Josh Stein’s Medicaid Mess

If you didn’t know better, you might think Gov. Josh Stein’s December 10 press conference was a victory lap, not a concession speech. 

“For months, the General Assembly has failed to fully fund Medicaid, forcing cuts to provider rates and leaving people and providers stressed and vulnerable,” Stein declared from the foyer of the Executive Mansion, flanked by Democratic lawmakers and health care allies. “The legislature’s continued inaction left health care providers with few options. So impacted families and providers took legal action, and the result of those court cases has led us to today.”

Stein announced that he was reversing the “real and damaging” cuts, which he said would allow the state’s 3 million Medicaid recipients to “continue to receive the care that they need and deserve.” 

Over the next 20 minutes, health care leaders took turns praising Stein for, as Coastal Horizons President Margaret Weller Stargell put it, “standing in support of all Medicaid providers in our great state.” The Arc of North Carolina CEO Lisa Poteat applauded Stein’s “continuing commitment to people with disabilities and the supports and services that are so fundamental to their lives, to their health and well-being.” 

There was some irony in the commendations. It was Stein’s administration, after all, that cut Medicaid rates in October over the objections of the Republican lawmakers he blamed and many of the people standing behind him. He changed course only when courts left him no other option—or, in his words, when his health department “read the writing on the wall.”   

Since July, Stein’s administration has argued that the state’s Medicaid program, which helps low-income people pay for health care, faces a $319 million shortfall. Without targeted cuts to reimbursement rates, health officials said, Medicaid would run out of money by May 2026, with catastrophic consequences.

But critics pointed out that the state’s Medicaid program faced projected shortfalls every year for at least the last seven, with an average annual gap of about $159 million. The state always found the money eventually, without cutting rates.    

Republicans accused Stein of playing politics. Health care advocates took him to court.

The Arc was among the dozens of organizations and Medicaid recipients who sued to block the cuts. Poteat told The Assembly that for months before that, she and other advocates pushed Stein to “just be the hero”—to fully pay Medicaid providers while working with legislators on a permanent solution. 

Instead, when the cuts kicked in, health care workers lost jobs, and some patients lost access to care, according to court filings.  

Judges began ruling against the administration in November, and more lawsuits were expected. Backed into a corner, Stein attempted to reclaim the mantle of health care champion.    

“It is a core belief of mine that, as a state, we should be expanding access to affordable health care, not restricting it,” he said at the news conference. His administration “never wanted to be in this position.”

Now the governor is back where he started. Without additional funding, the state’s Medicaid program will likely become insolvent this spring. House and Senate Republicans remain bitterly deadlocked over the budget, and no one knows if they’ll make a deal to avert the looming crisis. 

Some Democrats worry that Stein made a political miscalculation. Some Republicans say Stein’s hardball approach made a deal less likely.  

“He didn’t move the ball at all,” said Republican state Sen. Jim Burgin, who co-chairs the Senate’s health care committee. “The difference is, now everybody’s ticked off about it.”

Trust Issues

Though the federal government covers a majority of Medicaid costs, the state’s share—about $6.2 billion last year—is still colossal. After education, it’s the state’s second-highest expense.

In March, Stein’s budget proposal requested $700 million for the so-called Medicaid rebase, a process that adjusts Medicaid appropriations to account for increased enrollment and expenses. A few months later, the state Department of Health and Human Services (DHHS) said that wasn’t enough. It actually needed $819 million. 

For legislative Republicans, both numbers sounded implausible. Unable to reach a broader budget agreement, they instead passed a stopgap spending bill in late July that included $500 million for the Medicaid rebase.  

On August 11, DHHS Secretary Devdutta Sangvai sent lawmakers a letter warning of dire repercussions if more money wasn’t forthcoming. The letter said that multiple state and federal “fiscal uncertainties” were “unfolding simultaneously.” Their impact would be “difficult to predict.”

In previous years, DHHS could tap COVID funds and other federal programs to fill in Medicaid shortfalls. But those were gone. “Therefore, the current underfunding of the Medicaid rebase by the General Assembly requires painful cuts to Medicaid,” Sangvai wrote. 

All Medicaid providers would face at least 3% cuts to their reimbursement rates beginning on October 1. Specific providers, including inpatient hospital care, nursing homes, hospice care, and long-term behavioral health care, would see 8% to 10% cuts. 

“These reductions carry serious and far-reaching consequences,” Sangvai wrote. “Most immediately, reduced rates and the elimination of services could drive providers out of the Medicaid program, threatening access to care for those who need it most.” 

