Federal funding cuts coming from Washington could threaten Indiana’s finances, especially for Medicaid and education. Photo by Getty Images.

By Whitney Downard
Indiana Capital Chronicle

INDIANAPOLIS — The state of Indiana receives more than $20 billion from the federal government annually, or 44% of its budget, and is the third-most reliant state — behind only Louisiana and Mississippi, according to an analysis from the left-leaning Center on Budget and Policy Priorities.

Under President Donald Trump, and top adviser Elon Musk, those dollars are at risk. Dozens of governmental departments and agencies, and their associated funding streams, have been slashed — complicating the state’s efforts to craft a two-year budget in the 2025 legislative session.

In 2024, the State Budget Agency reported that Indiana received almost $23.4 billion from the federal government, with funds expected to stay relatively steady over the next few years. Over half of that funding, or $14 billion, went to Medicaid while the state Department of Education got nearly $1.8 billion.

The General Assembly’s GOP leaders answer reporter questions after the State of the State Address on Wednesday, Jan. 29, 2025. From left: Senate President Pro Tempore Rodric Bray, House Speaker Todd Huston. Photo by Leslie Bonilla Muñiz, Indiana Capital Chronicle.

Another big earner was the Division of Family Resources, which got $1.9 billion. Those education dollars primarily go to schools with a high number of low-poverty students or students with special education needs.

That $20-plus billion is roughly as much as the state of Indiana’s portion of spending from its general fund, which was $22.5 billion in 2024. In terms of non-government dollars, state revenues are expected to be modest-to-stagnant over the next two years.

The current budget version making its way through Congress cuts Medicaid, a concern for several sitting lawmakers. One Democrat urged his colleagues to adopt his amendment creating a fund to buffer Indiana from potential changes — warning Republicans that a special session could be necessary if cuts go too deep.

Rep. Ed. DeLaney listed some of the agencies receiving federal funding, including: public education, the Indiana National Guard, Medicaid, public health research, road construction, agriculture and veteran’s services.

The amendment was rejected on a party-line vote, despite getting some Republican sympathy.

Earlier this week, Indiana’s governor seemed confident that Indiana’s finances could weather federal cuts. But planning around these forecasted — yet undefined — cuts did make crafting the state’s two-year budget “much harder,” said Senate Majority Leader Rodric Bray.

Medicaid Funding

The Family and Social Services Administration, which oversees Medicaid, gets $16.8 billion of its $24.1 billion budget from the federal government, as outlined in its December budget presentation.

That 70% includes dollars earmarked for Medicaid, which provides coverage for more than 1.9 million Hoosiers, as of January.

Within Medicaid, a particular target for cost-cutting could be those Hoosiers covered by the Affordable Care Act. The Healthy Indiana Plan covers this expansion population in Indiana, paying for the medical care of more than 752,000 Hoosiers.

The state covers its 10% share of those HIP costs using a combination of provider and cigarette taxes, rather than dipping into general funds. The federal government pays for the rest.

If that rate falls below that threshold, Indiana has a “trigger law” to end HIP — though one senator questioned whether Indiana could truly end the program with that provision.

Medicaid rolls could also be reduced by adding work requirements or additional eligibility checks — something that Indiana Senate Republicans advanced last week.

But red states, which are disproportionately older and poorer, will bear the brunt of Medicaid cuts. By 2030, an estimated one in five Hoosiers will be at retirement age, or at a point in their lives when they need additional health care coverage. So many retirees enroll in Medicaid that it’s the single-largest payer of long-term care services like nursing homes and health aides.

And while many politicos agree that Medicaid costs need to be reduced, slashing the program would have a wide-ranging impact, especially on the rural or critical access hospitals that serve primarily Medicaid patients.

One-quarter of rural residents rely on Medicaid and nearly half of rural hospitals operate in the red, as written by researchers with Purdue University. Roughly half of Indiana’s births are covered by the government program and 38% of the state’s rural hospitals are at risk of closing.

But Medicaid isn’t the only target.

Other Federal Funds

Farmers, low-income renters and educators are already reeling from federal cuts.

Executive orders from the Trump administration paused and canceled funding for some programs that impact farmers — with billions of dollars at stake. That includes $20 billion for farmland conservation programs under the Inflation Reduction Act and the dismantling of the U.S. Agency for International Development. The latter purchases excess grains and goods from farmers for food programs abroad, which keeps domestic prices low for consumers without hurting producers.

USAID programming also supports research grants for the nations higher education institutes, such as the five-year $14.2 million Partnership for Higher Education Reform with Indiana University, which focuses on Vietnam.

Educators relying on federal grants to fund their health research are scrambling after a temporary block to dollars from the National Institutes of Health.

The New York Times estimates that a proposed cap on grants means Indiana institutions could lose at least $68 million across 786 grants.

Reporting last month implied that up to half of the staff with the Housing and Urban Development office could be eliminated. Programs under the agency strive to reduce homelessness and provide funding for Section 8 Housing Choice Vouchers, which subsidize rent for low-income Americans.

Trump has targeted the federal Department of Education for elimination, which would fundamentally shift how public schools are funded throughout the country.