DHS February forecast shows continuing Medicaid cost growth; $113 million IMD funding correction shifts costs to state

Alyce Bailey, budget director at the Minnesota Department of Human Services (DHS), told the Senate Health and Human Services Finance and Policy Committee on Wednesday that the February 2025 budget forecast projects continued growth in Medicaid and related forecasted programs and cited several drivers behind the increase.

The DHS presentation showed that for fiscal year 2026 about 55% of DHS funding is federal (roughly $14.0 billion) and 37% is from the state general fund (about $9.5 billion). Bailey said about 89% of forecasted spending is for medical assistance; other forecasted programs total roughly $718 million in state funding in FY26.

DHS highlighted four main drivers of the February forecast: increasing disability waiver spending; an acuity adjustment to managed‑care payments; growing spending for weight‑loss drugs added to medical assistance; and a correction in the behavioral health fund related to federal funding coding for some residential substance use disorder providers.

Dave Greenman, DHS chief financial officer, told the committee that in December 2024 DHS identified claims dating back to 2015 for a small number of residential substance‑use disorder providers that were ineligible for federal funding because those facilities meet the federal definition of institutions for mental disease (IMDs). He said the providers had been paid at the correct rates, but the funding source was coded incorrectly. Once discovered, DHS reclassified payments so they are paid with state dollars going forward.

Greenman said the agency’s estimate of the retroactive change is $113 million in state spending to replace federal funds for services provided over the prior 10 years. He also said the forecast assumes $12 million in FY25 for ongoing payments and about $19 million in FY26–27 as those facilities transition to a Medicaid waiver enrollment, noting tribal IMDs may voluntarily enroll in a SUD waiver that would allow federal match. Greenman said the forecast assumes gradual voluntary enrollment over about two and a half years.

On disability waivers, Bailey said the forecast increases for the disability waiver rate inflation adjustments (about 1% higher than projected in November) and continued growth in claims volume (average payment/units about 1.5% higher than November). She described an increase in recipient growth for the developmental disability (DD) waiver, particularly among children and youth, and quantified the total impact as about $35 million in the current biennium, $160 million in the next biennium, and $141 million in the tails.

Other notable figures DHS provided: long‑term care (including waivers and home care) accounts for roughly half of state MA spending; basic care services for people with disabilities and older adults are about $2.6 billion (27% of state MA funding); children and families basic care about $1.8 billion (19%); adults without children are a much smaller share of state funding because of a high federal match.

Bailey also described changes tied to the Community First Services and Supports (CFSS) program rollout. CFSS will allow an enhanced 6% federal match when participants transition from the old PCA program; DHS said the transition has been slower than earlier assumed, creating a one‑time adjustment in the forecast and a state‑funded caregiver option until CFSS is fully operational.

DHS said managed‑care contracts required a one‑time $31 million adjustment in this biennium because the post‑public‑health emergency population has a different acuity mix than assumed earlier. For medical coverage of weight‑loss drugs, DHS said utilization and the number of approved therapies have risen since those drugs were added to Medical Assistance; the forecast updates include about $11.7 million in the current biennium, $78.7 million in 2026–27, and about $87.6 million in planning years.

Committee members asked about the IMD coding error and what DHS is doing to support tribal providers enrolling in the waiver; Greenman said DHS is meeting with tribal leaders and will provide assistance but tribal enrollment is voluntary and timing is uncertain. Senators also pressed DHS about internal controls and how similar errors will be prevented; DHS leaders said improving financial controls is ongoing and offered to brief members on their work.

Bailey and Greenman emphasized the forecast is based on current law and that federal developments — including potential large Medicaid reductions contemplated in some federal proposals — create uncertainty for Minnesota’s budget outlook.

Ending: Committee members requested links to forecast materials and additional detail on specific slides; DHS provided those references and remains the contact for follow‑up questions.