Following Congress’ passage of the One Big Beautiful Bill Act (OBBBA), which was signed into law by President Trump on July 4, state legislatures and officials are reviewing how the major cost shifts from the federal government to states will affect their bottom line.
Kentucky’s Interim Joint Committee on Appropriations and Revenue heard testimony this week from the Office of State Budget Director John Hicks on initial impressions of the impact of OBBBA on the Commonwealth’s FY27-FY28 biennial budget.
Impact on Medicaid
Effective Jan. 1, 2027, OBBBA establishes work or community engagement requirements for the Medicaid expansion population (adults with incomes up to 138% of the federal poverty level). Hicks testified that this provision will impact IT systems and require increased resources to ensure compliance.
OBBBA also requires eligibility reviews every six months instead of annually, effective Jan. 1, 2027. According to Hicks, this provision may also require additional resources for administrative support.
Kentucky currently makes $5.4 billion in state-directed payments from state and federal Medicaid funds. OBBBA phases down state-directed payments to match Medicare rates, but Hicks emphasized that the calculations for this provision remain uncertain at this time.
Hicks testified that the phase down of Medicaid payments will result in a significant decline in healthcare spending by the state, primarily impacting hospitals.
Rural Health Transformation Fund
OBBBA includes funding for the Rural Health Transformation Fund. Each approved state will receive at least $100 million each year for five years beginning in federal fiscal year 2026.
Kentucky must apply for the funds by Dec. 31, 2025, but Hicks told legislators that state officials are still awaiting guidance from the Centers for Medicare and Medicaid Services on what the application requires.
Impact on Supplemental Nutrition Assistance Program (SNAP)
OBBBA makes substantial changes to how SNAP is funded, shifting costs from the federal government to states.
The state share of SNAP administrative costs will increase from 50% to 75%, effective Oct. 1, 2026. Hicks estimated this shift will cost the state general fund an additional $50 million in FY27 and $66 million in FY28.
Historically SNAP benefits have been 100% federally funded. According to Hicks, Kentucky issues approximately $1.2 billion in SNAP benefits. Beginning in federal FY28, states must pay a share of SNAP benefit costs based on each state's payment error rate:
- Less than 6% - 0% state match
- 6-7.99% - 5% state match ($62.6 million)
- 8-9.99% - 10% state match ($125.2 million)
- 10% or greater – 15% state match ($187.9 million)
Kentucky’s error rate for the first 6 months of federal FY25 is 3.7%.
Hicks stated that the administration plans a probability analysis in the next three months to determine if Kentucky’s error rate can remain low enough to avoid any state match for the near future when crafting the 2026-2028 state budget.
