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On February 3, 2026, Congress finalized federal funding for fiscal year (FY) 2026, with the House passing the Consolidated Appropriations Act (CAA), 2026, with a vote of 217-214, following Senate approval last week. The president signed the CAA () shortly thereafter. The law provides full-year appropriations for the Departments of Health and Human Services (HHS), Housing and Urban Development, Labor, and several other departments. 

This year鈥檚 HHS funding bill is notable not only for what it includes, but also for what it omits. It restores or maintains funding for key public health and research agencies previously proposed for elimination in the president鈥檚 FY 2026 , extends several healthcare programs, and contains a significant package of pharmacy benefit manager (PBM) reforms. All of this activity comes as the Administration  new grant programs and policy efforts related to its signature priorities. 

In this article, we review the major funding and policies approved in the HHS spending bill. We also address key considerations for healthcare organizations as they anticipate downstream funding and policy developments and develop advocacy initiatives for federal FY 2027 bills. 

HHS Funding Levels and Direction 

The bill provides $116.8 billion for HHS, an increase of $210 million over FY 2025, and rejects large-scale structural reorganizations proposed in the president鈥檚 FY 2026 budget. This provision preserves funding for the Agency for Healthcare Research and Quality (AHRQ), Centers for Disease Control and Prevention (CDC), Health Resources & Services Administration (HRSA), and the Substance Abuse and Mental Health Services Administration (SAMHSA) 

Table 1. HHS Agency Funding Highlights, FY 2026 

The bill also extends mandatory funding for community health centers, special diabetes programs, the National Health Service Corps, and Teaching Health Center Graduate Medical Education. 

PBM Reforms in the Package 

In one closely watched area of federal policymaking, the FY 2026 package includes a substantial set of PBM-related reforms that largely mirror the bipartisan package negotiated but not enacted in December 2024. These reforms have implications across Medicare Part D, commercial insurance, and employer-sponsored plans. 

The legislation contains the following PBM reforms: 

• Prohibits PBMs from deriving听remuneration听linked to drug prices for听Medicare-covered Part D drugs听
• Restricts spread pricing in Medicaid,听eliminating听a major driver of PBM revenue听
• Requires contractual transparency, mandating that PBMs clearly define pricing terms in agreements with Part D plan sponsors听
• Adds new PBM reporting obligations, including drug price reporting and rebate disclosures听
• Requires 100听percent听passthrough of rebates in ERISA-regulated plans for new, renewed, or extended contracts beginning听30 months听after enactment听
• Expands audit rights for plan sponsors听
• Codifies the 鈥渁ny willing pharmacy鈥� requirement for Medicare plan sponsors听

These provisions position 2026 as a consequential year for PBM regulation, increasing transparency, strengthening plan leverage, and heightening HHS oversight. 

Healthcare Extenders and Program Reauthorizations 

The bill includes a broad set of Medicaid, Medicare, and public health program extenders, affecting providers, patients, states, and managed care plans. 

Medicaid 

• Postpones reductions听in the听Disproportionate Share Hospital (DSH)听allotments听until FY 2028听
• Changes听the听DSH cap calculation听to听broaden which patient costs count toward Medicaid shortfall听
• Requires states to听develop and implement a process to听allow certain out-of-state pediatric providers to deliver services without听additional听screening for three years听
• Removes age limits on Medicaid鈥檚 Ticket to Work program, allowing adults older than age听65 to听participate听and requires state compliance by January 1, 2028听
• Establishes new maternity care reporting requirements听for rural hospitals, with dedicated federal funding听for hospitals听and states to听comply with听the reporting听

Medicare 

Congress extends several key programs and payment provisions, including: 

• Telehealth flexibilities through December 31, 2027听
• Incentive payments for participation in eligible alternative payment models through payment year 2028 (for performance year 2026) and applies an adjustment amount of 3.1 percent for 2028听
• Acute Hospital Care at Home waivers through 2030听
• Low-volume and Medicare-dependent hospital payment adjustments听
• The听1.0 work geographic practice cost index floor used in the calculation of payments under the Medicare physician fee schedule through December 31, 2026听
• Add-on payments for ambulance services听
• Continuation of Part D coverage for certain antivirals and modifications to hospice payment caps听

