This is an exclusive BHB+ story
Medicaid faces potential cuts after the Republican-led Congress passed a budget resolution to slash the outlays overseen by the House Energy and Commerce Committee — which oversees Medicare and Medicaid spending — by $880 billion over the next decade.
Cutbacks on Medicaid will likely have significant implications for behavioral health providers and patients.
This is especially true in areas within behavioral health where Medicaid beneficiaries are overrepresented, including substance use disorder (SUD) treatment and serious mental illness (SMI) care.
We’ve already seen Medicaid’s uncertain future impact the industry. Earlier this week, the SMI startup firsthand went through a round of layoffs, which sources told BHB were attributed to uncertainty and potential Medicaid cuts.
I’m also monitoring the impact on pediatric services, as Medicaid is the No. 1 payer for children. In particular, cutbacks could negatively impact the autism services industry, which primarily cares for pediatric patients.
“Medicaid cuts could have a crippling effect on behavioral health services. Behavioral health services currently already have limited resources and funding, any additional cuts would make things even more challenging,” Dr. Imamu Tomlinson, CEO of Vituity, told me. “This is especially true for patients at the lower end of the socioeconomic spectrum who depend on behavioral health safety nets.”
In the latest edition of your exclusive BHB+ Update, I’ll explore:
— Why SUD, SMI and autism care could face significant challenges if Medicaid funding is cut
— What the cutbacks could mean to investors in certain key areas
— Why providers with a mild and moderate mental health care focus could see fewer impacts
Medicaid cuts could have a crippling effect on behavioral health services.
Dr. Imamu Tomlinson, CEO of Vituity
Setting the stage
Seasoned behavioral health providers have recently weathered Medicaid redeterminations — in some cases providing teams of health navigators to help patients re-enroll in coverage. But with major cuts on the horizon I could see many organizations, especially safety-net providers, struggling to keep afloat.
There is already a shortage of behavioral health providers accepting Medicaid, and those who do operate on very thin margins. Cuts could make this gap even larger. In fact, only 16% of psychologists report participating in traditional fee-for-service Medicaid; the No. 1 reason for this decision was low reimbursement rates.
“Cuts to Medicaid funding could have a catastrophic impact on access to behavioral health services. Imposing per capita caps – where the federal government would limit the amount of Medicaid funding per enrollee – would likely lead to significant reductions in benefits and potentially lower Medicaid reimbursement rates,” Megan Cole, co-director of the BU Medicaid Policy Lab and associate professor at Boston University, told me.
“While some behavioral health services are required to be offered by all states, other optional services – such as prescription drugs, rehabilitative services, targeted case management, social work services, among others – could be eliminated or reduced in order to reduce per capita spending,” Cole continued. “This could significantly limit access to many critical [behavioral health] services. At the same time, if Medicaid reimbursement rates for behavioral health providers – which are already low – were reduced, this would result in even fewer behavioral health providers accepting Medicaid insurance, making it increasingly difficult for patients to access care.”
Not only could the cuts be disastrous for safety-net providers, they could also have major implications for Medicaid innovation. Many of CMMI’s demonstrations are focused on value-based care and Medicaid. It’s likely that these programs could also see further cuts.
SUD could be hit hard
For the last decade, combating the opioid crisis has largely had bipartisan support. During President Donald Trump’s first term in office, he created a number of initiatives focused on solving the opioid crisis. For example, in 2017, he signed an executive order establishing the Commission on Combating Drug Addiction and the Opioid Crisis.
While Trump has not commented on cutting funding for Medicaid, he has supported the funding bill, which calls for the reductions to the Energy and Commerce Committee, which oversees Medicare and Medicaid spending.
However, cuts to Medicaid could be detrimental to solving the opioid crisis, as Medicaid’s fee-for-service program is the country’s largest payer for SUD treatment and medication.
While cuts to Medicaid will likely impact smaller community treatment facilities, some of the industry leaders could also feel the hit.
