House Budget Committee Makes Further Modifications to Reconciliation Legislation

Overview

Late on Sunday, May 18, the House Budget Committee convened to combine the various reconciliation proposals from individual House committees into a single reconciliation bill, called the One Big Beautiful Bill Act, and voted in the early hours of May 19 to advance the legislation in a party line vote of 17–16. Notably, the four House Freedom Caucus members on the Budget Committee voted “present,” stating that their votes “signal the need for further negotiations” with respect to the bill before members of the caucus will support it.  

There were a handful of notable modifications as well as a number of technical modifications to the reported from the House Budget Committee to the House Rules Committee for consideration (see for the legislative text reported by the Budget Committee and for a comparison between this text and the text reported out of each House committee). These modifications are detailed below (referred to herein as the “May 18 amendment”).

Substantive Changes to House Energy & Commerce Committee Legislation

The House Energy and Commerce Committee (E&C) advanced its legislation after a marathon markup on May 14. However, the legislation reported from the House Budget Committee included several substantive changes:

Extending the FMAP Penalty to States That Voluntarily Support Coverage For Lawfully Residing Pregnant People and Children (Section 44111). Because undocumented immigrants and certain other noncitizens are generally ineligible for full-coverage Medicaid, as well as qualified health plans and premium tax credits on the Marketplace, operate additional, state-funded programs to ensure health coverage for certain undocumented individuals; these programs are in some cases limited to children and/or a narrow set of benefits, and in some cases cover broader populations and benefits. Effective October 1, 2027, the bill would reduce the federal medical assistance percentage (FMAP) for the Medicaid expansion population from 90% to 80% in states that fund certain types of health coverage for undocumented immigrants. The May 18 extends that penalty to states that take up statutory options to cover lawfully residing children and/or pregnant people under Section 214 of the Children’s Health Insurance Program Reauthorization Act (CHIPRA).

With this amendment, the House now appears poised to require 35 expansion states to cut off coverage for lawfully residing children and pregnant women or face a major financial penalty; non-expansion states that provide the same coverage to lawfully residing children and pregnant women, such as Texas and Florida, would not be subject to the FMAP penalty. Given that the penalty reaches into the hundreds of millions or even billions of dollars, nearly all, if not all expansion states, will be hard-pressed to retain this coverage. Since this is a late-breaking change and there are limited public data on the number of lawfully residing children and pregnant women covered under this option, the impact on coverage and expenditures does not appear to have been considered by the Congressional Budget Office (CBO). Even before this change, CBO preliminarily that 1.4 million people would lose coverage. That number is likely to increase substantially once CBO takes this amendment into account.

Modifying Services For Which Mandatory Cost Sharing is Required (Section 44142). For expansion adults with income above 100% of the federal poverty level ($15,560/year), the bill would require states to impose copayments on all services except those exempted under existing law (e.g., prenatal, family planning, and certain emergency services). The May 18 adds language exempting primary care services, mental health care services, or substance use disorder services from these copayment requirements. These provisions would take effect October 1, 2028. According to a May 20 CBO , this provision would cut state funding by an estimated $11 billion over the ten year budget window. However, it is not clear that CBO incorporated this modification into its analysis.

Increasing Frequency of Eligibility Redeterminations for Certain Adults (Section 44108). Beginning October 1, 2027, states will be required to redetermine eligibility for adults enrolled through Medicaid expansion—as provided by the original bill—or a section 1115 waiver providing minimum essential coverage (MEC)—as modified in the May 18 amendment—once every six months. Like the mandatory work requirements, more frequent redeterminations are expected to increase churn for adults in states with expansion or expansion-like waivers as individuals cycle in and out of the program, creating disruptions to care, earlier terminations for those who experience an increase in income, and “procedural terminations’ stemming from failure to complete necessary paperwork.

According to CBO, implementation of this provision will lead to a decrease of $53.2 billion in federal funding over ten years. The May 20 CBO does differ slightly from the analysis on May 13, which may account for this change or may simply account for the fact that the May 20 analysis accounted for interactions between the provisions whereas the May 13 analysis did not.

Expanding Scope of the Good Faith Waiver Removal for Eligibility-Related Improper Payments Under Medicaid (Section 44107). Under the Payment Error Rate Measurement (PERM) program, the Centers for Medicare & Medicaid Services (CMS) audit state Medicaid and Children’s Health Insurance Program (CHIP) programs to identify improper payments, including payments for ineligible individuals or non-covered services, payments greater than the amount due, and payments that lacked all required documentation. Each state is reviewed under the PERM program once every three years and works in conjunction with Medicaid Eligibility Quality Control (MEQC) programs during each PERM year to reduce erroneous spending by monitoring eligibility determinations. If more than 3% of a state’s total payments in a given year were improper for reasons relating to enrollee eligibility, CMS must disallow federal funds for the “excess” improper payments above that threshold.

Current law authorizes CMS to waive that disallowance, in whole or in part, if a state was unable to achieve the 3% target despite good faith efforts. CMS regulations allow states to qualify for this waiver by implementing a Corrective Action Plan and certain other program integrity activities.

