Agencies explain school-based Medicaid funding and warn of federal uncertainty

MONTPELIER, Vt. — Agency of Human Services and Agency of Education officials briefed a joint House and Senate education hearing on May 9 about how Medicaid funds school-based medically necessary services, how that revenue is distributed, and how possible federal changes could affect the program.

Agency presenters described the mechanics of the program and its fiscal flows and warned that national proposals under discussion could create fiscal risk, though several of the largest cuts under early Washington proposals had become less likely by late spring.

How school-based Medicaid works and who is eligible

Agency presenters summarized the program’s eligibility rules: to qualify for school‑based Medicaid reimbursement a student must be enrolled in Vermont Medicaid and have an Individualized Education Program (IEP) or Individualized Family Service Plan (IFSP) that includes a medically necessary health service. Agency presenters noted that not all Medicaid-enrolled students have IEPs and vice versa; federal claimable services fall in the intersection of those groups.

“Medicaid pays for medically necessary health services and Medicaid administrative services provided to eligible students in Vermont schools,” an agency presenter said during the briefing, describing the program’s scope and the variety of provider types that can be reimbursed.

Revenue, distribution and the Education Fund

Agency finance staff described the program’s revenue flows. For fiscal 2024 the program’s total revenue was described to committee members in the slides as about $27.5 million. By statute, 50% of the funds attributable to school-based services are returned to school supervisory unions and local education agencies (LEAs) as grants to be used for intervention or prevention programs; those grants are paid out periodically and are proportional to each LEA’s draws. Agency staff said up to 30% may be reserved for state-level appropriation to support program administration at the Agency of Education or the Agency of Human Services. The remainder — at least 20% and sometimes more — is deposited into the Education Fund; agency materials indicated roughly $8.5 million was deposited into the Education Fund in fiscal 2024.

Agency staff said that all Vermont LEAs participate in the school‑based Medicaid program, and that local grant recipients must report on the use of grant funds.

Federal uncertainty and state levers

Presenters described a dynamic federal policy environment and identified four broad levers states use to respond to major federal Medicaid budget changes: backfilling with state general‑fund dollars, reducing provider rates, tightening eligibility, or reducing covered services.

“We really have 4 levers to deal with major budgetary changes to the Medicaid program … backfilling with state general fund dollars, reducing rates, reducing eligibility, or reducing services,” Ashley, the agency’s director of Medicaid policy, told the committee. She and other presenters underscored that medically necessary services for children are mandatory Medicaid coverage; that constraint narrows the options available if Congress and the Centers for Medicare & Medicaid Services enact large federal reductions.

Witnesses also said several of the more extreme federal proposals that were being discussed earlier in the year had become less likely, though other changes of a more technical nature remained possible and could produce meaningful impacts. Agency staff said they are modeling impacts and preparing options for state decision-makers, while warning that many program elements are constrained by federal rules and existing state eligibility levels.

Program context and other notes

Agency presenters distinguished the Medicaid school‑based program from other school-funded Medicaid initiatives, noting Success Beyond 6 (a Department of Mental Health program referenced by committee members) is a separate Medicaid‑funded source for school mental‑health services administered by another state agency. Committee members asked for follow‑up figures on the size of Success Beyond 6 relative to the school‑based health-services revenue discussed at the hearing; presenters said they would provide follow-up information.

The agencies told the committees they were monitoring federal developments closely and preparing analyses of possible impacts and trade-offs for state leaders. No formal actions were taken at the hearing; presenters asked the committees to submit questions so the agencies can provide more detailed written follow-up.

Ending

Officials asked lawmakers to note that mandatory federal coverage of medically necessary services for children constrains some state responses to federal cuts, and said the agencies will continue to provide updated fiscal modeling and options as federal developments unfold.