Behavioral Health Policy 

The appropriations bill听was听finalized听as the听administration听听new funding and policy initiatives听to听support behavioral health, crisis services, workforce expansion, and youth mental health鈥攅fforts mirrored in SAMHSA鈥檚 increased appropriations.听

SAMHSA鈥檚 $7.4 billion budget includes: 

• $1.6 billion听for State Opioid Response grants听
• $1.01 billion听for the Mental Health Block Grant听
• $535 million for the 988 Suicide and Crisis Lifeline听

Considerations for Stakeholders 

Federal funding and policy developments affect state budget dynamics as many states are now releasing 2026鈥�2027 budget proposals as well as the operational and growth plans of healthcare organizations and partners. 

A few key takeaways from the FY 2026 funding bill include: 

• Federal appropriations signal听congressional and听administration priorities and have听downstream听impact on upcoming rounds of grant cycles, including听SAMSHA and HRSA听awards.听
• The approved funding and certain policy extensions provide operational stability and reduce near-term fiscal pressure, such as the further delay of Medicaid DSH cuts. The extra time will allow healthcare entities to prepare for future reductions and plan for financial sustainability.听
• Agency and program funding emphasize oversight, program integrity, and听compliance. In addition,听fraud and program integrity听priorities are听woven into听certain听new听policies听and program听extensions,听including听PBM reforms, flexibility for pediatric care across state borders,听and rural maternity cost reporting requirements,听among others.听

Connect with Us 

If you would like deeper analysis or state and stakeholder-specific effects, 贬惭础鈥檚&苍产蝉辫;policy experts are available to assist. 

As of January 1, 2026, nine governors had released proposed budgets for state fiscal year (SFY) 2027. With the phase down of federal funding and substantial policy changes approved in the 2025 budget reconciliation act (P.L. 119-21, OBBBA), these proposals offer insights into how governors plan to manage mounting fiscal pressures, navigate new federal mandates, and position their programs for long-term sustainability. 

Today, 黑料网 Information Services (HMAIS) published its first preliminary review of proposed SFY 2027 budget proposals. The initial installment includes budgets from Alaska, Colorado, Florida, Mississippi, New Mexico, South Dakota, Utah, Virginia, and Wyoming, with the latter two proposals covering the fiscal 2026鈥�28 biennium. 

HMAIS will release periodic updates as additional governors publish their budget proposals鈥攖he same rolling approach we used in 2025 (here and here). Because 15 states enacted 2025鈥�27 biennial budgets last year, HMAIS also might review substantial mid-biennium health-related adjustments or supplemental funding. 

The remainder of this article provides a snapshot of several notable themes and emerging trends detailed in the full report. 

Implementation of New Federal Requirements 

State leaders are preparing budgets for SFY 2027 at a time of heightened fiscal stress and structural uncertainty. Entering 2026, governors are facing reductions in federal funding, particularly in Medicaid and Supplemental Nutrition Assistance Program (SNAP) funding. In addition, they are preparing for new federal requirements that will begin to take effect later this year, including narrower flexibilities for financing and Medicaid community engagement policies and more frequent eligibility redeterminations. 

Against this backdrop, governors are using FY 2027 budget proposals to comply with OBBBA鈥檚 mandates and to stabilize their safety net programs and realign state operations around stricter fiscal realities. 

Medicaid Work Requirements. Virginia鈥檚 proposed budget includes funding to implement federal Medicaid community engagement requirements, including a recommendation to add nine new authorized positions in SFY 2027 and 12 more in fiscal year 2028 to meet workload demands. In addition, South Dakota鈥檚 governor proposed amending the state鈥檚 2026 budget to secure funding to implement these requirements. 