With legislative Republicans mired in an acrimonious budget standoff, the Stein administration didn’t trust them to come through with additional funds before Medicaid ran out of money. The governor said he saw no alternative.   

His concerns weren’t unfounded. In September, the House and Senate passed bills allocating an additional $190 million to Medicaid—the amount the legislature’s fiscal research staff said the program needed. (The Stein administration considers this amount a “compromise” that would only partially fund Medicaid.) But the Senate’s version included funding for a children’s hospital, a priority of Senate leader Phil Berger and a nonstarter for the House. 

Neither bill reached Stein’s desk. 

In late October, Stein’s office asked Berger and House Speaker Destin Hall to sign a letter promising to appropriate additional funds if Medicaid had a shortfall in exchange for DHHS reversing the rate cuts. Hall signed it. Berger did not. 

“There is no need to sign a letter when the Senate sent the House an eligible bill with the funding months ago,” Berger spokesperson Lauren Horsch told The Assembly in an email. That bill includes funding for the children’s hospital and a rural health care initiative.   

After that, Stein called a special legislative session to address the Medicaid crisis. Hall and Berger declined. At the time, Hall blasted the governor’s “politically motivated and unnecessary provider rate cuts.” 

A Stein spokesperson denied that politics played a role. “The administration faced two bad options and chose not to play politics but instead to exercise leadership by being fiscally responsible,” the spokesperson told The Assembly in an email. 

But many Republicans believed Stein was trying to portray them as incompetent, and himself as a savior, going into next year’s midterms. “You know that it was going to be, ‘The legislature didn’t pass a budget. I had to save them from themselves by putting these cuts in,’” Burgin said. 

While DHHS blamed rising health care costs for its increased Medicaid needs, legislative Republicans questioned the department’s spending. 

In an interview, Sangvai argued that the state’s Medicaid program is fiscally responsible. The rebase increases are largely driven by the rising costs of prescription drugs and behavioral health care. 

The program cost about $36 billion this fiscal year. “It’s a natural tendency to think, when you have dollar figures that big, there may be administrative overload or inefficiencies,” Sangvai said. 

Ninety-six percent of Medicaid revenue goes to beneficiaries, he said. Only a small percentage is spent on administration. Ahead of the provider cuts, he slashed that, too. 

Sangvai said DHHS never wanted to cut rates. “As a provider myself, I can understand, these are devastating rate cuts,” said Sangvai, a former president of Duke Regional Hospital and a family medicine physician. 

Even so, the department aggressively defended the cuts in court, in one case accusing autism therapy providers of being “self-serving.” In another, the department disputed that adult care homes had suffered “real and immediate” harm because of the cuts. 

The Cost of Cuts

The day before Poteat joined Stein in the Executive Mansion, her organization was part of a powerful medical consortium suing the state’s health department.

The Arc, a nonprofit, provides services to about 5,000 North Carolinians with intellectual or developmental disabilities. As its CEO, Poteat said she joined the lawsuit as a last resort. 

“There are three branches of government,” she said. “The first two weren’t working.”

The dysfunctional ones, in her telling, were the legislative and executive branches. Poteat said that throughout the summer and early fall, she and others pleaded with Stein and legislators to first avoid, then reverse, the rate cuts. 

“It just became this political football,” Poteat said. “It wasn’t working. People were getting hurt.”

Her organization wasn’t as hard-hit as others. Its payments were cut by 3%. But like many other health care providers, The Arc runs on narrow margins and has fixed costs. 

It is legally required to pay frontline health care workers a set percentage of its Medicaid payments. The cuts put Poteat in a legal predicament: She was required to pay employees money she could no longer afford. 

“How are we supposed to abide by the letter of the law?” Poteat asked. 

Her solution was to lay off 10 office employees and cut hours across her organization. She avoided cuts to The Arc’s field staff, who directly support its clients. Though the rates have been restored, the people she let go won’t be rehired. 

“What’s lost is lost at this point,” Poteat said. “It’s especially hard during the holidays.” 

Poteat said she’s disappointed it took Stein so long to reverse the cuts, but she’s still grateful he did. “He’s in a bad position,” she said. 

Attorney Robb Leandro represented The Arc and more than 100 others in two lawsuits against DHHS. In 19 years of representing clients in the health care industry, he said he’s never seen the wide-eyed fear he saw this fall. 

Providers told him that top employees were quitting, and they were forced to use personal funds to make payroll.  

“They would almost be yelling at me: ‘What are we going to do?’” Leandro said. 

