As states begin planning their fiscal year (FY) 2027 budgets, many Medicaid programs are preparing for tougher financial conditions. State revenue growth has slowed while health care spending pressures continue, and recent federal policy changes under the 2025 budget reconciliation law add uncertainty to future funding streams. Even as enrollment stabilizes, costs tied to provider payments, higher needs among beneficiaries, and expanding long-term care, pharmacy, and behavioral health utilization are contributing to rising spending.
In response, many states are already signaling a shift toward Medicaid cost containment. Provider rate reductions, limits on optional benefits, and other traditional cost-cutting measures are once again part of budget discussions. While these approaches may deliver short-term savings, they risk restricting access to care and running counter to CMS’s mission to protect coverage and promote population health. As fiscal conditions tighten, states and Medicaid managed care organizations (MCOs) are being forced to reconsider how savings are achieved — and whether benefit reductions are a sustainable or acceptable path forward.
At the same time, Medicaid programs are under heightened scrutiny for payment accuracy. Improper payments above the federal 3 percent threshold now carry real financial consequences, regardless of whether funds are later recovered. States will face federal funding reductions for any amount over the 3% improper-payment rate, with far fewer opportunities for exemption. Under this framework, dollars paid incorrectly remain improper even after recovery, fundamentally changing how states must think about budget protection. Recovery alone no longer reduces financial exposure or safeguards future federal funding.
Cost Avoidance Is Essential to Meeting the 3% Standard
Improper payments continue to drain billions of dollars from Medicaid each year, often because claims should have been paid by another insurer. Traditional “pay-and-chase” recovery efforts do little to reduce improper payment rates and provide no protection against future errors.
Prospective cost avoidance directly addresses this challenge by preventing improper payments before they occur. Real-time identification of other health insurance and third-party liability ensures Medicaid consistently operates as the payer of last resort. Each claim stopped from being paid incorrectly helps states stay below the 3 percent improper payment threshold and preserves funding for covered services.
Operational Efficiency Protects Program Resources
Budget pressures are often compounded by administrative inefficiencies. Manual workflows, fragmented eligibility data, and delayed coverage verification increase error rates and drive up operating costs.
Automating eligibility checks, claims workflows, and coverage validation improves payment accuracy while reducing administrative burden. These efficiencies allow Medicaid programs and MCOs to meet federal payment accuracy standards without shifting costs onto providers or members.
Program Integrity as Budget Protection
Program integrity has evolved beyond a compliance function — it is now a core budget preservation strategy. Proactive monitoring, advanced analytics, and stronger oversight enable states and MCOs to identify payment risk earlier and prevent systemic issues that lead to improper payments.
When program integrity is aligned with prospective cost avoidance, Medicaid programs reduce financial leakage, improve audit readiness, and strengthen long-term fiscal stability — even in periods of economic uncertainty.
Efficiency, Not Benefit Cuts, Is the Path Forward
As Medicaid budgets face increasing pressure, cutting benefits should be a last resort — not the default response. The most effective way to prepare for funding reductions is to ensure that claims are paid correctly the first time.
Preventing improper payments, maintaining compliance with the 3 percent federal standard, and modernizing Medicaid operations allow states and MCOs to protect access to care while preserving limited program resources. In today’s environment, cost avoidance is not optional — it is essential to sustaining Medicaid’s mission.