Eligibility and Redetermination. Several governors are proposing investments to support heightened eligibility checks across Medicaid, SNAP, and Temporary Assistance for Needy Families (TANF). For example, Colorado Gov. Jared Polis鈥檚 budget proposes $19.1 million to improve the state鈥檚 eligibility system for programs such as Medicaid, SNAP, and TANF. Utah鈥檚 proposed budget includes a recommended allocation of nearly $16.5 million to the Department of Workforce Services for 鈥淗.R. 1 Medicaid Eligibility Administration,鈥� and nearly $10 million for the 鈥淗.R. 1 SNAP Administrative Services.鈥� 

SNAP Changes. States are backfilling lost federal funding and investing in error reduction and system modernization. New Mexico Gov. Michelle Lujan Grisham鈥檚 proposed budget, for example, includes $37 million to replace the decrease in federal funding for SNAP administration ($4 million of which will support 150 new full-time positions), as well as $8.9 million for systems improvements to reduce payment errors in SNAP. South Dakota Gov. Larry Rhoden鈥檚 proposed budget includes $5.5 million to offset a reduction in SNAP federal funding. 

Strategic Cost Containment 

Considering OBBBA implementation and the effects that it will have on their budgets, our first review of governors鈥� budget proposals signals that states are taking an aggressive posture toward limiting expenditure growth in 2026 and 2027. Initial proposals include targeted reductions, tighter utilization management, and restrictions on benefits. 

Since the 2025 legislative session, Colorado has taken multiple steps to prepare for declining federal revenue. For example, Governor Polis鈥檚 proposed budget accounts for multiple actions approved through an amended executive order that would reduce spending to brace for OBBBA鈥檚 impacts. Examples include: 

• Reducing provider rates to 85 percent of the Medicare reimbursement rate听
• Establishing limits on Community First Choice services听
• Adjusting听the听home health nursing and therapy services payment听methodology听
• Introducing cost controls for Medicaid benefit categories that have shown disproportionate growth听
• Implementing听a听$3,000 annual cap on adult Medicaid dental benefits听and a听$750 annual cap on dental benefits for individuals in the Cover All Coloradans program听
• Changing听the听Cover All Coloradans behavioral health program from managed care to fee for service听
• Reviewing provider fees听in anticipation of听possible State听Directed Payment approval from the Centers for Medicare & Medicaid Services (CMS)听

Former Virginia Gov. Glenn Youngkin鈥檚 budget鈥攏ow inherited by Abilgail Spanberger following her inauguration January 17, 2026鈥攊ncludes multiple cost-containment proposals, such as: 

• Anticipated adjustments to capitation rates after a review of Medicaid managed care organizations听
• A $2,000 annual limit on adult dental services Medicaid coverage听
• Elimination of听both听automatic rate increases for psychiatric residential treatment facilities and qualifying听addiction听and recovery treatment services providers听and听automatic biennial inflation increases for听medical听assistance听providers听
• Restrictions on听emergency听maternity services to Medicaid听enrollees听who听are ineligible听for Medicaid听because听of their citizenship status听
• Standardized听hourly limits across home and community-based听services听waivers听
• Actions听related to听鈥渆nsuring appropriate utilization鈥� of services,听such as听applied听behavioral听analysis and crisis services听

States are expected to include additional cost-containment tools throughout 2026 and beyond as OBBBA鈥檚 fiscal effects become clearer over the coming months and years. 

What to Watch 

The budget proposals indicate the resources that executive agencies need and preview governors鈥� policy agendas for the year ahead. Stakeholders should track program reductions and rate changes, eligibility system investments, and shifts in care models. 

In addition, some of the announced budget proposals consider federal awards to states under the Rural Health Transformation Program (RHTP). For example, the Alaska Department of Health budget request addresses the state鈥檚 RHTP implementation plans, and Wyoming鈥檚 budget proposal outlines RHTP priorities. Many states are preparing RFP processes to operationalize their RHTP strategies and make progress on the goals of their initiatives. 

Connect with Us 

As federal funding uncertainties continue, states and other stakeholders will need to adapt their delivery systems, administrative structures, and financing models throughout OBBBA鈥檚 multiyear rollout. HMA offers expertise, analytics, and strategic advisory services needed to navigate this evolving landscape. For details contact Andrea Maresca and Kathleen Nolan. 

The full state of the states and governor budget report is available to HMAIS subscribers. In addition, HMAIS maintains a  that incorporates details of each initiative and the first year award.  

