once a year. Now we will be doing it twice a year for 700,000 people.”

How to pay for it Bush said NC DHHS is looking for ways to cover the new costs without tapping state general fund dollars, because when lawmakers passed the Medicaid expansion law they specifically wrote it to avoid any outlay from the state. The law stipulates that if supporting expansion costs the state anything, then expansion could be repealed.

Instead of the state paying for expansion costs not covered by the federal government, hospitals are picking up the tab through paying a higher tax rate on dollars they earn from Medicaid.

Working with the North Carolina Healthcare Association, which represents the state’s hospitals, and legislative staff, Medicaid leaders have narrowed their approach to three potential financing options, all of which would require legislative action to deploy.

The first option would restructure how public hospitals contribute to Medicaid expansion by shifting more funding into transfers among different state departments. Doing so would free up room under a new, lower, federal cap on provider taxes and allow hospitals to help finance the added administrative costs tied to work requirements and twice-yearly redeterminations without increasing state spending.

The second option would redirect a larger share of tax revenue on the insurance companies that run Medicaid managed care to cover the costs of the expansion population. Currently, 60 percent of that revenue supports expansion, while 40 percent flows to the state’s general fund.

Bush said that updated data suggests the expansion share of the insurance premium tax could increase to about 73 percent, shifting money already in the system away from the general fund and toward Medicaid administration.

The third option would require lawmakers to tap state savings generated by Medicaid expansion - savings that have accrued to other agencies, such as those overseeing behavioral health or corrections - and formally appropriate them back to NC Medicaid.

“We have not used this before,” Bush said. “Those savings have accrued to the various different agencies, but they would need to be appropriated to North Carolina Medicaid if we were to use those.”

She added that a final recommendation may include a combination of approaches rather than relying on a single funding source.

Tight timeline State health officials repeatedly underscored the need for speed, noting that systems development, testing, county training and member outreach must begin well ahead of federal compliance deadlines.

“We need legislative action as soon as possible so that we can begin building and testing our systems and notifying our members and working with our counties to prepare for January [2027],” when the work requirements start, Bush said.

To move forward, she said, lawmakers would need to make two statutory changes: adjusting the administrative funding amounts fixed in law to reflect higher costs, and authorizing one or more of the financing mechanisms under consideration.

Bush said this will need to happen by the end of March, at the latest.

Rep. Donny Lambeth (R-WinstonSalem), a co-chair of the committee, said the timing could be challenging given uncertainty around the General Assembly’s legislative calendar. Lawmakers are not expected to return to Raleigh until later this spring after party primaries on March 3.

The oversight committee - which usually meets on the second Tuesday of the month outside of the legislative session - is skipping its February meeting. It won’t meet again until March 10.

Lambeth acknowledged the urgency of the issue.

“I do think we need to have serious discussion with leadership here about when we might be back together,” he said.

He indicated support for the hospitalfocused financing approach, particularly shifting assessments and intergovernmental transfers, but suggested that lawmakers may ultimately need to blend multiple options to make the numbers work while minimizing disruption to hospitals and the general fund.

But speed on budget matters has not been a priority at the General Assembly lately. North Carolina lawmakers have been deadlocked over a state budget for the better part of a year, leaving agencies across state government operating without clear spending authority months into the fiscal year.

Until a budget deal is reached - or lawmakers pass standalone legislation to address Medicaid’s administrative funding - state health officials say their ability to prepare for the federal changes remains constrained. And the compliance deadlines continue to approach.