Acadia Healthcare (Nasdaq: ACHC) is the largest pure-play behavioral health provider in the U.S. Its services include acute care, specialty care and comprehensive treatment centers (CTCs), which are focused on caring for people with SUD. In 2024, the company reported that 57% of its payer revenue came from Medicaid. It’s hard to imagine that if there were substantial Medicaid cuts, some of that wouldn’t impact its SUD care business.
With traditional Medicaid efforts potentially losing funding, it’s unlikely that Medicaid expansion efforts will come to fruition.
Over the past few years, several states filed 1115 waivers that would allow incarcerated individuals to enroll in Medicaid before their release. Much of the focus of these programs was to give incarcerated people a better care continuum, particularly around SUD treatment and recovery. Formerly incarcerated people are 40 times more likely to die from an opioid overdose than the general public in the two weeks after leaving prison.
The U.S. Centers for Medicare & Medicaid Services (CMS) have already rescinded 1115 waivers for social needs guidance. I could see these 1115 waivers aimed at supporting incarcerated people getting on Medicaid be next on the chopping block.
SMI care could face setbacks
But SUD isn’t the only treatment area that could face major challenges.
About 10% of adults enrolled in Medicaid have a serious mental illness, according to the Kaiser Family Foundation. Comparatively, roughly 6% of privately insured patients have an SMI. Additionally, Medicaid beneficiaries with moderate and serious mental illness report higher treatment rates compared to privately insured patients, according to Kaiser Family Foundation.
The recent layoffs at SMI startup firsthand could be indicative of what is to come for SMI providers, which is unfortunate because the innovation ecosystem has often neglected SMI care. I personally think firsthand has an interesting care mode, where it uses a peer model to engage and build trust with patients before bringing them into care. And I would like to see more founders looking to address this population.
Still, with potential cuts on the horizon, I could see potential founders and venture investors shying away from the sector.
Similarly to SUD care, it won’t just be the smaller providers impacted if folks with SMI lose their Medicaid coverage. As I mentioned before, Acadia, which has a large acute care business, relies on Medicaid for more than half its revenue. Additionally, Universal Health Services (NYSE: UHS), another large provider in the U.S. that offers a range of services, including acute inpatient care, also relies on Medicaid for a large portion of its revenue.
While UHS leadership recently acknowledged the uncertainty around the future of Medicaid on the company’s Q4 earnings, CFO Steve Filton remained optimistic about the continuation of the programs.
“There is a fair amount of support throughout the country for Medicaid programs and protecting Medicaid programs,” Filton said. “There hasn’t been a whole lot of discussion specifically about directed payment programs, but we believe that there’s a significant amount of political support at the state level for those programs in a great many states.”
While SMI and acute care providers will likely feel a squeeze if Medicaid cuts go into effect, it’s worth noting that many outpatient providers focused on mild and moderate behavioral health conditions may face little disruption to their business. For example, LifeStance (Nasdaq: LFST), the country’s largest outpatient behavioral health provider, reports that only 5% of its revenue was derived from patients with government payers. I wouldn’t be surprised if we see more providers leaning into commercial pay areas, such as outpatient care.
Pediatric pulse
More children are covered under Medicaid than any other health plan in the U.S. If Medicaid faces significant cuts, that could impact pediatric behavioral health providers.
One area that I think could be significantly impacted if changes were made is the autism and applied behavior analysis (ABA) service industry.
A CMS report found that children with public insurance coverage had significantly higher rates of autism than children with private insurance or with no coverage. Five percent of children with public insurance had autism, compared to 2% with private insurance and 2% with no insurance.
The sector has already begun to see state Medicaid programs introducing caps on services. For example, Indiana Medicaid recently proposed an ABA cap of 30 hours weekly for no longer than three years.
“In our experience when working with payers and state Medicaid plans, they are becoming increasingly concerned about the general cost of ABA,” Jeff Beck, CEO and co-founder of AnswersNow, said during a BHB webinar.
Still, there is a strong advocacy culture in the autism community, which could be a factor in preventing major cuts.
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