As we kick off the new year,听黑料网听(HMA)听is launching a new series of brief,听insightful听interviews听with our policy experts听on issues听that will define听2026鈥攚hat鈥檚 changing, why it matters, and how federal, state, and industry decisions will shape what happens next.听Building on听our earlier analysis of听the Rural Health Transformation Program听((RHTP),听here听and听here), this week, we听start听with a听pointed听look at听the Centers for Medicare & Medicaid听Services鈥檚听(CMS)听first year of RHTP awards.听

Rural Health, Ready or Not: CMS Wants Results in 2026

An interview with Kathleen Nolan, Senior Advisor, HMA, and , Principal, Leavitt Partners, an HMA Company. 

Q: What do the new Rural Health Transformation Program awards tell us about US Department of Health and Human Services (HHS) and CMS priorities heading into 2026? 

Kathleen Nolan: One of the clearest signals is that CMS expects visible progress in 2026. This is not a program that gives states months of planning runway. The application made it clear that CMS wants states to start doing the activities they proposed right away鈥攏ot just planning or propping up existing systems. CMS wants to see meaningful movement on implementation in 2026, especially in the areas of workforce, infrastructure, technology modernization, and care delivery redesign. 

Sara Singleton: Exactly, and CMS is using this investment to reinforce some of the administration鈥檚 broader policy goals. Many state proposals leaned heavily into chronic disease prevention, chronic care management, and expanding supports that promote healthier lifestyles. That alignment isn鈥檛 accidental. The Administration is looking for real traction on these priorities, and RHTP gives states both the resources and the accountability framework to make progress. So, the message from CMS is clear: Move quickly, implement strategically, and show early gains in the areas that matter for long-term population health. 

Q: Was anything in the awards themselves surprising? 

Singleton: There was a lot of speculation about how wide the spread in funding levels might be, particularly for states鈥� discretionary initiatives. But the distribution was relatively tight; 32 states fell in the 鈥渁verage鈥� range of $190鈥�$230 million, with only four states above $230 million and 13 below $190 million. That suggests CMS isn鈥檛 signaling dramatic differences in expected performance or ambition. 

Nolan: It reinforces that CMS is looking for consistent, measurable progress from every state. States that struggle to implement their plans could see less funding in about years. 

Q: What should states keep top of mind heading into year one? 

Nolan: Accountability. CMS has made it clear they will adjust budgets in later years if states don鈥檛 meet expectations on reporting and evaluation. That also means states need to know where the dollars are going and what they are getting for the investment. Year one performance really matters. 

Singleton: And it鈥檚 not just CMS. Congress and the Office of Inspector General for HHS will also be watching how states use these funds. 

Q: What rural health policy developments are you watching in early 2026? 

Nolan: Decisions about the leadership for these initiatives and state legislatures. Federal investment can only go so far. States will need strong leaders and supportive policies to accelerate and sustain RHTP efforts in year one. What legislatures choose to prioritize will shape the impact of RHTP far beyond year one. 

The federal drug pricing landscape continues to undergo significant transformation as executive branch agencies advance an ambitious suite of regulatory and model testing initiatives intended to lower the costs associated with the Medicare and Medicaid programs. In response to ongoing concerns about rising out-of-pocket costs, increasing pressure to align US prices with those paid internationally, and the continued implementation of the Inflation Reduction Act (IRA), federal agencies are reshaping how prescription drugs are priced, reimbursed, and negotiated in federally financed programs. 

The current policy environment reflects a growing emphasis on benchmarking drug prices to those in peer nations, referred to as 鈥渕ost favored nation鈥� (MFN) benchmarks, and accelerating actions that require or encourage manufacturers to offer lower net prices. 黑料网 (HMA), is tracking these developments in the public payer space, replicating Centers for Medicare & Medicaid Services (CMS) payment methodologies, and modeling alternative policies to assist life science companies, payers, and other stakeholders. 

In this article, we review the administration鈥檚 recent efforts to reduce Medicare and Medicaid spending on drugs and biologics, including confidential manufacturer negotiations and three new models that together could reshape pricing dynamics across federal programs. 