Skipping Rent

In court filings, DHHS argued that state law prohibits the Medicaid program from spending money that’s not in its operating budget. In the department’s interpretation, that meant it had to cut rates now or risk spending money the General Assembly hadn’t appropriated.    

Burgin found this claim lacking. “This is like not paying your rent or your house payment because you might not get paid next April,” he told The Assembly. 

The argument is also novel. In prior years, DHHS didn’t cut rates while waiting for additional funding to shore up Medicaid. 

“I don’t think that anyone has ever read that statute in the way that the department was reading it,” Leandro said.

In an October 9 letter to lawmakers, Sangvai admitted that DHHS’ position had changed. But in prior years, budget negotiations were “active,” funding shortfalls were “relatively small,” and pandemic funds were available, he wrote. “None of those factors are true now.”

Medicaid providers and recipients argued that the rate cuts violated state law and pointed out that DHHS had not obtained federal permission to reduce rates. (DHHS said it could submit a request to retroactively do so by December 31.) They also noted that Medicaid has a $500 million reserve fund—though the General Assembly has to pass legislation to unlock it.

“I don’t believe that the General Assembly is going to let the program go insolvent,” Leandro said. 

Judges agreed. In November, courts issued injunctions in the first two lawsuits, temporarily ordering DHHS to restore some Medicaid rates; attorneys filed two additional lawsuits. On December 4, an administrative law judge extended one of the temporary injunctions. Other lawsuits were coming, and DHHS wasn’t likely to see better outcomes. 

Stein threw in the towel, while seeking to absolve himself of blame. 

“Their failure forced these cuts, which are causing real and damaging impacts on people’s health and well-being,” Stein said at last week’s press conference, referring to the General Assembly. “Their failure is irresponsible and callous, and it’s infuriating, because all of this was absolutely unnecessary.”

Republicans bristled at the suggestion that Stein’s decision was their responsibility.  

“From the beginning, legislative leaders told Gov. Stein these cuts were unnecessary and would not be in the best interest of North Carolinians,” said Horsch, Berger’s spokesperson. “This was a self-inflicted ‘crisis’ that could have been entirely avoided.”

Picking Fights

Legally, it might not matter that DHHS no longer has access to pandemic funds or that the administration doesn’t trust Republicans to keep Medicaid flush. Nor does it matter that the state will soon be squeezed by the feds. 

In 2027, new federal rules will shrink a key source of Medicaid revenue, while new work requirements are expected to shed 255,000 beneficiaries from the state’s Medicaid rolls. DHHS says it’s ill-equipped to keep pace with the administrative requirements. 

Sangvai says that context is key to understanding the department’s decisions. 

“You may have heard that, historically, rate cuts weren’t necessarily required,” Sangvai told The Assembly. “Those years, just quite honestly, were different.”  

Even so, cutting Medicaid put Stein in an unenviable political position. He’d campaigned on expanding health care, but his administration acted to cut it. It then defended that decision in court, lost, and emerged with little to show for its efforts.  

Privately, some Democrats questioned Stein’s strategy. In their view, he’d picked a losing battle with traditional allies, while Republicans painted themselves as Medicaid defenders. It would have been better to force the issue as funding dries up in the spring. If Republicans don’t deliver, they’ll own the consequences.  

That might well be Stein’s next move: a bully pulpit campaign as the clock ticks down.

But Republicans’ hackles have already been raised. They think Stein tried to bluster his way to a political win. 

“You don’t need to pick a fight if there’s not a fight,” Burgin said. 

Brian Lewis, a veteran lobbyist, said that by picking this fight, Stein might have sullied his mostly amiable relationship with the Republican-led legislature.   

“Gov. Stein enjoyed a very long honeymoon,” Lewis said. “He was getting a lot of praise across the aisle from the legislative branch. This was, I would argue, his first mistake. Things didn’t work out as planned. What did Mike Tyson say? You can have a plan until someone hits you in the face.”

Stein’s spokesperson said Republican lawmakers must “work out their differences and pass a full budget, including fully funding Medicaid,” but the governor “is not leaving the negotiating table. Failure is not an option.” 

Sangvai told The Assembly that the state’s Medicaid expenditures are “tracking very close” to DHHS expectations. Without additional funds, the program will likely run out of money in five months. 

After that? 

“I hate to even kind of speculate, honestly,” Sangvai said. “But there is a risk of additional service reductions, rate cuts, providers not getting paid. The collateral from that is offices closing, emergency rooms being overrun. We really need to be allocated the money in full to avoid these kinds of catastrophic situations.”