Source: Healthcare Dive
Hospitals are putting major expansion projects on hold and bracing for service cuts as new limits on Medicaid state-directed payments threaten to squeeze already tight finances.
Making matters worse, many hospitals will see their revenue and margins decline as millions of Americans lose health coverage and uncompensated care costs rise under the recently enacted budget reconciliation package, dubbed the One Big Beautiful Bill.
The law restricts new Medicaid state-directed payments, financial arrangements allowing states to make supplemental payments to healthcare providers for services covered under managed care contracts. It caps such payments at 100% of Medicare rates in Medicaid expansion states and 110% in non-expansion states, while gradually cutting existing payments above those levels starting in 2028.
The changes will slash federal Medicaid spending by $149 billion over 10 years, according to health policy research firm KFF.
State-directed payments enable states to mandate that Medicaid managed care plans compensate providers at specific rates, which have been benchmarked against commercial insurance rates that can be double or triple what Medicare pays. The payments have become a critical revenue source, totaling more than $100 billion in annual Medicaid spending nationwide.
As state-directed payments are cut, hospitals will also have to contend with a rise in the uninsured population, which is expected to increase by 10 million under the legislation and add $433 billion to hospitals’ uncompensated care costs from 2025 to 2034.
Safety-net hospitals will be especially vulnerable because they treat large numbers of Medicaid and uninsured patients.
“Our member hospitals are really going to be in double jeopardy over the next few years,” said Beth Feldpush, senior vice president of advocacy and policy at America’s Essential Hospitals, which represents more than 350 safety-net providers. “Their uncompensated care costs are going to rise because people are still going to come to them for treatment, and once they’re uncovered, a lot of those costs are just going to end up as uncompensated care costs for our hospitals.”
The bigger picture
The state-directed payment cuts, which are the third-largest source of federal Medicaid savings in the reconciliation package, come as congressional watchdogs raise concerns about the rapid growth and transparency of state-directed payments.
The Medicaid and CHIP Payment and Access Commission, which advises Congress on Medicaid payment policy, has called for better oversight, noting that “it’s not clear the extent to which state directed payments have made meaningful improvements in access” to care.
MACPAC has also raised concerns about states using creative financing schemes that could inflate federal Medicaid funding without states having to invest their own resources.