Executive Branch Negotiations Seek to Drive Access to MFN Discounts 

In 2025, the administration issued an  directing federal agencies to pursue strategies to establish MFN pricing, linking US prices for certain drugs to the lowest (or second lowest) adjusted net prices among a targeted set of peer countries. Following the order, federal officials sent  to 17 major pharmaceutical and biotechnology manufacturers, urging them to negotiate agreements that would voluntarily align prices with MFN-based benchmarks. 

To date, 14 manufacturers have signed , though full details remain confidential. These agreements are understood to accomplish the following: 

• Provide听state听Medicaid听programs with听access to听MFNbased听discounts听
• Require that new drugs be launched in the United听States听at听MFNaligned听prices听
• Offer certain drugs at discounted听directtoconsumer听prices through a forthcoming 鈥淭rumpRx鈥� program, expected to launch later this year听

Reports suggest that manufacturers entering these MFN-related arrangements may receive exemptions from several federal actions, including the Center for Medicare and Medicaid Innovation (Innovation Center) demonstration models described below and certain tariff-related policies. 

MFNLinked Models Designed to Lower Drug Costs Across Medicare and Medicaid 

Along with the negotiation efforts, the CMS Innovation Center has proposed three models that would test MFNbased pricing through structured rebate mechanisms. Each model targets different segments of the market while testing how international benchmarks could be integrated into federal drug payment policy. 

New Models Test Alternatives to Inflation Rebates 

Announced in December 2025, the  and the  are designed to test alternative approaches to the Inflation Reduction Act鈥檚 (IRA)  policies. CMS plans to test the models鈥� potential for market driven price reductions if manufacturers choose to lower list prices instead of paying MFN-based rebates. 

Key features of the GLOBE Model are as follows: 

• Applies听to听25 percent of听Medicare听fee-for-service听(FFS)听beneficiaries听using certain听Part B drugs听
• Beginning in October 2026,听becomes听mandatory听for select drugs and targets听highspending,听physicianadministered听Part B categories, excluding products already subject to IRA听negotiations, generics, biosimilars, and certain听lowspend听products听
• No changes to听physician and hospital听reimbursement,听although beneficiaries听expected to听see reduced cost sharing听

The GUARD Model will similarly test whether applying MFN-based rebates to Medicare Part D drugs will lower Medicare costs. Key aspects of this model include: 

• Fiveyear听model听that would start听January 1, 2027听
• Target听therapeutic categories with more than $69 million in annual Part D spending听
• No impact on听plan bids and beneficiary cost sharing听

These models rely on pricing data from 19 countries. Manufacturers that voluntarily submit net price information would trigger quarterly benchmark updates; otherwise, CMS will use a fixed list price based benchmark for the entire pilot period. 

CMS is seeking  on whether additional categories, for example cell and gene therapies, should be excluded from GLOBE. GUARD is also open for  through February 23, 2026. 

GENErating cost Reductions fOr US Medicaid (GENEROUS) Model 

The , expected to begin in 2026, creates a voluntary pathway for state Medicaid programs and manufacturers to enter supplemental rebate agreements tied to MFNaligned prices. MFN pricing under this model is based on the second lowest net price in G7 countries plus Denmark and Switzerland. GENEROUS is also expected to align with pricing commitments negotiated through the administration鈥檚 manufacturer agreements. 

Key Considerations and Potential Impacts 

The combined effect of federal negotiations and Innovation Center models could be substantial, though outcomes will depend on manufacturer participation, benchmark stability, and operational feasibility. Key considerations include: 

• State听Medicaid savings, especially听the extent to which听MFN鈥憀inked rebates exceed existing supplemental rebates听
• Reduced Medicare beneficiary cost sharing for Part B included in GLOBE听
• Shifts in manufacturer pricing strategies, including potential changes to US launch prices听
• Interactions with the IRA, particularly Part D redesign and Part B inflation penalties听

Connect with Us 

HMA experts continue to track the federal drug pricing landscape closely as comments, operational details, and implementation timelines evolve across these initiatives. Our team replicates CMS payment methodologies and models alternative policies using the most current Medicare FFS and Medicare Advantage (100%) claims data. 

For more information听and听questions about the policies described听in this article, please contact听our experts below.