Effective FY 2030, this provision would all but eliminate this waiver authority. CMS would be able to waive the disallowance only as to certain types of errors in assessing eligibility for a so-called “spend down” group—optional eligibility categories for individuals or families whose incomes are above the threshold for Medicaid eligibility, but who may qualify for coverage after spending a certain amount on out-of-pocket medical expenses. CMS would no longer have authority to waive disallowances for any other types of improper payments, even when the state is operating in good faith to address the errors. In addition, under the May 18 , the error rate would be calculated based not only on routine PERM findings, but also taking into account any erroneous payments identified under MEQC programs, audits conducted by the the Department of Health and Human Services (HHS) Inspector General, or any other CMS-initiated audit outside of the standard PERM process. 

Technical Changes to House Energy & Commerce Committee Legislation

Additional modifications to the E&C title that are more technical in nature include the following:

Technical Modifications to the Orphan Drug Exclusion Provision (Section 44301). Under the Inflation Reduction Act (IRA), certain orphan drugs are excluded from Medicare price negotiations—specifically, drugs designated as an orphan drug for a single rare disease and for which the only approved indications are for that rare disease. This provision would broaden this exception to permit drugs that have an orphan drug designation for “one or more rare diseases or conditions” and that are approved for one or more rare diseases to be excluded from Medicare price negotiations. This provision also starts the timeline for when a drug is eligible for negotiation at the point at which the drug first receives FDA approval for a non-orphan indication, instead of starting the clock when the drug is first approved for any indication, as is the case under current law. These provisions would apply beginning with initial price applicability year 2028.

The May 18 amendment provides additional technical corrections that appear to be aimed at curbing potential Byrd rule issues by adding additional clarification as far as which drugs are subject to this policy. The amendment further clarifies the effective date of this policy (effective for IPAY 2028). The policy’s substance, however, remains unchanged.

Striking the GAO Report from the PBM Transparency Provision (Section 44305). This section establishes stricter requirements for pharmacy benefit managers (PBMs) under Medicare Part D. The May 18 amendment struck the provision directing the Government Accountability Office (GAO) to conduct a comprehensive study on compensation and payment structures tied to prescription drug prices within the retail prescription drug supply chain under Medicare Part D. As with the tweaks in the orphan drug section, this deletion appears aimed at proactively mitigating issues with this section under the Byrd Rule since a GAO study has no budgetary effect.

Changes to House Ways & Means Committee Legislation

In a party-line vote, the House Committee on Ways and Means (W&M) Republicans coalesced to pass , also on May 14. The health provisions include significant new conditions on the financial assistance available through the health insurance Marketplaces.

While there were broad changes to the tax provisions in the W&M bill, the changes to the health provisions were relatively limited. Namely, the May 18 amendment deleted former Section 112102, which enumerated specific immigrant statuses not eligible for premium tax credits. This deletion appears not to have any meaningful impact given that Section 112101 remains and defines a category of “eligible immigrants”, which is narrower than current PTC eligibility. By implication, Section 112101 makes ineligible the same categories of individuals listed in the previous Section 112102.

As a result of this deletion, there were a few section numbers that needed to be updated. However, that encompasses the totality of the changes to the health provisions in the legislation.

What’s Next

The House Rules Committee overnight, at 1 am on Wednesday, May 21, and—as of publication—the meeting is still ongoing. The unusual meeting time reflects the requirement that the legislative text be posted for 72 hours prior to the Rule Committee meeting. Further modifications are expected during in the legislation reported out of the Rules Committee to the full House for consideration. For instance, we anticipate that the implementation dates for the mandatory work reporting requirements (in Section 44141 of the E&C bill) will be accelerated—from 2029 to 2028 or even 2027—in order to reap additional federal savings. However, as of publication, updated text has not yet been made available through the Rules Committee. Furthermore, it remains to be seen whether there will be a full CBO analysis of the comprehensive legislation prior to consideration by the full House.

Once the legislation is advanced from the House Rules Committee, House GOP leadership has indicated that it will move expeditiously to hold the full House vote before House Speaker Mike Johnson’s (R-LA) self-imposed Memorial Day deadline.

Specifically, the bill discusses noncitizens who are neither (1) “qualified non-citizens” as defined under Personal Responsibility and Work Opportunity Act (PRWORA), or (2) “lawfully residing,” the same term used to define the optional eligibility group for lawfully residing children and pregnant people under section 214 of the Children's Health Insurance Program Reauthorization Act of 2009.

PERM does not identify fraudulent payments. Rather, it captures any payments that do not comply with federal requirements, including in cases of inadvertent error or missing documentation.

The improper payment rate is calculated based on the dollar amount of the improper payments, not based on the number of improper claims. CMS confirms that eligibility errors include an individual who was enrolled in Medicaid despite being ineligible, as well as an individual who qualified for coverage, but who received services that were not covered for that enrollee’s eligibility group. The bill proposes to expressly codify that second type of error in statute.

In the Senate, the Congressional Budget Act (CBA) provides guardrails for the use of the budget reconciliation process since it is exempt from the Senate filibuster and, as such, can be enacted by a simple majority vote (50 votes) rather than the 60-vote threshold typically required to end the filibuster. The Byrd Rule is the most restrictive of the policies in the CBA and allows Senators to block provisions of reconciliation bills that are “extraneous” to a policy’s federal budgetary effect.