Key budget writers described themselves as “cautiously optimistic” about Indiana’s financial future, even as Medicaid budget growth continues to outpace overall revenues.
“The revenue forecast is … a 3% increase in revenue next year and a 0.3% increase the year after that. But Medicaid alone is 9%, 6% (growth). So we have to look at our expenses, specifically Medicaid, and that growth is going to close that gap,” said Sen. Ryan Misher. “I think this is the reason we have strong reserves so we’re in a good place.”
“I think we just have to be very, very cautious,” added Mishler, a Republican from Mishawaka.
Revenue in the first year is projected to be just $730 million higher than the current year, which was buoyed by an influx of federal dollars.
Those funds are expiring. And potential actions from the incoming Trump administration in the form of tariffs and mass deportations add uncertainty to Indiana’s economic outlook.
“In the last few budgets, we had an infusion of federal dollars. Those dollars aren’t there anymore. With this administration, it won’t be there. Period,” said Rep. Gregory Porter, D-Indianapolis.
Medicaid is expected to grow by $418 million in the next year alone, cutting into the newly projected revenue.
When confronted with the growth, which Mishler has repeatedly highlighted as a concern in previous years, he admitted that he was “scared.”
“I fear that Medicaid is going to start driving our budget. I said that two years ago and I’m even more nervous about it now,” Mishler said. “… unfortunately, this year, it’s almost kind of like we have to look at Medicaid and work backwards and see what we have left.”
What’s going on with Medicaid?
The reports come roughly one year after learning about a $1 billion projected shortfall in the Medicaid budget, which officials attributed to unforeseen demand and exponential growth in certain services.
At least two lawmakers weren’t satisfied with answers from the actuaries at Milliman behind those calculations and how last year’s forecast missed the mark.
“I”m looking for accountability, because this is Hoosier taxpayer money that’s been squandered,” said Sen. Chris Garten, R-Charlestown. “Outside of government, if somebody made a billion-dollar mistake, you would have been fired and not retained.”
Garten, along with Indianapolis Democrat Rep. Ed DeLaney, pressed contractor Milliman on the “mistake.” Over the last year, the Family and Social Services Administration that oversees the program implemented a series of changes designed to better inform Medicaid budget forecasts, such as using more timely data and releasing monthly expense reports.
To offset the shortfall, Indiana Medicaid Director Cora Steinmetz pointed to her agency’s unpopular efforts to contain costs.
Earlier this year, FSSA implemented a waitlist for Medicaid waiver services for elderly and disabled Hoosiers as well as a cut to attendant care payments to parents caring for medically fragile children. Those two actions alone contributed to the bulk of the savings incurred, which totaled roughly $348 million.
Additionally, the state augmented the Medicaid budget with savings, or $255 million in the last fiscal year.
But costs are still expected to grow, despite the changes, which Steinmetz attributed to increased enrollment and high health care costs.
“The largest category of spending in our Medicaid program remains the long-term services and supports, or LTSS … and represents more than one-third of total expenditures,” Steinmetz told lawmakers. “… while representing just 6% of the Medicaid population, recipients of those LTSS services account for 44% of our Medicaid payments.”
This disparity is part of what prompted the state to launch managed care for LTSS — primarily used by elderly Hoosiers — in the hopes that it would save the state money in the long run. One-in-five Hoosiers will be retirement age by 2030, an age when people start relying on such programming.
During the 2024 fiscal year, the state spent over $19 billion on Medicaid, with the federal government picking up nearly 70% of the tab. Additional revenue from provider taxes and cigarette taxes offset costs for specific programs, such as the Healthy Indiana Plan.
But costs are expected to go up, though the federal government is still expected to pay for the majority of the Medicaid budget. In the 2025 fiscal year, that number ticks up to nearly $21 billion and increases by at least another billion in the following two years.
The need from the state’s general fund, which grew by 54% between 2023 and 2024, is expected to grow by 7.6% in 2025 to $4.4 billion — up from $4.1 billion in 2024. By 2027, that number is expected to hit $5.2 billion.
Preparing for the 2025 budget
In the meantime, Indiana’s revenues are projected to remain sluggish — more so in the 2027 fiscal year than in 2026.
Sales taxes are expected to pick up by single-digit percentages in the upcoming biennium, while individual and corporate income taxes are only expected to grow in the first year. In the second year, both are expected to fall, as Indiana finishes phasing in tax cuts.
The news means there will be some new spending for the fiscal year 2026 budget but almost none in fiscal year 2027.
“We have to be very careful in the second year, especially because the growth in Medicaid is going to exceed the revenue growth,” said Rep. Jeff Thompson, R-Lizton. “… if we don’t think ahead, we end up in a bad position that second year.”
Porter, on the other hand, pointed to a Republican decision to expand voucher payments for “school choice,” rather than traditional public schools.
Still, several large requests are on the docket for next year, including road maintenance, child care subsidies and property tax reform — the latter of which is a priority for Gov.-elect Mike Braun but could reduce either state or local budgets, depending on the course of action.
“There will be some type of reform,” Thompson said about property taxes. “With the (Braun) administration, we’ll find the right spot to land that’s good for taxpayers. But property taxes aren’t going away; I don’t perceive that happening.”
“You keep a wide array of taxes, but keep them all low,” Mishler added. “I think that’s kind of the concept that we’ve used.”