DPHHS tells Appropriations subcommittee it projects $34.4 million general‑fund shortfall and may seek supplemental

Representative Gillette convened the Legislative Appropriations subcommittee for a quarterly DPHHS briefing, where agency officials said the department now projects a fiscal‑year 2026 general‑fund shortfall of about $34.4 million and larger supplemental needs into FY2027.

DPHHS Chief Financial Officer Natalie Smitham told the committee that higher‑than‑expected utilization in hospital inpatient, critical access hospitals and nursing facilities, a reduction in drug rebate percentages and other factors are driving Medicaid cost increases. The department reported projected Medicaid shortfalls of approximately $28.4 million in general fund and $146.3 million in restricted federal funds, plus an operating shortfall at the Montana State Hospital. Director Charlie Breton said the department has begun planning options to reduce the FY27 budget impact and will propose a first‑year supplemental per statute.

To limit immediate general‑fund pressure, DPHHS proposed two internal fund transfers the agency would include in the supplemental: moving about $25.0 million of Medicaid expansion administrative costs to the HELP Act state special fund and shifting roughly $9.2 million of Healthy Montana Kids‑eligible expenditures to that state special revenue. Natalie Smitham noted those moves would substantially deplete the cash in the referenced special funds and that statutory approval will be required as part of the supplemental packet.

The department also described a menu of mitigation strategies it is evaluating for FY2027, including not implementing scheduled provider rate increases and reviewing optional benefits. Director Breton said the agency is trying to avoid service cuts or rate reductions where possible but must present a mitigation plan to meet the statutory requirement when requesting a first‑year supplemental.

Representative Cafaro and other legislators pressed department staff on timing, the source of additional positions tied to HR1 implementation and whether certain shortfalls areatable to legislative decisions (for example, floor amendments in the 2025 session that reduced appropriation authority). Ms. Smitham said the adopted legislative caseload assumptions and a lower FMAP for FY27 have contributed to the current gap and that the department and LFD had warned of this risk during the session. She said the department expects to return to the legislature with a formal House Bill 3 supplemental request and that the executive branch will work with the committee on a mitigation plan to meet the statutory rules.

The department asked the committee to note the timing constraints: some federal funds (for example, a Rural Health Transformation Program grant) are time‑limited, and shifting many costs into state special funds would reduce their future availability. Ms. Smitham said final decisions about any provider rate changes or benefit reductions will be made in coordination with the Governor’s budget office and will be presented to the committee before being implemented.

The committee asked for more detail on which specific services would be considered "optional" and how the department will engage stakeholders before any rate or benefit decisions. Ms. Smitham and Director Breton committed to ongoing briefings and to returning with more detailed mitigation proposals in June, including the fiscal math that will underlie any request to delay rate increases or reduce optional benefits.