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Indiana budget leaders are cautiously optimistic about the state’s fiscal position after they received revenue, economic and Medicaid forecasts Tuesday afternoon and looked ahead to debates over the next biennial budget in the upcoming legislative session.
The primary fear is the significant growth of Medicaid costs, which have grown to be the second-largest recipient of state funding behind K-12 education. The state’s Medicaid program, which primarily pays for health care for low-income people and those with disabilities, continues to increase in cost at a rate faster than state’s revenue growth.
It hit a tipping point last year when lawmakers learned about a $985 million shortfall in the state’s Medicaid budget.
How the Indiana Legislature plans to address Medicaid—both in fitting the growing bill into the budget and lowering future costs—remains one of the next budget’s biggest questions. (The state and the federal government share in picking up the tab for Medicaid.)
Senate Appropriations Chair Ryan Mishler, R-Bremen, said Tuesday the state is in a good place, especially since lawmakers are aiming for a flat budget and are aided by strong reserves. However, he described growing Medicaid costs as “scary” and a problem he’s seen coming for years.
“I don’t remember in my years of doing Medicaid first and working backwards,” Mishler told reporters. “But unfortunately, I think that’s kind of where we’re at.”
And House Ways and Means Chair Jeff Thompson, R-Lizton, said lawmakers will need to be especially careful the second year of the budget when forecasts expect a 0.3% increase in state revenue.
“If we don’t think ahead, we end up in a bad position,” he said.
The General Assembly will reconvene on Jan. 8 to begin official business, including building the 2026-2027 budget—which will take effect July 1, the beginning of Indiana’s 2026 fiscal year. The fiscal 2024-2025 budget totaled $44.5 billion.
Lawmakers will receive an updated economic forecast in April when the Legislature is finishing up the budget.
Revenue slows
State revenue—including income tax, sales tax, gaming taxes and corporate income taxes—for the next two years is projected to hang around $23.2 billion per year. According to projections, revenue growth in fiscal year 2025 will inch up at 0.3%, a $72 million increase, following a 3.3% increase, or $732 million, in fiscal year 2024.
Revenue for this fiscal year is expected to come in 3.1% under what was projected in a previous forecast, which over-projected sales and corporate income taxes.
Growth in state income and sales taxes is expected to slow down or backtrack in the coming years. For example, individual income tax is expected to grow by 2.3% in the 2026 fiscal year but decrease 3.6% in 2027.
Medicaid continues to go up
The state’s Medicaid bill is estimated to grow 9.4% in fiscal year 2026 to $4.8 billion, according to the forecast. The year after is projected to hit $5.2 billion, a 6.9% increase.
Lawmakers learnd at this time last year that the state had underestimated Medicaid cost growth, which resulted in a $985 million shortfall in the state’s Medicaid budget. From fiscal year 2023 to 2024, the state’s Medicaid burden grew 53.7% from $2.6 billion to $4.1 billion.
As for the current budget, Medicaid will cost the state about $4.1 billion and $4.4 billion for fiscal years 2024 and 2025, respectively. Medicaid costs in fiscal year 2024 came in $139 million over budget, while 2025 is expected to come in $225 million under budget.
The Family and Social Services Administration, which administers the state’s Medicaid program, is seeking to curtail a surge in the state’s Medicaid bill.
State Medicaid Director Cora Steinmetz said the reason for the significant cost increase and residual growth was an unexpected number of Medicaid enrollees remaining eligible. The largest pot of spending is for long-term care for seniors.
Medicaid enrollment grew significantly during the pandemic when the federal government blocked states from kicking users off the program, even if they no longer met eligibility guidelines, and incentivized states to expand the program by paying for a larger share of it. Once that temporary funding ended, Indiana—and other states—rolled back the expansions, but they found that more residents remained eligible than expected.
Enrollment grew by about 772,000 from January 2020 to April 2023. FSSA expected about 400,000 people would be removed when the state audited their rolls for people who were no longer eligible. However, their expectation was off by about 175,000 people.
Earlier in the meeting, Steinmetz proposed changes to how the state covers Applied Behavior Analysis, or ABA, services, which provide treatment and education for children with autism. The eligibility tightening includes limiting ABA instruction to 30 hours a week (a reduction from 40) and a cap of three years. FSSA is also seeking to reduce the misuse of these funds.
Medicaid forecast firm questioned
Both Democrats and Republicans pressured Jeremy Palmer, principal and consulting actuary with Milliman—the firm that produces the state’s budget forecasts—over his refusal to call last year’s billion-dollar shortfall a mistake. Instead, he called it a “forecast assumption.”
Sen. Chris Garten, R-Charlestown, questioned whether lawmakers can trust the accuracy of the forecast following the shortfall.
Garten and Rep. Ed DeLaney, D-Indianapolis, asked how much Milliman’s FSSA contract is worth. Palmer and Steinmetz estimated about $1 million of its $10-$12 million contract is focused on producing the Medicaid forecast. Garten added he doesn’t think the state should be hiring firms that make this large of a mistake.
“Outside of government, if somebody made a billion-dollar mistake, you would have been fired,” he said. “I’m looking for accountability because this is Hoosier taxpayer money that’s squandered, as far as I’m concerned.”
Mishler and Thompson weren’t as condemning as other lawmakers, but they said Milliman has some responsibility and welcomed market competition for the contract. They told reporters they will work with the Medicaid numbers they have despite the uneasiness following the miscalculation last year.
“I try to be a little more conservative,” Mishler said. “If we come back in April and it is tighter, it’s really tough to take away. It’s easier to add.”
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