Drivers of Medicaid cost pressures in 2025

On July 2, 2025, Centene Corporation’s shares plunged 40 percent. This came after a stark press release stating that “morbidity” was higher than expected in its insured population. This public reckoning highlighted a broader trend: Medicaid costs across the United States are rising more than expected, with major insurers and state programs struggling to manage the financial fallout.

Centene identified specific cost pressures in behavioral health, home health, and high-cost drugs. These were particularly pronounced in states like New York and Florida, where services were “carved in” to Medicaid managed care without adequate rate or risk adjustments.

Centene is not alone. Molina Healthcare, in its first quarter 2025 earnings report, cited elevated costs driven by increased utilization in long-term services and supports, behavioral health, pharmacy, and seasonal illnesses. Elevance Health likewise noted a “higher Medicaid medical cost trend.”

These developments contrast sharply with earlier expectations. A 2024 survey by KFF projected that while Medicaid spending would remain elevated post-pandemic, the rate of growth would slow to 7.0 percent in 2025 from 19.2 percent in 2024. So, what explains the divergence between expectation and reality?

Structural and systemic drivers

Higher acuity, delayed care

The end of continuous Medicaid enrollment left behind a population with more complex health needs. Many enrollees had delayed or forgone care during the pandemic, only to return in 2025 with advanced conditions, particularly in mental health and substance use.

Infectious disease surges

Seasonal illnesses such as flu and respiratory infections added unexpected strain in Q1 2025, resulting in more ER visits, inpatient stays, and costly treatment episodes.

Specialty drug uptake

High-cost medications — including GLP-1 agonists like semaglutide and tirzepatide — are increasingly used to treat diabetes and obesity. These drugs drive per-member-per-month costs upward even when utilization rates are stable.

Provider rate increases

States raised reimbursement rates to attract and retain healthcare workers amid labor shortages. While necessary to ensure access, this effort increased the cost of every Medicaid-covered service.

Lagging capitation rates

Capitated payments to managed care plans often fail to keep pace with medical cost trends, leaving insurers to absorb losses until state rate adjustments catch up.

LTSS and an aging population

Demographic shifts are pushing up demand for long-term services — both in institutional settings and in home- and community-based alternatives. These services are expensive, and use is growing.

Supply chain and labor inflation:

Macroeconomic forces remain a headwind. The World Bank’s Global Supply Chain Stress Index remains elevated, while U.S. healthcare employment is still expanding, putting further upward pressure on wages and supplies.

Policy and fiscal shifts

FMAP phase-out

The expiration of enhanced federal Medicaid funding (FMAP) has transferred more cost burden to states, many of which now face Medicaid as the single largest item in their budget.

Administrative and policy pressures

States are incurring new costs to implement federal eligibility redetermination rules, review waivers, and prepare for possible Congressional reforms (e.g., per capita caps or work requirements).

Implications

These combined forces are making Medicaid more expensive per enrollee, even as total enrollment declines. The program’s efficiency — with administrative costs under 4 percent of spending — offers little slack to absorb this shock. Proposed federal legislation, featuring cuts to Medicaid spending, could present further challenges.

While fraud and inappropriate enrollment get political attention, the primary cost drivers in 2025 are medical: complex patients, expensive drugs, wage inflation, and outdated payment formulas. For now, insurers like Centene, Molina, and Elevance are issuing warnings. If trends continue, states may soon be forced to reduce benefits or cut provider rates.

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