Health Care and The Hollow State

How Federal Cuts Will Cascade Through State and Local Services

Note from Don: This is a guest from Brint Milward. If you are regular reader of Can We Still Govern, you might remember me mentioning his work. He is one of the leading scholars in the world in thinking about how network theory applies to public sector settings. A network perspective is especially useful in understanding the connected but disaggregated nature of how public health funding flows from the federal government, the topic of this essay.

The news from Washington has been terrible for federal workers since Elon Musk and DOGE came to town. They have put whole agencies in the woodchipper and thrown workers out on the street. The Trump Administration’s 2026 budget proposal has requested a 26.2% reduction to HHS spending.

It is important to understand that such cuts are not limited to federal employees. If they occur, it will set off a cascading crisis through every city and state in the country as non-federal employees who deliver federal services are also laid off. This is the invisible weakness of the hollow state.

I have studied and written about the provision of health services through networks of public, private and non-profit providers for decades. When people think about health services, they don’t always see how connected different parts of the network are – and how vulnerable the entire structure would be to the type of changes the Trump administration is proposing.

We don’t know how many healthcare workers are paid directly or indirectly from federal contracts but if the federal agencies that fund them lose workers and programs, it will be a seismic shock to healthcare and public health in all 50 states. We often think of the federal government as a leviathan. In fact, the federal government through contracting diffuses power across government levels and nonprofit agencies rather than concentrating it in Washington.

The federal government is dwarfed by the number of employees in state and local government and in the nonprofit sector who, as a matter of law, it contracts with to produce taxpayer funded goods and services. That is the hollow state – hollow in the center with contractors stretching into every city and town in the U.S.

These contractors and the federal employees who oversee the contracts in specific program areas, like aid to rural hospitals, constitute networks of people, funds, and policy in hundreds of programmatic areas from mental health to reducing infant mortality often without the recipients knowing the federal government is the source of this largess.

Today, there are approximately 2.1 million civilian non-postal federal employees - not much more than in 1970 and, yet the U.S. population has grown by 68%. The vast majority, about 85% are scattered across America, outside of the Washington DC region.

Justin Fox at Bloomberg

It is estimated that 5.22 million contract employees and 2.31 million grant employees work under federal contract. Some contractors work in state and local government which comprises 12% of the U.S. workforce - double what it was in 1970.

Justin Fox at Bloomberg

Others, supported by federal contracts, are in the nonprofit sector. There are now 2,000,000 nonprofit organizations, up from 400,000 in 1970, and they constitute 10% of the workforce, excluding volunteers. In comparison, the 2.1 million federal employees constitute only 2%.

A federal contract manager may oversee a large number of contracts. The contract holders, in turn, subcontract with local agencies and nonprofits that are twice removed from the original federal contract with perhaps three or more links in the chain of subcontracting before it reaches the end user. We don’t know the size of the hollow state because no one has succeeded in measuring it. However, over the last 50 years, much of the growth in state and local government and the nonprofit sector has occurred in health and human services – exactly the areas the federal government has increased its funding.

The Substance Abuse and Mental Health Agency (SAMHSA) is an example. It plays a key role in funding naloxone distribution to reverse opioid overdoses. Its vital work is carried out exclusively by first responders and NGOs. Similarly, drug counseling and treatment is provided by non-profits. It is estimated that in 2023, nearly 400,000 people were employed as substance abuse, behavioral disorder and mental health counselors – work mostly paid for under federal grants. About 722 SAMHSA federal civil servants monitor these grants. If their positions and the grants they administer are eliminated, drug treatment, counseling and overdose prevention in all 50 states could collapse.

The hollow state was created over the last fifty years with the enthusiastic support of Congress who could claim that they weren’t increasing the size of the federal government but were responding to constituent needs. It was supported by local politicians, communities, and programmatic professionals in state and local government and the nonprofit sector who supported a model where the federal government funds jobs in state and local government and the nonprofit sector in a multitude of policy areas. Domestic spending by the federal government quintupled in that time and nonprofits and state and local governments have increased their workforce dramatically.

It was easy to gain broad support for building the hollow state partly because it was less visible than hiring more federal employees. For the same reason, it is easy to miss the vulnerability the hollow state creates when it comes to the delivery of federal programs. It will suffer mass layoffs because of the cascading effects of the firings, cutbacks, and program elimination at the federal level. It will have a multiplier effect many times greater than cutting the federal workforce and will threaten the viability of many of the programs that support the health and welfare of our most vulnerable citizens.

If many of the healthcare services funded under contract are eliminated, where will the clients go? What will be the impact?

For those who develop health problems and seek treatment, hospitals are the only alternative. By law, they must keep their doors open. The Emergency Medical Treatment and Labor Act of 1986 requires hospitals to provide emergency medical treatment to anyone, regardless of their insurance status or ability to pay. Requiring these services, but providing no money to compensate the hospitals, could lead to hospital shutdowns, especially in rural areas where hospitals operate on thin margins. Cuts to Medicaid will already hurt hospital bottom lines, especially in rural areas, just as they will be facing greater demand.

With decreasing services in healthcare, those in need will seek help from nonprofits who will have also lost part of their funding. For example, nonprofits that deliver services such as housing assistance, food programs, healthcare, education, and mental health support often rely heavily on federal grants from several different federal sources (e.g HUD, SNAP, Medicaid, and others).

If these federal grants are cut these nonprofits would face budget shortfalls requiring them to reduce services, lay off staff, or close programs. Catholic Charities, the nation’s largest provider of social services, depends on government funding for two thirds of their annual budget.

Thus, at the time when demand for services exceeds capacity, low-income families, the elderly, and veterans would be negatively affected. The agency running Meals on Wheels for the elderly has lost half its staff and all 10 regional offices have been closed, decreasing the ability of local nonprofits to deliver food to the elderly.

These cuts will have a disproportionate impact on low-income, rural, and minority communities — who already face barriers to healthcare. Health disparities could widen as a result, as these communities rely most on publicly funded services. Additionally, the proposed cuts, especially for Medicaid, could lead to a shift in the burden of health care costs from the federal government to state and local governments, which will have significant implications for state and local budgets and taxes. The proposed cuts have been met with criticism from Democrats and some Republicans but thus far, these warnings have fallen on deaf ears.

It is shocking that the draconian changes that the Trump Administration is enacting are going forward with such little debate or understanding given their impact. We should always be willing to reform and innovate as the system we have isn’t perfect, but it does provide critical healthcare services to the nation. This is not an effort at innovation or reform, we are engaged in the unilateral disarmament of our healthcare and public health institutions with little consideration of its impact on the health and welfare of our citizens.

Brint Milward is the Melody S. Robidoux Fund Leadership Chair at the School of Government & Public Policy, University of Arizona.

FOR MORE ON THE FEDERAL BUDGET